KEY POINTS:
Twelve months ago a lowly Government messenger named Michael Ryan precipitated what would be the biggest bombshell dropped by a government on the country's largest company.
Ryan slipped his cycling buddy and Telecom financial controller Peter Garty an envelope containing a secret Budget paper that detailed a proposal to open up Telecom's network monopoly.
What Ryan did that day was force the Government to rush out its announcement that it would force Telecom to open up its network to competition - a move the telco had been fighting since it was privatised in 1990. The announcement was greeted with euphoria by both rival phone companies and the public, who were told "cheaper, faster broadband" was just around the corner.
A wounded Telecom announced that "it's hard to see how the steps announced today will deliver on the Government's aims of high-speed broadband throughout New Zealand".
A year later it seems as though little has changed. Broadband is still expensive and New Zealand ranks 22nd out of 30 OECD countries for broadband uptake.
However, industry players say that behind the scenes progress is being made and the local loop is being steadily unbundled.
Minister of Communications David Cunliffe said the day of the announcement was one he would never forget.
"[The leak] probably added to the drama, but I think it was a pretty dramatic announcement anyway because it really ended, finally, 15 years of light-handed regulation since Telecom was privatised," Cunliffe said.
He said the Telecommunications Act introduced in 2001 didn't solve the problem that Telecom, controlling more than 90 per cent of New Zealand's lines network, had the ability and incentive to discriminate against competitors.
That near-monopoly had supported the company's profit and its share price for years. Indeed, Telecom's shares took a hit after the unbundling announcement, shedding close to 9 per cent in a day as the price fell from $5.55 to $5.06.
It has averaged $4.76 over the past six months and closed yesterday at $4.88.
Cunliffe said the Government's move was ostensibly aimed at bringing consumers a wider range of telecommunication products at cheaper prices, thereby dragging New Zealand up into the top half of the OECD rankings of telecommunication services.
What rival internet service providers seized on was the promise of local loop unbundling - opening up Telecom's network of fibre and copper wire to competitors.
When contacted by the Business Herald, Orcon's vociferous general manager of operations and regulatory affairs Scott Bartlett gave the standard soundbite response of the underdog.
"We don't have unbundling," he said. "I keep reading in various newspapers Telecom quoting that they're looking for quick wins, that they're committed to quick wins. Twelve months on and no one delivered even a single win."
But pressed further, Bartlett said a year on there are tangible results coming out of the Government and industry processes.
His company, along with other telcos, will be testing access to Telecom's networks by the middle of the year with plans to "go nuts" from December.
But he admits to having been far too optimistic about the time it would take to prepare for local loop unbundling.
"I am pretty sure that I was the one saying that I'd have a test exchange up and running by the first quarter of'07."
Hidden in the background is a huge amount of work being done to prepare for local loop unbundling (LLU).
Part of that work is being undertaken by the Telecommunications Carriers Forum, a group with membership including Telecom, TelstraClear, Vodafone, CallPlus, Compass Communications, Woosh Wireless, WorldxChange, Kordia, Orcon and Vector.
Representatives from these telcos spend two days a week drafting, negotiating and agreeing the operational and technical specifications that will deliver LLU and unbundled bitstream services (UBS).
Bartlett said rather than the industry working independently and banging together like kids at a rock concert, they are joined in a waltz.
Most agree there is a more co-operative approach from Telecom and credit the new face of Telecom's Matt Crockett and his team for that.
"I'd like to think our wholesale customers are dealing with quite a different organisation," said Telecom chief financial officer Marko Bogoievski.
Telecom wholesale sells its broadband and landline products to internet service providers to then on-sell to their retail customers.
Telecommunications Users Association of New Zealand head Ernie Newman said the change in attitude from Telecom over the past 12 months was very much to its credit.
According to CallPlus chief executive Martin Wylie, other than some network performance problems late last year, there are some promising signs Telecom is trying to treat them more like customers rather than just competitors.
Wylie said in reality the industry hadn't yet got into "the really tough stuff". He said the crunch would come with the determination of the commercial terms and pricing under which Telecom proposes to provide services to other operators.
Rival telcos have yet to see how Telecom will respond under pressure. But the heat had started to come on with Telecom last month announcing it won't be able to undertake the Government's operational separation plan and keep up progress on unbundling, Wylie said.
"It is kind of a sniff of Telecom of old in that tactic."
He said there was also the risk that Telecom returns to the practice of litigating to slow down progress.
The Government wants Telecom to be split into three operating units - retail, wholesale and network - to allow competitors equal access to its network and services.
Telecom says this would be unnecessarily complex and expensive and instead advocates a two-way split which would see the retail and wholesale units operating separately under the Telecom banner, but the network assets in a separate company. Bogoievski said Telecom had done some serious work with the industry to deliver new services as soon as possible, but he wanted to see the Government define the priorities for resources.
"If you want to get them finalised quickly you need to pull together some of the different regulatory activity that is currently occurring."
Telecommunications analyst Paul Budde said there was a fine line between feeling sympathetic for what Telecom was saying and on the other hand, an underlying gut feeling that quite often it was a tactic used to delay and frustrate rather than make progress. He does caution against looking to Australia for best practice examples. There, he said, incumbent telco giant Telstra used the courts to hold up unbundling for seven years and was still vigorously campaigning against alternative networks.
Budde also said those around the world that have already unbundled the local loop are currently building new fibre-to-the-node networks that will make LLU technology obsolete.
He said the longer New Zealand waited for local loop unbundling the more out-of-date the technology and regulation would become.
But a "gleeful" Mark Rushworth, as he recalls being described in the media last May, is still optimistic about the progress.
"We're still hopeful we can get some keys to an exchange before the end of 2007."
However Rushworth, iHug's chief executive, warns the future may not be so bright for smaller ISPs.
"If you don't get big, you get bought, because you need scale for LLU," said Rushworth.
IHug itself was bought by British-owned Vodafone last year. Earlier in the year Oamaru-based toll, internet and landline service provider CallSouth was acquired by electricity retailer TrustPower.
Rushworth said any delays to LLU would be felt acutely by the smaller ISPs operating on thin margins, whereas bigger players would be able to ride out any delays the incumbent puts into the process.
TelstraClear head Allan Freeth agrees. Freeth said if telcos are going to be serious about providing a true alternative to consumers then they are talking about investing $200 to $300 million.
He said some ISPs were signing up customers on thin margins in the hope the quick introduction of unbundling would allow them to regain ground by "mining out" the cost once input costs go down.
"That's a very dangerous business and it requires helpful shareholders and banks propping up your company while you get there or you're hoping someone like a TelstraClear or Telecom will come along and buy you to get hold of your customer base."
He said it was inevitable that over the next three to five years there would be industry rationalisation and consolidation.
"This is a game for companies with substantial backing and deep pockets ... if you're serious about substantial investment in this industry you're always talking hundreds of millions of dollars."
Cunliffe said he was absolutely confident the direction set by the Government was "the right one for New Zealand". Cunliffe said although he knew it would take time to pass the law, do the separation work, bed in the changes and see the market response reach the consumers, the schedule was running on time.
"I think it's fair to say that everything we expected to happen has happened," Cunliffe said.
"I would ask the sector and the public to have confidence that everything that can be done is being done.
"I share the determination that the public does that we should have faster cheaper broadband with a wider choice of providers and better investment in networks as soon as possible."
Steps On Route To Unbundling
May 2006: Communications Minister David Cunliffe announces Telecom will be forced to open its network to competitors.
June 2006: Telecommunications Amendment Bill is tabled in Parliament, requiring Telecom to allow competitors to use equipment and lines running to homes and businesses.
September 2006: Telecom joins rival telcos in working groups to sort out the technical details of local loop unbundling.
December 2006: Telecommunications Amendment Bill is passed under urgency, tightening the regulation of Telecom.
April 2007: Government details plan to split Telecom into three operating units - retail, wholesale and network.
April 2007: Telecom proposes a two-way split with the network assets in a separate company saying the Government plan is unworkable.
May 2007: Telecom announces a third-quarter result showing flat revenue growth and higher costs in New Zealand.
Then & Now
IHug: Mark Rushworth
Chief executive
May 2006: "The handbrake's finally come off and we have to applaud the Government's decision, it made the right choice and tonight the champagne will be flowing."
May 2007: "We're still hopeful we can get some keys to an exchange before the end of 2007."
Telstra Clear: Allan Freeth
Chief executive
May 2006: "In my early discussions with our Australian shareholders this evening they are both very pleased and it's certainly changed the whole environment for investment by them here and we'll be very interested in the detail."
May 2007: "I guess that initial hope and euphoria has been lost a little in Telstra with the length of time it has taken to get to a decision on pricing and terms and conditions on unbundled local access and the exchange."
Telecom: Bruce Parkes
General manager of regulatory affairs
May 2006: "Today's package actually tells players to put away any major investment plans and rely on regulations instead."
Marko Bogoievski
Chief financial officer
May 2007: "I'd like to think our wholesale customers are dealing with quite a different organisation."
TUANZ: Ernie Newman
Telecommunications Users Association chief executive
May 2006: "It's great. It means progress. It means economic progress. It means competition. A lot of the competitive players, like CallPlus, ihug, TelstraClear, suddenly have a business case to again invest in New Zealand."
May 2007: "It's been painfully slow and the direct benefits to the consumer have yet to emerge."
