All Budde news for industry

Only a man like Paul Budde could deliver such a damning indictment of our telecommunications industry but remain so good humoured.

The Dutch-born telecoms analyst has for years been compiling research on the New Zealand market from his office at Bucketty, in the bush north of Sydney.

But his reports, which are often peppered with stern warnings, have been getting grimmer by the year.

That's because Budde believes a lack of competition and technological development in the telecoms industry is threatening the country's future.

His latest report points to the continuing "mobile rort" in call pricing, TelstraClear's retreat this year from key markets, a failing wholesale broadband regime and Telecom's renewed "fortress mentality".

Industry executives accuse him of being "socialist" in outlook, unrealistic and loose with the facts. But he's a lone voice in the analyst community when it comes to suggesting solutions to the industry's numerous problems.

Budde likes a good joke, but as he visits New Zealand presenting his research this week, the underlying message will be serious.

More worrying than the lack of competition in calling and internet services, says Budde, is the fact that those here with the power to make changes in the national interest don't see the big picture.

"Not everybody in New Zealand seems to fully understand that their future lies in an internet-driven, not a telecoms-driven, economy," he says.

The coalition Government, he argues, isn't well-positioned to transform the industry. With the world moving full-tilt to next-generation internet technologies, there's no sense of urgency here.

"Not all of the four parties involved have a good understanding of the importance of telecoms for the economy, and for the community at large."

Budde has long been a thorn in the side of Telecom and its transtasman rival Telstra, but the rogue analyst's shift in attention to the Government and regulator is a worrying sign.

There is growing consensus that the regulatory regime set up with such studious devotion to detail is a failure.

Budde says its shortcomings are affecting everything from the ability of our businesses to compete with overseas competitors to the success we have in luring Kiwis home to address a serious shortfall of skilled workers.

"New Zealand is trying to get some of its top-notch expatriates back to help reverse the brain drain, but present third-rate telecoms services will make recruitment very difficult."

Of Telecom's competitors in the internet market, he is complimentary. CallPlus, Orcon and ihug were among those making the best of a dire wholesaling regime, which served up margins on the sale of high-speed internet services that were as low as two per cent.

"Ihug's speed-independent broadband service is certainly different, and this is creating a shockwave though the industry, but ihug has little room to manoeuvre," Budde says. "Like everybody else, it is unable to build VoIP or IPTV products into its broadband offerings."

That's because those advanced services - high-quality internet telephony and delivering video over internet lines - aren't supported through the wholesale services available from Telecom.

"The current half-baked bundled products these second-tier players are now able to deliver are nothing like the new products and services we are seeing elsewhere in the world," he says.

His contempt is not directed at the second-tier internet providers themselves, but a regime that gives them limited scope to compete with Telecom.

"Under the current regime, no more than perhaps 10 per cent of the approximately 100 ISPs will be able to survive," he predicts.

So what's the answer? In Budde's view, a second stab at winning the regulatory crown jewels - local loop unbundling. It would see Telecom's "last mile" network from its telephone exchanges through to customers opened up to competitors. Placing their own equipment in Telecom's exchanges, they would then have control over the types of services they want to deliver over Telecom's copper wire lines.

In 2002 Telecommunications Commissioner Douglas Webb concluded that unbundling wouldn't kick-start the broadband industry as quickly as the wholesale broadband regime.

Unbundling was rejected in favour of a scheme designed to give Telecom's high-speed internet services to rivals at discounted rates.

The problem is, margins in the wholesale business are wafer thin and no one can deliver anything different from Telecom.

The result, Budde says, is that the market is now distorted. With a large number of internet providers advertising high-speed internet deals, it appears there is competition. But the wholesale regime serves only Telecom, Budde says, adding that the incumbent telco has subsidised the advertising of its tiny rivals to the tune of between $1 million and $1.5 million.

"It is also amazing to see how much money Telecom is prepared to throw at the second-tier ISPs to prop up their advertising campaigns in order to reach their wholesale target," he said. Budde suggests the country should aim to have one million broadband subscribers by 2007 (four times the figure Telecom targeted to have by the end of this year) and that the figure can only be achieved through unbundling.

He believes a rate below $15 per subscriber is needed, well below the $26 per customer wholesale broadband regime charges for what he calls an inferior product.

The second component the Government needs to consider, he says, is operational separation of Telecom's business units. That would see its retail, wholesale and network units divided up so Telecom would be treated on an even footing with its competitors.

New Zealand can learn from Australia and Britain, where Telstra and British Telecom respectively are either currently dealing with operational separation or have recently gone through it.

Budde says the current review of telecoms legislation needs to be widened to look at this type of operational separation of Telecom.

The biggest beneficiary of unbundling and operational separation would be second-ranked telco TelstraClear. Last month it ditched plans to build a mobile phone network and has said it will not sell Telecom's wholesale residential products nationwide, but only where it already has a network - mainly in Wellington and Christchurch.

"It must have been quite embarrassing after the [unbundling] debacle to find that [TelstraClear] did not have a plan B. In key markets they have lost valuable market share during the last year," Budde says.

He believes Telstra could quit New Zealand if the regulatory situation doesn't improve.

"Telecom has already unfolded similar plans in relation to AAPT, but both companies have inflated expectations of the value of their overseas operations."