I don't believe this is true, at least for the larger ISPs (may be the case of Universities). A friend of mine owns a small ISP in New Zealand and I've discussed this with them as I assumed there would be a huge demand for local data centres and storage/streaming services. Right now all traffic goes out of the country and back in again - that's what should feel like a rip-off.

Apparently Telecom could do this but it would require a court order or major political pressure. If this were happening now you'd see a lot more innovation in the digital space, and the experience of using the internet in NZ, in terms of streaming media etc. Netflix for example declined to startup business in NZ because of these problems. http://www.stuff.co.nz/technology/digital-living/6045189/NZ-...