The Commerce Commission today said Telecom's Internet service provider (ISP), Xtra, raises competition concerns.
The Commission has received 15 complaints from ISPs that Telecom is breaching the Commerce Act.
The complaints fell into three broad categories:
· that Telecom is supplying its 0800 service to Xtra at a cheaper price than that offered to competing ISPs;
· that Telecom is refusing competitors access to a new Internet service, IPNet; and
· that Telecom is deliberately running Xtra at a loss to drive other ISPs out of the market.
Commission Chairman Dr Alan Bollard said that while the Commission has decided to take no further action over the first two issues, it is concerned that Xtra being run at a very substantial loss may breach the Commerce Act.
The Commission must address the question, are Xtra's losses for the first few years a legitimate investment to gain a foothold in the rapidly expanding Internet services market, or is such a strategy anti-competitive behaviour, and prohibited by the Act?
While running a business at a loss is not prohibited by the Act as such, a company in a dominant position using that position for the purpose of eliminating competitors is prohibited by section 36 of the Act.
The Commission is concerned that Xtra's alleged below cost pricing and the level of loss being incurred may be contrary to this section of the Act.
Many ISPs have followed Xtra's price reduction. However, given the cost of purchasing 0800 services from Telecom, it is unlikely that they can match Xtra's 0800 prices without also providing these services at a loss.
"There is evidence that Xtra's pricing may have a detrimental effect on competition and this may indicate the purpose for the pricing strategy," Dr Bollard said.
"Healthy competition benefits both customers and providers of services - it allows buyers and sellers to send strong, clear signals to each other. If a dominant company abuses its power, customers and competitors lose out.
"It is vital that a new market, such as that for Internet services, should develop in the directions determined by healthy competition between companies and decisions by customers. The Commerce Act puts in place important limits to protect competitors and customers.
"We will continue our investigation of Xtra's pricing into the New Year and will advise of its results when the investigation is completed. This investigation will necessarily touch on very important and complex issues under the Act."
Returning to the other two categories of complaints, complainants also alleged that Telecom was selling its 0800 service to Xtra at a cheaper price than that offered to competing ISPs. The Commission's investigation showed that Telecom uses the same pricing formula for all ISPs including Xtra. There is no evidence of a breach of the Act in this matter.
The third category of complaints was that Telecom was refusing competitors access to IPNet. The investigation found that IPNet is still being trialled and has not yet been commercially launched, therefore there is unlikely to have been a breach of the Act in this respect.
Media contact: Chief Investigator Commerce Act Geoff Thorn
