Stickybeak by proxy (Part 2)

In Part 1 we looked at some aspects of online privacy. In this article we look at the law.

Can the old dog still hunt

New Zealand’s privacy laws are generally considered to be pretty sound. The Privacy Act began life in 1993 describing a set of principles and giving you a bunch of rights in relation to controlling the collection, use and disclosure of personal information.

“Personal information” is defined in the Act as “information about an identifiable individual”, i.e., information from which you can be identified. If an agency is collecting anonymous information about your movements online, that is one thing, but if your online profile grows to the point that you could be identified from it, the rules in the Privacy Act can apply. As discussed in part 1, the line between anonymous and identifiable can be pretty uncertain.

The Law Commission looked at the Act in a three-year review of privacy laws that was completed in August 2011. It continues to believe that self-protection is the best protection, but suggests a substantial set of changes aimed at improving the law including:

  • new powers for the Privacy Commissioner to act against breaches of the Act without necessarily having received a complaint, and allowing it to order those holding information to comply with the Act or submit to an audit of their privacy rules, and
  • measures to minimise the risk of misuse of unique identifiers, and require those holding information to notify you if your information is lost or hacked, and
  • controls on sending information overseas.

The government agrees that it is time for substantial changes to the Act, although it does not agree with everything the Law Commission has proposed. A new draft Bill is expected next year.

To the ends of the earth

One obvious issue in the internet age is the lack of matchup between the international nature of internet services, and laws that are limited to the borders of any particular nation. A modestly-sized nation at the end of the world, like New Zealand, has limited ability to influence foreign organisations who may not have any local presence, although our Privacy Commissioner has taken action against reputable major players offering services in this country.

One answer is to harmonise our laws with other countries, or rely on the big fish to protect our privacy. If the US or the EU forces firms to improve privacy protections we will benefit. The US Federal Trade Commission can legitimately argue that its actions will protect users in other countries (see the summary of a talk from Nethui 2012 here, and it is focused on this stuff. Vivian Reding, then the EU Justice Commissioner said that privacy for European citizens “should apply independently of the area of the world in which their data is being processed …. Any company operating in the EU market or any online product that is targeted at EU consumers must comply with EU rules”. The French data protection agency is investigating Google’s new privacy policy.

Another evident challenge to existing privacy law is to the notion of “informed consent”. As a legal principle it is fine, i.e., your favourite online service has a privacy policy and you consent either directly to it by checking the box and clicking “I accept” or implicitly by using their service. So long as the policy does not breach the law and the service follows their own policy, they are legally blameless.

In practice you likely haven’t read the policy, and you may not be in a position to avoid surrendering some privacy in any case. Participating in society increasingly requires online interaction, and any online interaction will involve sharing some information. Legally operators can rely on your click to indicate consent to their privacy policy, but in practice you cannot really withhold it.

One solution could be crowd-sourced reviews of online privacy policies, or organisations that rate others policies. There are similar troubles with the terms of licensing agreements to which you have to consent in order to use software.

Fit for purpose

Users have options to protect themselves online if they care to. They can avoid being tracked, ensure their privacy settings for social media services are well considered, disable cookies, turn off javascript, use fake Gmail or Facebook accounts, use incognito modes on their browsers, access the online world through a VPN or a range of other things. The Privacy Commissioner has guidance also. And you either have now or will soon also have an option to turn on a “do not track” option in your browser, that will impede the ability of firms to piece together your internet history as you find your own trail through the online garden.

Sadly users mostly do not avail themselves of these options. That may be because some impede the internet experience a bit. Or because users do not care to change their behaviour much despite saying they are worried about online privacy.

In these circumstances, there will continue to be debate about how far users can or should take responsibility for their own protection, and how far the law needs to go. This battle is the natural result of the standard model for internet services, i.e., if you want free internet services, you need to realise that your eyeballs are the price. No one should be surprised that advertisers try to make their services more effective by learning more about the brains behind those eyeballs.

 

Hayden Glass is a Principal with the Sapere Research Group, one of Australasia’s largest expert consulting firms. Thanks to Rick Shera (@lawgeeknz) for instructive conversation.

This article was originally published on the TUANZ blog.

Advertisements

Stickybeak by proxy (Part 1)

Our ideas about privacy need redefining in the internet age

I consider myself a fairly typical internet user. Google for web search, a Gmail account for email, calendar and contacts, the Chrome browser for surfing, and my Google drive for a whole host of documents stored and shared in the cloud. On my Android phone I have 60 or so apps installed. I have no Facebook account, but I am on Twitter. I use Dropbox to share files, Flickr for my photos, iTunes for music, and Tumblr and WordPress for blogs. Plus, like the rest of you, I use online banking, shop online, and get my news nearly exclusively from online sources. I provide my location to make Google maps work better and also to help get better search results, but I click “Deny” when my phone gives me the choice to share location with any particular website.

I am sharing, therefore, quite a lot of information on the internet. This is an entirely standard way of life. Around 80% of us use the internet, and 80% of users report using Facebook.

The internet is such a part of daily life that we now share information unconsciously. Everything we do online creates a record and we don’t think too much about what happens to it. In US academic Daniel Solove’s vivid phrase, “data is the perspiration of the Information Age”. Others, like American computer security specialist Bruce Schneier, think of your click-stream as a type of pollution, in the sense that it is created by doing some useful online task but it can have unpleasant side-effects that need to be managed.

In Part 1 of this post we take a brief look at the online privacy environment and what makes it different. In Part 2 we look at how laws are changing to adapt to it.

Something new under the sun

Problems of information privacy are much more difficult in the internet age because the internet itself is so widely available, and information flows on it are difficult to control.

The internet has no borders, and is not based in any particular country. The location of service providers or users is generally unimportant: information available in one place is available in all, and it is difficult to control or trace the flow of data. Content is continually being added or modified, but content is also persistent, i.e., information that was once on a website can be searched for and retrieved even after the content of the site has changed.

The internet is also tricky for governments to control. There are, of course, still telecommunications operators who connect you to the internet. They have extensive physical investments, powerful brands and reputations to uphold. But service providers who hold information about you are generally not dependent on individual governments for resources at all. Most of the New Zealand internet’s most popular services are provided by US firms based in California with servers all over the world, and with little local presence here. The ability of the New Zealand government to influence the activities of, say, Facebook is limited, and given the aterritoriality of the internet, it is often not clear how firms can navigate the thicket of different national responsibilities.

Privacy, of course, is also a non-internet problem. Those holding information need to not, for example, lose sensitive government data in the internal post, or leave their computer systems open for members of the public to access.
But often internet users do not realise how much they are sharing (see these unfortunate Belgians), or what the consequences are. Facebook stands accused of deliberately making it hard for users to control their own privacy, and even the most sophisticated can get it wrong, releasing data that they think is innocuous (like AOL or Netflix that turns out not to be when combined with other public data. See also a local example.

Gold in them thar hills

The major online services companies have also raised substantial privacy concerns by mis-estimating what their users are happy with: cue dismay when Mark Zuckerberg, Facebook CEO, said that his firm was built on privacy expectations that all users might not share and the furore over changes to Facebook’s privacy settings that have led to EU and FTC regulatory intervention, or when Google’s then CEO Eric Schmidt said that if you want to keep something private online “maybe you shouldn’t be doing it in the first place”.
With all of this information about your online activities able to be discovered, there is money to be made in sifting through it,tying it together, and then selling the profiles to online advertisers.

Consider Rapleaf, a US outfit that matches email addresses with a range of public data including Zip code, age, income, property value, marital status and whether the person who controls this email address has children. It claims to have data on over 80% of US email addresses, and charges 0.5 cents per match.

Or this article (registration required), a deal between Facebook and a firm called Datalogix that allows the site to track whether ads seen on Facebook lead users to buy those products in stores. Datalogix buys consumer loyalty data from retailers, and matches email addresses in its database to email accounts used to set up Facebook profiles.

Generalised concern

It is hardly surprising that people are concerned about online privacy. Americans say their biggest perceived privacy threat is social networking services like Facebook and Twitter (they are also worried about unmanned drones, electronic banking, GPS/smartphone tracking and roadside cameras).

New Zealanders are worried too. A Law Commission survey revealed that 84% of respondents were concerned about “the security of personal details on the internet”, more than were concerned about “confidentiality of medical records” (78%) or “government interception of telephone calls or email” (72%).

Expectations of privacy clearly depend a lot on context. Information I share with my mother I may not wish to share with my friends (sorry guys), and information I share with my friends I may wish to keep secret from a potential employer. Information that I directly and intentionally share (e.g., via Twitter) is less sensitive than information that I do not know is being collected. I would consider my browser history, my email and my search history more sensitive than my purchase history from Amazon.com. I am pretty relaxed if information about these things is used just to target online advertising. I am less relaxed if these data were put together and used to establish my identity or calculate my credibility and trustworthiness.

And since my list of privacy preferences will not be the same as yours, it becomes clear that the question of online privacy is about the limits of my ability to control the flow of information about me, and my basic point here is that the internet age means that I have less control than before.

If users are concerned about control but feel (and to some extent are) powerless, what help does the law provide? We take up that story in Part 2.

Cut and run

The good people at San Francisco airport have a millimeter wave scanner, which they use, as per normal procedures, to scan departing passengers.

So when I had the joy just recently to fly through America, I was presented with the usual choice.

  • endure the millimeter wave scanner (about which more below), or
  • subject myself to an “enhanced pat-down” (subject of the infamous “don’t touch my junk” video, from a traveller who took objection to it in November 2010).

In the event the choice was made harder for me by the airline schedule and by the enormously long immigration queue I had had to wait through, because if you ask to avoid the scanner, it takes time to make an officer available to do the pat-down. What this meant was that, on one side of the decision scales was a quick scan (there was no one in front of me in the queue) and catching my plane, and on the other side was the scan-free pat-down, missing my plane, staying overnight in San Francisco and doing it all again the next day.

In the end I resignedly surrendered my principles, skipped through the scanner, and rushed to get on my plane which, as if to reassure me, ended up leaving early.

Who cares

It turns out that I need not have been so concerned. It doesn’t seem sensible to subject oneself to more x-rays than you need to, even if the machine they use at some airports gives a trivial dose by comparison with the rays one would absorb during the flight.

But in fact I was subjected to the millimeter wave scanner in San Francisco, which raises far fewer health concerns. The European Union issued a report saying that x-ray backscatter machines should not be used if millimeter wave devices are available, and banned the use of backscatter devices in their airports.

Still horrible

It remains a horrible thing to have to do. You stand in the machine alone, having been divested of your phone, your valuables, some clothes, and some of your dignity. You stand still, your feet on the little yellow feet marks that show you how to stand, isolated suddenly in the relative quiet of the transparent box. You hold your hands up in front of you, following the directions of the agent a few feet away, and aping the cheerless pictogram attached to the machine at eye level. A gesture of surrender to the might of technology and the bureaucracy that has determined that this is For Your Own Security.

The process is anonymised, clinical, optimised to process the greatest numbers of widgets with the least possible delay. Those doing the scanning been denuded of judgement, weary conveyor-belt workers following the rules, directing the endless stream of travellers through the bottleneck and onward into obscurity.

There is a whirr, the arms of the machine come to life and quickly spin around. Anti-climax. And you are done. You stroll out into the freedom and relative calm of the secure area, repatriated with your belongings, who have been through a similar process with more dangerous x-rays.

The future

More amazing, the world accepts that this process is just how you get on a plane. As the TSA reportedly told this man, “By buying your ticket you gave up a lot of rights”. To me it seems more like the distopian vision of some early twentieth century serialist than the considered best efforts of a far-sighted twenty-first century government.

Of course, I am sceptical about the value of airport security in general. But still. Since they do not seem to find anything particularly helpful, and the terrorists are in retreat in most of the world, I do wonder how much longer this madness can continue. I see the process has been streamlined for frequent flyers. How long will it take for the rest of us?

 

PS One of my favourite things about airport security is the sign that says, in essence, “All airport security screening is by consent, but if you do not consent, you will not be allowed to fly.” So cynical.

So just what is the matter, America

A kind of book review of “What’s the matter with Kansas”, by Thomas Frank

This is a really interesting book of American political analysis. Basically it explores an apparent paradox – poor people, especially in rural, mid-Western America, vote for the Republican party. The book tries to explain why this is so even when it is clear, in Mr Frank’s hypothesis, that the Republicans’ economic policies contribute to the impoverishment of those who vote for them.

His basic point is that conservatives use social hot-button issues (think abortion, gun control, gay marriage) and more generally a supposed split between rural and urban values to motivate followers to vote Republican, and as part of that platform poor voters also end up with an economic policy that works against their interests, undermining their rural lifestyle, destroying their industry and towns, and concentrating wealth in fewer and fewer hands.

As one example of this phenomenon, Mr Frank considers recent Kansan economic history and in particular looks at the rise of big agriculture and resultant demise of small towns. The marvel is that the democratic response to these economic declines is for Kansans to vote even more conservatives whose policies contribute to the decline of the small towns in the first place.

Les bleus et les rouges

The book is partly a response to the blue state/red state division that was coined in the 2000 presidential election. Crudely this is the idea that America is divided into Red states in the middle of the nation that are reliably Republican and where the good people live simply, but American made, and respect decent traditional values, and those Blue states on the coasts that vote Democratic and where everything is fancy, outre and imported, including the moral code.

Mr Frank points out that, on this theory, it is authenticity rather than anything about actual behaviour that divides the salt of the earth pickup-driving residents of the Red states from the effete, Volvo-driving residents of the Blue. Of course it is purely a political division – in practice, plenty of Red Staters prefer to sip on that fake fancy coffee than to slurp up cups of drip of death at the local diner for 50 cents a pop. But a parade of conservative Republican leaders create a social contrast between Red and Blue to make common cause with the average citizens of the Red states, infuriate them with talk of how the effete residence of Blue staters are responsible for all social problems, and through this secure both their outrage about social issues and their support for right-wing economic policies that do not advance those voters’ economic interests.

The net result is a slightly bizarre political position that talks a great deal about class, but denies that economics has anything to do with it, and results in the truly weird spectacle of the working poor fighting against healthcare reform that would give them insurance, or supporting tax cuts for millionaires.

Along the way, Mr Frank reviews the political history of Kansas, his state of birth, and catalogues the remarkable transformation of Kansas from home to firebrand radical progressive political activists at the turn of the last century, to a by-word for backwardness and parochial arch-conservatism at the turn of the this (Kansas School Board vs The Church of the Flying Spaghetti Monster being a marvellous recent example).

En route

He also reviews the ongoing conflict in the Republican party between conservatives and old-school liberals (these days sufficiently unfashionable to be a threatened species). And he talks in detail about the efforts of Republicans to paint themselves as victims of a liberal media conspiracy that works always against the common man. Those liberal elites and nasty mainstream media making the television ever ruder and society more permissive against the wishes of the majority.

In some fascinating chapters he talks to people who are conservative Republicans and tries to understand and document their stories. I found it uniquely interesting and bizarre that they think that economic institutions that would normally be on their side (e.g., minimum wages, unions, regulation of healthcare) are instead part of the problem. These people seem to want to create a low-wage, highly-competitive, race to the bottom labour market despite the obvious fact that this could undermine their own living conditions and those of their community radically. Or they are so motivated by social issues, especially abortion or religious questions, that they vote only on that basis, and they end up supporting the most conservative economic policies because only those leaders are sufficiently conservative on social policy.

I was particularly struck by the description of victimhood of the Republican party grassroots – the “backlashers” in the quote below, and the conscious pretence that they are not part of the ruling power even when their man is in the White House (the book was published in 2004):

While liberals use their control of the airwaves, newspapers, and schools to persecute average Americans – to ridicule the pious, flatter the shiftless, and indoctrinate the kids with all sorts of permissive nonsense – the Republicans are the party of the disrespected, the downtrodden, the forgotten. They are always the underdog, always in rebellion against a haughty establishment, always rising up from below.
….

Conservatism … can never be powerful or successful, and backlashers revel in fantasies of their own marginality and persecution.

And they combine all this with statements about their own supposed subversiveness through their willingness to stand up for the unpopular or unfashionable ideas, and to provide their lone voice support for traditional values.

Deux choses encore

Aside from being genuinely interesting social commentary about a part of society that I seldom encounter and know nearly nothing about, two things struck me.

First is the enduring relevance of this debate today for what sort of country the United States wants to be.

Mr Obama is famous partly for a speech he gave in 2004 to the Democratic National Convention that talked party about post-partisanship and the end of red state/blue state rhetoric. But the underlying debate about inequality and the limits of democracy continues to this day.

For instance, I note in today’s New York Times the continuing kerfuffle over covertly recorded comments by Mr Romney that the 47% of the nation who do not pay federal income tax are moochers who view themselves as entitled to support from everyone else. Interesting, there is a bunch of interesting data from the non-partisan Tax Policy Center that shows how the 47% of non-payers breaks down by income, and by state – lots of them are in Red states, surprise surprise).

The second thing that struck me was the enduring crapness of this narrative. It is so unconstructive and so unhelpful to draw such stark lines on the political map, leaving aside the basic fact that it isn’t even true geographically – you can see from the Wikipedia map of recent election results, that it is more complicated than just inland versus coast.

In this connection, the newspaper also records the rather damning point, so far as Mr Romney is concerned, that the reason the 47% proportion is so high is because of tax credit programmes that have been a darling of the Republican party since before Regan and that have been expanded substantially in recent years in efforts to make work pay better than welfare.

Fortunately, it may be that the peddlers of these types of rubbish messages are getting their comeuppance. I like to believe, with no evidence at all, that American voters eventually got tired of voting in people who didn’t ever make any progress on the social issues they used to attract votes and have now moved on to more radical Tea Party candidates who are actually trying to follow through on the political agenda they were elected for, no matter how batty. The result is a bunch of elected officials who vote extremely socially conversatively, and also generally want to dismantle government in fundamental ways. It will be fascinating to see how this plays out in the course of the next few years. Kansas, so they say, is now almost entirely in the hands of the more conservative factions of the Republican party.

Anyway, over to you. If you want more, there is a movie. And if you think ye olde Red State/Blue State debate is a bit out of date now, fear not. I see Mr Frank has penned another book on how the conservative right have fared since 2008.

Trouble at the top

I see in the news that CEOs are still getting pay rises bigger than their employees. CEOs pay has grown almost 10% in the past year, they say, compared with a 2.9% rise in average ordinary time earnings (and 1% consumer price inflation).

This is a trend that has been going on for quite a while, and it is much more of an issue in other places like the UK, where the government is requiring listed companies to have a shareholder vote on executive pay that will bind the company, and in the US, where recently the New York Times reported on 25 companies who paid their CEOs more than the companies paid in taxes. Cue dismay and disgust.

It does seem to be an issue all around the world, although these guys say it is mostly a US problem:

American chief executives received roughly four times what their Swedish counterparts in comparably sized companies did and 3.1 times that of a Japanese chief at a comparably sized company.

The average CEO at one of the 500 biggest US companies was paid $10.5 million a year in 2012, roughly split one third salary, one third other benefits, one third shares. Nice work if you can get it, although CEOs a bit longer in the tooth probably remember 2007 as the halcyon days – average US big-company CEO compensation peaked at $17 million each that year. And spare a special tear for poor Mr Dauman at Verizon who took home $84.5 million in 2010 but could only manage $43 million in 2011.

The ratio of CEO pay is obviously high enough to be a cause of significant political controversy, although CEO pay is not as high these days as it was earlier in the 2000s  relative to production worker pay on this data.

The golden goose

So why is this happening. Have we we got more companies that need leaders, driving up demand? Or perhaps fewer people coming out of CEO school looking for sandpits, reducing supply? Or maybe the value of what CEOs do has gone up over time somehow.

You can take your pick from a large number of hypotheses out there in the land of the commentariat. A selection of ideas follows.

  • Some, like these folk in the Wall Street Journal, argue CEOs generate their remuneration (which is often linked with share prices) from manipulating short-term results to drive up the value of their options, and don’t worry enough about long-term company health.
  • The Economist says that the increasing divergence between CEO pay and the pay of the unskilled worker is effectively due to globalisation. Referring to the UK, it says that CEOs with relevant skills are increasingly hard to find as companies diversify and internationalise (although presumably the HR department doesn’t lack for people willing to put their hat in the ring for $10 million a year). More soberingly, there is less to distinguish an unskilled worker in the UK from one in India or China these days, pushing down wages at the bottom end of the labour market as jobs move to where labour is cheapest.
  • Warren Buffett, billionaire investor, is on record as saying (see page 16 of his 2005 report to shareholders) “Too often, executive compensation in the U.S. is ridiculously out of line with performance”, and he particularly criticised large CEO exit payments:

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets.”

(Mr Buffett is not so indiscreet as to reveal how much time he has spent cleaning toilets in his lifetime).

  • The misalignment Mr Buffett talks about could be because compensation of executives in the US is more like a process of executives using their power to influence their own compensation and extract as much as they can rather than pay arrangements that are aimed at maximising shareholder value.
  • Or it might be because no Board wants to admit that they have a below average CEO by setting a below average pay package in this era when everyone knows what CEOs earn (although I think the world would be a better place if information on what people earned was more freely available).
  • Some say CEOs are mates with the people who set their pay and there is an unspoken rule that if they get approved higher salaries, then they will reciprocate when it comes to making the decisions for others. Or that those advising the relevant peeps on what the CEO should be paid are conflicted by other valuable work that they are doing for the CEO. Or that more generally, there just isn’t sufficient connection between company results and what the boss gets paid.
  • Paul Krugman, Nobel Prize winning economist, argues that the upsurge in executive pay was brought about by political and social factors, including an environment where the media and politicians are less likely to criticise inflated pay rates, weaker unions, and a sharp decline in marginal tax rates.
  • These academics argue that it is basically because the value of the companies CEOs run has gone up – similar to the Economist’s argument. So compensation for executives at the largest companies has risen because the market capitalisation of the largest companies has gone up. If you want to be paid more, work for a bigger company. Although reportedly business services, computers and banking are exceptions – they get paid more anyway. Leading some to say that “perhaps chief executives can add more value in more dynamic sectors”.

Or you might not really care why it happens, but just want it to stop.

Input to output ratio

Interestingly, precisely none of these people think high CEO pay has anything much to do with CEO performance itself. Which leads us on to the interesting question of whether CEOs actually matter at all.

And that in turn leads us on to this really interesting Atlantic article. I quote.

In their groundbreaking “Leadership and Organizational Performance: A Study of Large Corporations,” first published in 1972 in American Sociological Review, Stanley Lieberson and James O’Connor … asserted that the CEO’s influence was seldom decisive in a company’s performance…. “Industry effects,” such as the amount of available capital and the stability of the market, accounted for almost 30 percent of the variance in corporate profits. “Company effects,” such as the firm’s historical place in the corporate pecking order, explained about 23 percent. “CEO effects” explained just 14.5 percent. And even this impact should be viewed skeptically: it unavoidably bundles CEO actions that were genuinely smart and skillful with those that were merely lucky.

Which, if true, means that your task as the CEO is to get your company into an area that is growing quickly. Jeffrey Immelt, the CEO of General Electric (the third largest company in the world by some measures), is reported to have said “Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.” Previous CEO Jack Welch more or less agreed with this assessment.

Others are even more sceptical about the value of CEO. The article again:

James March, a management professor at Stanford, says that in any well-run company that’s conscientious about grooming its managers, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”

Eek. How much do we pay them again to keep the lights on?

Silver linings

The Atlantic eventually conclude with two interesting points:

  • One, it is important to ask not whether CEOs add any value, but when they add value, i.e., in what circumstances do you want a rockstar CEO and when would rather have someone less dramatic and ultimately less change-oriented.
  • Two, good CEOs can improve things a little bit. Bad CEOs can really stuff things up. I think anyone who has ever had a boss or been a boss knows this. It is much much easier to stop/ruin/doubt/undermine than it is to support/improve/really add something useful.

I note the irony in Atlantic feteing the then CEOs of Research In Motion, Mike Lazaridis and Jim Balsille, whose “newest BlackBerrys are flying off the shelves”. No more. This is Research In Motion’s share price  for the last five years (the article was written June 2009). Mr Balsille is particularly infamous for saying that he wasn’t worried about the iPhone, and didn’t think it would affect sales of Blackberrys. That said, they got the last laugh, to the tune of $12m between them when Research In Motion finally showed them the door.

And broadband for all (part 2)

Now everyone has access to a telephone, the question is how to get everyone great broadband

In Part 1 of this post we look at the historical approach to universal service. This Part 2 looks at the future: and in particular at rural broadband.

To its credit, the government has recognised that access to broadband in rural areas is a serious economic and social issue. The Rural Broadband Initiative (RBI) is the response: an industry-funded, government-led programme building faster broadband infrastructure in rural areas. When it is finished 86% of households outside the cities and most rural schools, health centres and public libraries will be able to access fast broadband, mostly within the next two years. Vodafone is building around 150 new sites and securing fibre to more of its towers, and Chorus is building 3,100 kms of new fibre. You can track Vodafone’s progress here or Chorus’ here.

Like Edward Woodward

The RBI was a big and welcome change in approach on how to to encourage telecommunications companies to provide services in hard to reach areas.

  • The TSO simply imposes the obligations on Telecom (and from 2001 to 2011 required other operators to pitch in to the costs). A similar model operates in Australia, where Telstra has the obligations and the other operators compensate it to the tune of around 50m each year.
  • The RBI is a competitive subsidy model (the money actually comes from the industry itself through a levy), rewarding Chorus and Vodafone, who won the tender, for building networks and providing services in rural areas. The German government has done something similar, requiring bidders for new generation cellphone spectrum to commit to build their networks in rural areas before they are allowed to build them in urban areas, implicitly accepting a lower sale price for the cellphone spectrum as the price of universal broadband coverage.

Not only is the RBI a better approach in terms of actually getting services rolled out in rural areas, but it sets a simple and clear standard for minimum broadband services which:

  • will reach 86% of rural customers, over half of whom will have access to multiple competitors and a choice of technology (copper or wireless)
  • will deliver a peak speed of at least 5 Mbps over wireless (a bit quicker than average fixed broadband services today) and 20 Mbps for copper-based services,
  • will be priced so that services cost the same in both urban and rural areas.

Four challenges for the review

First, there will be continued pressure from rural customers for better broadband services (see paras 164 to 167 of this Commerce Commission summary. This could take the form of a minimum guaranteed broadband service that must be available to all New Zealanders. There was much debate around the RBI as to whether 5 Mbps was fast enough for those customers relying on fixed wireless services (although of course it is a whole lot better than the no broadband at all that many rural customers faced before the RBI came along). The UN has defined broadband as a basic human right, and Finland in 2010 made a rule that all telecommunications operators were required to offer broadband access of at least 1 Mbps.

Competition over the RBI-funded infrastructure should mean that customers will gradually get more bang for their buck – in urban areas competition has meant growing datacaps with broadly static prices. Wireless services have smaller data caps than copper-based services reflecting the higher costs of data on wireless technologies. But new mobile technologies should allow faster wireless data speeds and bigger data caps in due course.

Second, the government’s review will need to consider updating the TSO requirements for the internet age.

Certainly free local calling is heavily utilised – accounting for 29% of all voice minutes in 2011 (see page 11), but if the Commission is right it is holding back competition. For the growing number of customers who use mostly or only their mobiles, “free” local calling is rather expensive. Other elderly TSO requirements – like not charging more in rural areas than in urban areas, and ensuring Chorus does not shrink its network seem superflous given the developments of recent years.

What to do with the ineffective price cap on basic voice services is trickier. It does not seem to serve customers very well, although clearly it is helpful for the industry to be able to put up prices every year.

Third, the obligations could be extended beyond just Telecom. With Chorus, the network company, now split from Telecom, the retailer, it doesn’t obviously make sense that the TSO obligations should rest only on Telecom. If Telecom is required, say, to have a standard plan that offers free-local calling as an option, there is no obvious reason why this rule should not apply to other operators as well.

The fourth challenge is ensuring everyone can get decent broadband.

Even after the completion of phase 1 of the RBI there will be coverage and competition black spots. There is a phase 2 of the RBI (ably explained by the Commision in para 159 of this report) to reach schools and other priority users that are not at present covered by the RBI or the government’s fibre network (the UFB).

Systematic, public, up-to-date data on remaining areas of trouble could also help – it seems like it would be an easy extension on the government’s (lamentably out of date) broadband map to show people who do not have service at present. This would help operators figure out the value of network extensions, sharing infrastructure where it makes sense in remote areas. Satellite solutions will work for many. Community self-build solutions like those from Wiz Wireless can also help in some parts of the country.

Over to you

So the ball lies fairly firmly in the government’s court. Its review is required to be completed by the end of 2013. We wait to see the outcomes with interest. A bold answer would consign the outdated TSO requirements to the dustbin, and ensure a sensible alignment between the TSO and the RBI as we continue to work towards universal broadband.

Hayden Glass is a consultant specialising in technology, telecommunications and public policy with the Sapere Research Group. This post originally appeared on the TUANZ blog.

And broadband for all (part 1)

Now everyone has access to a telephone, the question is how to get everyone great broadband

The government is to review next year the rules about universal service, i.e., the questions of what minimum level of telecommunications service should be guaranteed to everyone, and how best to make that happen.

The legislation requiring the review is quite specific about what to cover, including whether existing universal service rules are still needed, how they should be delivered on, and funding arrangements.

Successive governments have required Telecom to make basic voice services available to everyone. These historic requirements are now out of date, overtaken by competition and by technology (especially mobile). The real questions for the future are about broadband, as the government’s Rural Broadband Initiative (RBI) recognises.

Part 1 of this post looks at what the universal telecommunications services are, and how the requirements have fared over time.

Part 2 considers the future, explains why the RBI is a big improvement, and looks at what remains to be done.

What is universal service

The universal service programme in New Zealand suffers under the moniker of the Telecommunications Service Obligation for Local Residential Telephone Service (TSO). Fundamentally its job was to ensure that everyone had access to a fixed-line telephone that they could afford. (There are also separate arrangements for a text relay service for the deaf, confusingly also called a TSO, that are not the subject of this post.)

The latest incarnation of the TSO is a deed agreed in December 2011 as part of the separation of Telecom and its network arm, Chorus. The TSO imposes four main requirements on Telecom.

  • Never raise the price of basic fixed-line phone service for residential customers faster than the rate of inflation, unless Telecom can show its profitability is “unreasonably impaired”.
  • Never charge more in rural areas than in urban areas for “basic residential service”, which in effect means Telecom’s standard Homeline service.
  • Continue to offer fixed-line phone service to all customers who were connected in December 2001, and
  • Provide free local calling as part of the basic phone service for residential customers. Via an exchange of letters with the government in 2000, Telecom was also required to provide slow-speed dialup services to most customers.

Chorus, the network company, has obligations to maintain its fixed network coverage to ensure that Telecom can continue to meet its obligations.

These obligations have changed only slightly since they were put in place on Telecom’s privatisation in 1989 despite radical changes in the industry in the meantime. The slow-speed dial-up data requirements were put in place in 2001, when Telecom was given the ability to bill its competitors for some of the alleged negative profit impacts of having to meet these obligations. The Commerce Commission checks each year whether the obligations have been met.

The 2001 requirement for the industry to compensate Telecom was never going to be a popular policy in the industry. It led to a very long-running legal dispute eventually won by Vodafone, although as between Telecom and Vodafone the case had already been settled before the last court decision came out. Vodafone was essentially arguing that the Commission had not followed the law properly and as a result had substantially overstated the cost of the TSO obligations for Telecom. Soon after, the government announced it would get rid of the contribution system, particularly in light of evidence cited by the government that Telecom had not spent the money it had been given by Vodafone and others on rural network infrastructure in any case.

Universal service anyway

The TSO obligations have worked so far as they went, i.e., the fixed-line network is as no smaller than it was in 1989, the price of basic fixed-line phone has gone up at almost exactly the rate of inflation, and free local calling remains part of Telecom’s Homeline package (see the Commerce Commission’s helpful report).

But thanks to competition and technological change, these obligations are now chronically out of date.

* Ensuring access to a fixed-line telephone is no longer the problem. Just about everyone has access to a fixed line and a mobile phone, coverage continues to expand through competition, philanthropy, and the RBI, and local calls are cheaper and cheaper on prepay mobile plans with no minimum spend.

* The price cap on residential phone service was insufficiently tough in the first place. The Commerce Commission thinks that free local calling has retarded competition, and that New Zealand has one of the highest prices for standard residential service in the OECD. The price of standard residential phone services has risen even while prices for other phone services have collapsed. Local calling is only “free” for customers who pay the high monthly fee, which might be why the now-renamed Ministry of Economic Development calls it “charge-free local calling”.

In short, the existing TSO is a solution to a problem that no longer exists. The real issue now is broadband for everyone. As we shall see in Part 2.