Christopher Niesche: Worse could still be on the way for telco as separation threat looms

Things could get even worse for Telecom.

As the telco's stock plunges on the local sharemarket, another threat looms over the country's largest listed company.

The Government had been widely expected to force Telecom to open its network to competitors - unbundling the local loop - but the surprise lies in what it is considering next: structural separation.

This would break the company into two separate arms, one which owns the phone network and the other to sell phone and internet services. Telecom would lose control of its most valuable asset, its network.

Communications Minister David Cunliffe said the Government was studying the desirability of structural separation and this was no empty threat. Yesterday's decisive action showed that the Government has completely lost patience with Telecom.

The company's fate was sealed last year when Helen Clark attended an Apec meeting in South Korea. A demonstration of the latest communications left the Prime Minister feeling as if New Zealand were the "country cousin".

New Zealand is ranked 22nd of the 30 OECD countries in broadband uptake - South Korea is second - and if uptake doesn't improve, the Government will take further action.

If Telecom chief Theresa Gattung and her executives try to stall local loop unbundling - as Telstra has been accused of in Australia - then the Government will break the company apart.

The changes will ensure that Telecom's profits drop, and probably sharply, though it's too early to guess by how much.

Telecom now faces the challenge of trying to get its profits growing again under the new and tougher rules.

These rules should ensure that the telecommunications market in New Zealand flourishes. Telecom should embrace the change and try to get as big a slice of the larger market as it can by providing the best and most up-to-date products and services it can.

Its other option is to continue with the strategy that failed it so miserably yesterday - digging its heels and fighting any change.

If it does that, things will get worse.