Telecom's fibre network dilemma

Photo / Martin Sykes

Telecom faces carving off its retail division or ceding control of its investment if it joins with the Government in building an ultra-fast broadband network.

Finalised plans for the taxpayer-funded $1.5 billion broadband network were released yesterday.

The plans say investment partners chosen to help build the network must divest their retail business, or lose the ability to control the company building that part of the network.

Telecom chief executive Paul Reynolds said selling its retail or network divisions was firmly off the table.

While the company is committed to its network investment plans, Reynolds said that if the Government proceeds with a plan that excludes meaningful participation by Telecom it would look to alter some aspects of its separation agreement.

This agreement, which came into effect in March last year, forced Telecom to split into operational divisions and offer competitors access to its network on the same terms as its own divisions.

"It's kind of hard for Telecom to be fully involved in the way it's currently structured. Obviously that's going to significantly restructure the industry in New Zealand and would put the existing commitments and undertakings back on the table," said Reynolds.

Paul Winton, principal at Temple Investment, said it would be reasonable for Telecom to question its operational separation undertakings.

"To now have a competitor being funded by the Government, you'd be understandably distraught if that were to happen," said Winton.

"Balancing off those operational commitments with any incremental investment would make sense and I think that will be part of a behind-the-scenes negotiation, possibly on a region-by-region basis."

Goldman Sachs JBWere analyst Tristan Joll said it was not clear how the ownership rules of the broadband plan would affect Telecom.

"The question is, is it as explicit as it appears or are there other ownership structures which might satisfy the government criteria without Telecom having to separate parts of their business?"

Reynolds said the door was still open for discussions with the Government over the role of its network arm Chorus in the Government's investment plans. "The Government has a choice there, but I noted that they're open to discussion," said Reynolds.

"The worst outcome of all would be if we squander significant money in duplicating expensive fibre networks in New Zealand."

First NZ Capital analyst Greg Main said debate in Australia had recognised the need to get Telecom's equivalent, Telstra, to put its internet traffic across the government-backed network.

He said the debate needs to include Telecom for the new network to make economic sense.

In its announcement, the Government knocked back Telecom's proposal to extend its nationwide investment plans and an alternative offer of creating a network of fibre-ready tubes, an outcome which disappointed Reynolds.

Communications and IT Minister Steven Joyce said the Telecom plan was not sufficiently attractive to justify moving from the contestable region-by-region approach favoured by the Government. He would like to see Telecom table a proposal that meets the Government's specific requirements.

Joyce said the possibility that Telecom could choose to compete had been considered. "It's a finely judged thing from their perspective as well because there is an opportunity for them to work with the Crown and achieve a much faster capital investment and a much more future-proofed capital investment than they would seek to achieve on their own," said Joyce.

TelstraClear has reiterated an earlier stance to compete against a state-funded fibre network.

Joll said there was potential for Telecom to compete head-to-head with the Government's fibre network.

He said any outcome that involved adversarial behaviour was not in anyone's interest and he didn't believe Telecom was interested in responding in that way.

"I think it's in everyone's interests for all entities that can contribute to this thing to co-operate," said Joll.

Vector chief executive Simon Mackenzie confirmed its interest in a government partnership, particularly in its Auckland stronghold that makes up a third of the population covered by the government plan, but would not be drawn on how much it had to spend.

"We feel in a good position to be able to offer a good solution so long as the commercial arrangements stack up," said Mackenzie.

He indicated there could be room for other parties to co-invest.

Winton said Vector and the lines companies were always the natural players in the Government plan, mainly because of their ability to roll-out networks at a lower cost.

"This is really the lines companies to win now and they'll really have to fluff it seriously to not be playing a significant role at the fibre table in the future," said Winton.

Telecom shares closed unchanged yesterday at $2.68. Vector shares closed steady at $1.97.