It's crunch time for Telecom

By PETER GRIFFIN

The first of several major decisions from the Telecommunications Commissioner will be handed down this week, bringing the prospect of more aggressive competition in the sector by Christmas.

A decision on TelstraClear's application for a review of Telecom's interconnection pricing will be followed soon by a draft ruling on wholesale pricing and a calculation of the new Kiwi Share or Telecommunications Service Obligation (TSO), which the main companies will be expected to share.

The decision on interconnection pricing will draw particular interest from Telecom's competitors, who believe the charges they pay to access Telecom's network are crippling their businesses.

Outspoken telecoms analyst Paul Budde agrees.

"Telecom's interconnect rates are well above international benchmarks [about 1c a minute]," he says.

"So Telecom reaps a significant premium on that and, as such, this could be classified as a contribution from competitors to the TSO costs."

With regulatory change in the wind, activity in the sector is increasing and has also been stimulated by the Government's PROBE project, which aims to get high-speed internet to all schools by the end of 2003 but will extend broadband to communities in 14 regions covering the country.

For telcos, PROBE is a valuable opportunity to scoop Government funding that makes rural projects viable.

With relatively unproven technology from US company IP Wireless, Vodafone and Walker Wireless won the tender to build a wireless service in Southland. Tenders in other regions will be fought over mainly by Telecom/BCL and Vodafone/Walker Wireless.

Critics of PROBE are sceptical of its "build and they shall come" plan, pointing out that little research has been done to gauge what uses there will be for high-speed internet in rural communities.

But recent increases of telco activity in the regions are generating a good amount of anticipation.

Wairarapa District Health Board chief executive Joel George says wireless broadband could offer general practitioners real-time access to patient records, even the sending of x-rays and test results between clinic and hospital.

"There are lots of people in the Wairarapa on the end of tenuous communications links. That's generally seen as being a pretty big inhibitor to doing business."

Dargaville dairy farmer Michael Moulds would spend more time using web portals like Fencepost.com and dealing with suppliers online if his dial-up internet connection did not keep dropping out.

"I can run the farm without even going near the internet, but there are a lot of things I could do online which would give me more time to spend down on the farm rather than filing paper in my office," he says.

Early signs are that such enthusiasm does translate into customers.

In July, Taranaki launched a scheme that combines Telecom's Jetstream ADSL service and wireless technology to cover 83 per cent of the region.

By the end of September, 855 ADSL connections in the Taranaki region had been notched up.

Telecom's group general manager, Government relations, Bruce Parkes, says Jetstream versus wireless broadband is a real example of competition because his opponents are building their own infrastructure, not selling their flavour of a service that Telecom wholesales.

It's a typical incumbent argument, but one delivered with more force as Telecom faces the strong prospect of having to lower its wholesaling pricing at the behest of the Telecommunications Commissioner.

The "build versus buy option" is something TelstraClear chief executive Rosemary Howard has been talking about since Telstra acquired Clear for $435 million in November, plucking Howard from heading Telstra Wholesale to turn around the loss-making New Zealand business.

TelstraClear is looking for a wholesaling deal with Telecom to reach the Auckland residential market, sidelining an abortive strategy to roll out infrastructure in Auckland suburbs itself.

With a ruling on wholesaling looming, Telstra's Sydney-based chairman, Bob Mansfield, is optimistic that TelstraClear will get the deal it needs to expand its presence in this key market.

"It's totally illogical to me for Telecom, as AAPT, to be using our network in Australia [and] when we tried to do the same thing here they tell us to 'go stuff yourself'," he said after a visit this week.

Parkes counters: "The discounts TelstraClear are demanding here are nothing like what we get in [Australia]," adding that Telecom would soon increase the range of wholesale products, but would favour infrastructure competition.

"What's the use in scribbling out our name at the bottom of a bill and putting your own?"

A better wholesaling regime will give a helping hand to TelstraClear and other emerging competitors, but that is not discouraging investors who have warmed to Telecom as it measures up well against fellow incumbents struggling with huge amounts of debt, underused networks and stagnant share prices.

The market quickly absorbed US telco Verizon's 20 per cent stake in Telecom, which sold for $1.6 billion.

Even the $188 million loss reported by Telecom for the year ended June 30 had little impact.

Despite sceptical analysts, some of whom believe Telecom should have gone further when it sliced $850 million off the book value of Australian operation AAPT, Telecom is in relatively good shape.

At home earnings are flat, but that's a trend faced by telcos globally. In Australia, AAPT is a distant third to Telstra but is now cashflow positive.

A bullish report from Macquarie Equities puts a $6.50 12-month target on Telecom shares "based on the New Zealand operations generating significant cashflow and Australian operations that are materially improving and not valued by the market". The shares closed on Friday at $5.10.

Across the Tasman however, market watchers remain dubious.

"AAPT is rapidly establishing itself as a niche market player, rather than a true telco carrier. While this will improve its profitability it will limit its size and therefore its future potential," says Budde.

Both Telecom and Telstra, which is targeting one million broadband subscribers by 2005, would like take-up to be better, but are loath to slash prices to stimulate demand.

"Why is there an expectation that broadband should have a two-year growth cycle?" asks Mansfield.

"All major technologies from VCRs to mobile phones had a 10-year take-up period before everyone had them."

Telecom now has 46,000 Jetstream connections, 26,000 of which are in the residential sector.

It will not divulge what proportion of that subscriber base is hooked up to Jetstart, an entry-level DSL offering that delivers access speeds slightly better than dial-up rather than the much faster Jetstream service.

Parkes says Jetstream is the number one pick to reach most of the country, with BCL being used as a wireless partner to reach the rest.

By March, Telecom will have lifted ADSL capability from 75 per cent to 83 per cent of telephone lines.

But as Telecom marches on with plans to deliver Jetstream to every corner of the country, take-up in areas already connected remains sluggish.

In New Zealand and Australia broadband penetration remains below 3 per cent, trailing other western countries.