Between the lines: Talk is cheap for Telecom

Telecom's talks with various parties about its money-losing rural network appear to have yielded little of substance.

Yes, every trust-owned lines company the Business Herald spoke to was enthusiastic about the idea of taking over some of Telecom's rural network.

One, hearing that Telecom was considering its future, wanted to know who to talk to, while others seem to have explored the idea almost as far as developing business plans.

The firms are boxed into the humdrum lines business by the electricity reforms, so the synergies potential of taking on a complementary network business in telecommunications is worth investigating, even if it proves impractical.

But while discussions with Telecom have taken place, they seem to have been mostly at the behest of lines companies. And they have not gone very far - apparently because Telecom is preoccupied with Australia, and because it seems to have no idea what it wants to do anyway.

If Telecom is confused, it has good reason. The power to control the market that its ubiquitous network once bestowed is eroding, although more slowly than some competitors would like.

While they might argue that its ubiquitous network is still of great value, it clearly needs to eliminate any loss-making areas so that it can fend off intensifying competition and accompanying margin squeezes in its core business and residential markets.

The $167 million in losses from rural services may not be as bad as Telecom portrays. It can still charge through the nose for terminating other carriers' traffic to rural customers. And the overall profitability of its local network remains a mystery after its failure to meet a September disclosure deadline and ongoing deliberations at the Ministry of Economic Development about whether to prosecute.

But Telecom faces great uncertainty. The Government may take up the telecommunications inquiry's recommendation that Kiwi Share obligations to provide "ordinary telephone services" evolve to equal those available to most users.

Telecom has not won a reputation for gold-plating its rural network and, by its own admission, it could cost $500 million to meet even basic internet standards.

An even larger concern looms. The telecommunications inquiry fell short of unbundling the local loops so other carriers could put their own equipment in Telecom exchanges and use its lines to provide their own services.

Europe, Australia and the US have now done this, and the inquiry left that matter open for future consideration.

Perhaps it shied away from recommending doing so now because, while it is becoming standard in other deregulated markets, the current raft of proposals may be about as big a shake-up as can be absorbed at this time.

But even without local loop unbundling, Telecom may well think that getting rid of its indifferent rural network now may be smart as its value could decline.

While the capital freed would be useful for expanding into Australia, the removal of a rural network management distraction would also leave it free to concentrate on an increasingly competitive wholesale market, in which carriers vie to supply services to one another and to internet service providers, data warehouses and a plethora of online activities.

Regardless, it is curious that Telecom has admitted it has had talks about its rural network now. Legislative proposals on the telecommunications inquiry will be put to cabinet within weeks and it is in Telecom's interest to step up the focus.