Cross lines over broadband

They rubbed shoulders at the buffet table and gossiped over coffee, but the heads of New Zealand's second-tier telcos are not a happy lot.

Telecom chief executive Theresa Gattung and Vodafone boss Russell Stanners were upbeat as they outlined proposed services at last week's Telecommunications Users Association conference in Wellington, but the message from smaller players was grim.

They say they have money to put into new services, but won't do so until regulatory changes make it worth their while.

A load of self-serving bluster? Of course, but you get the feeling there's disappointment with a wholesale broadband regime that many initially greeted with optimism.

Most of them can't make the services pay and internet provider Orcon says it's losing $50,000 a month delivering wholesale services.

The frustration over perceived shortcomings in the wholesale broadband service offered by Telecom boiled over last month, when a group of internet providers presented a letter of complaint to the Commerce Commission.

TelstraClear was not among those who signed, but its chief executive Allan Freeth, the former boss of agriculture supplies company Wrightson and a dry realist, shares their angst.

A review of TelstraClear's business had reinforced the "stark economies" of the second-ranked telco, he told conference goers.

Freeth said the 250,000 residential broadband subscriber target set by Telecom may well be reached by the end of the year.

However, "few will be wholesale customers and ... dynamic competition will still have not arrived".

Freeth has called for "public bashing" of Telecom to stop. Instead his criticism is saved for regulator Douglas Webb and the Government.

"While Wellington fiddles, the world will have moved on," he said.

TelstraClear had decided against selling Telecom's wholesale broadband services except in Wellington and Christchurch, where the presence of its own networks made it viable to do so.

That left TelstraClear out of the residential broadband loop in Auckland where Ihug, Orcon and other players were pushing new deals based on the wholesale regime.

"I start looking at it from [the point of view of] hard-nosed economics," said Freeth, who is feeling the pressure from shareholders across the Tasman to deliver profits.

"We're not here to meet Government targets, we're here to make money. The expectation is for TelstraClear to be a pretty strong growth vehicle [for Telstra]."

A Commerce Commission decision on a deeper form of network access for TelstraClear is pending.

In the meantime, TelstraClear has more modest aims than those espoused by Freeth's outwardly more ambitious predecessor, Rosemary Howard.

A question mark still hangs over TelstraClear's plans to build a mobile phone network. But elsewhere, modest investments are being made.

TelstraClear would launch a digital television service over its cable network in Wellington and Christchurch and was spending $10 million quadrupling capacity on its North Island fibre backbone.

"One-point-five billion dollars later, and reselling Telecom's products over the Telecom network is, for the foreseeable future, our lot when it comes to mass-market competition," he said.

Telecom's other competitors are equally despondent.

Martin Wylie, new chief executive of third-ranked internet and calling operator CallPlus, said despite the regulator requiring Telecom to offer its services to competitors at a wholesale rate, it was "hard times for second- and third-tier carriers".

"We're in [the high-speed internet] market, but no one is going to get rich, with one possible exception, selling their product," he said, alluding to Telecom's stranglehold on the broadband market.

Ihug's new chief executive, Mark Rushworth, said the margin in selling the new wholesale services that had become available to Telecom's competitors was less than for selling regular dial-up services that have been around for years.

"There's a whole lot more we'd like to do with broadband, but in the current environment, it doesn't make much sense," he said, pointing to the progress parent company iiNet had made in Australia where it was taking advantage of local loop unbundling to put its own equipment in Telstra's phone exchanges.

"I never thought I'd say it, but I quite like the Australian model," he said.

Wireless operators such as Woosh, Broadcast Communications and Wired Country preach a different story. The frustrations of the broadband wholesalers play into the hands of those who have got into wireless early.

As Neil Simmonds, head of Auckland-based Wired Country pointed out: "It's quite convenient for us that the incumbent behaves the way it does."

Communications Minister David Cunliffe told the conference that Telecom was likely to reach its 250,000 residential broadband goal.

But more work had to be done to meet the target of having a third of those customers signed up with its competitors.

He said New Zealand needed 600,000 broadband subscribers to level peg with its peers in the OECD in terms of broadband penetration.

Cunliffe said he was reviewing a recommendation by the Commerce Commission to force Vodafone and Telecom to lower the rates they charge to connect to each others' networks and would release his decision soon.

He was clear that Telecom would play a major role in determining how fast the country's communications infrastructure was improved.

But he hinted that the Government was annoyed that it had not been better informed about the progress of work on Telecom's next-generation network, which would receive a large chunk of Telecom's $750 million capital expenditure next year.

"I'm still waiting for detailed briefings on the next-generation network."