Christopher Niesche: Telecom now facing an uphill battle

There's no doubt the Government will crack down on Telecom later this year.

Following lobbying from business, New Zealand's woeful broadband performance is very much on the Prime Minister's radar screen and she is determined - both privately and publicly - to do something about it.

Unless Helen Clark can be persuaded otherwise, the Government will force Telecom to unbundle the local loop, opening up its network to competitors.

In theory, this would allow other internet service providers to set their own broadband speeds and prices, and the resulting competition should bring much better deals for consumers and a better result for New Zealand.

Telecom chief Theresa Gattung and her team now face an uphill battle to persuade the Government to maintain the status quo. They have only until the middle of the year when Communications Minister David Cunliffe reports the results of his regulatory review of Telecom.

It won't be easy. Telecom has few allies that the Government has to be worried about alienating, so faster and cheaper internet is likely to be something Helen Clark would want to deliver to business in the absence of tax cuts. And Government patience with Telecom has well and truly run out.

Telecom staved off local loop unbundling in 2003 by promising to deliver 250,000 new residential broadband connections by the end of last year, one-third of which were to be wholesaled through other providers.

It is clear now that this has been a failure: Telecom missed those targets and then disowned them and New Zealand seriously lags the rest of the developed world in broadband.

This time around Telecom has a two-pronged strategy to persuade the Government not unbundle the local loop.

First, it has announced lower broadband prices and faster speeds for residential and business customers. Its competitors will be offered the same terms. This should boost broadband uptake in the next few months and allow Telecom to claim that the status quo is working.

Second, Telecom is currently negotiating what it's calling a "Wholesale Charter" with the other internet providers. Essentially, this means that anything by way of speeds and prices Telecom can offer its own customers, it must also make available for its competitors to sell.

In theory the charter should level the playing field, even though Telecom would retain control over the pace of any changes to the market.

These two initiatives are attempts by Telecom to dress itself up as a good corporate citizen. In reality, they're nothing more than naked self-interest, nothing more than another attempt to keep the Prime Minister and the regulators at bay.

The irony is that Telecom's solutions - if they are adhered to - might actually be the best solution for New Zealand, at least for the next two or three years.

Local loop unbundling could take years to implement. If the Government decided to further explore the option then the Commerce Commission would likely be asked to conduct another - in fact, its third - review into local loop unbundling.

If after that the Government decides to go ahead, then there's the crucial issue of putting a price on access to the local loop for competitors. The price will ultimately determine the success of unbundling.

In Australia, the Australian Competition and Consumer Commission has been wrestling with this issue for two years and is yet to find a solution.

Also, it's expensive for internet service providers to install their own equipment, which is required to turn local loop access into the best available internet services. This raises questions about how viable it would be for internet service providers in New Zealand's small market.

In Australia - which is ahead of New Zealand - most of the improvements to broadband offerings have come through wholesale agreements in a fiercely competitive market, not through local loop unbundling.

New Zealand might be better off with Telecom continuing to wholesale broadband access to rival internet providers, in conjunction with the beefed-up powers for the Commerce Commission that the Government is planning. These powers could be used to force Telecom to give better deals to its competitors.

Still, deciding against local loop unbundling carries a huge risk. If Telecom doesn't deliver then the country will have lost two years for no progress and be even further behind the rest of the world.

Before the Government decides against local loop unbundling, it has to ask itself one crucial question: Can it trust Telecom?

On past experience, the answer has to be probably not.