Call to split Telecom into two companies

Telecom NZ should be split into a network company and a services company, says a New Zealander helping to break up Mongolia's state-owned telecommunications company.

John Third, managing director of Guinness Gallagher, a Wellington-based consultancy working on privatising and breaking up Mongolia Telecom told the Computerworld weekly newspaper there was a simple solution for problems in New Zealand telecommunications.

"Structural separation is the answer and it's nowhere near as difficult as they think," he said. The the most difficult part for the sector was the willingness, or not, to engage with the issue at its most fundamental level.

"Telecom would be better off if it was split up," he said.

Mr Third said splitting Telecom into a network company and a services company was the best way forward, as both sides of the business had competing and contradictory business plans.

"Networks are low risk and low return, and have low complexity," he said.

"Service companies are higher risk, for higher return, and are far more complex. Networks have long life spans; service companies deal with shorter lifespans for products."

Having one company trying to fulfil both roles meant "destroying value" on both sides of the business, Mr Third said.

"Networks are better [if they are] owned by pension funds that want a steady and reliable return on investment."

The newspaper said investors would be free to chose either the new network company, with its steady income stream building a network open to all service companies, or a stand-alone services arm that competed on a level playing field.

Such a split would side-step the politically-charged issue of unbundling the local loop, effectively giving all-comers equal access to the Telecom network.

Telecommunications Minister David Cunliffe has ordered an industry stocktake and a review of the Telecommunications Act 2001 in the wake of criticism of the slow and light-handed regulation of Telecom.

Mr Cunliffe promised last year to act against Telecom if it failed to meet the wholesale target, which he described as being light.

Telecom is reported to have missed its self-imposed wholesale broadband target after setting itself the goal of delivering broadband to 250,000 residential customers with one third of those connections being offered via wholesale partners.

Although it exceeded the 250,000 target, Telecom fell well short of the wholesale component of the pledge.

When it became apparent last year that the wholesale target would be missed, Telecom chief executive Theresa Gattung stated that the goal was never one-third of all customers, or 83,333.

Instead Ms Gattung said that it was a third of all new broadband customers, but both the Commerce Commission and Mr Cunliffe have disagreed and insisted the pledge was for one-third of all residential broadband connections by the end of 2005 to be wholesaled or resold.

This week, industry sources have speculated that when Mr Cunliffe's stocktake is presented to the cabinet, it will canvass not only local loop unbundling, but a structural separation of Telecom's retail and wholesale operations, as proposed by Mr Third.

Other speculation has arisen over the extent to which Telecom will be financially compensated for local loop unbundling through a boost in Telecommunications Service Obligation levies which competitors have to pay to subsidise "unprofitable" customers in remote areas, even if they do not use Telecom's landline connections.

Other commentators have said that unbundlling Telecom's local loop would be short-sighted because it is a "sweated asset" and if Telecom sold it back to the Government, its investment would be diverted to "next generation networks" carrying mixed traffic such as voice, video, and data at high speeds.

If Telecom was split - as has recently happened in British Telecom -- a network company would have to sell space to all service providers and Telecome would be forced to become more competitive and innovative instead of balancing the interests of one division against the other.

- NZPA