Peter Nowak: Telecom investors sense end is nigh

The game is just about up for Telecom and, given that the company's stock is plumbing near its 52-week low of $5.71, investors know it.

The Commerce Commission gave Telecom a figurative stay of execution two years ago when it decided against opening up the company's internet network to competitors. The commission opted instead to let Telecom try out a wholesale scheme, and the company has since continued to profit handsomely from its virtual monopoly of the broadband market.

But all signs are pointing towards the axe falling heavily, and soon. The company's share price has been in decline since the commission signalled two weeks ago that it would be giving TelstraClear better broadband wholesale terms. Other internet service providers are sure to get similar access, and some have already lowered prices in expectation of getting such a ruling.

Not surprisingly, Telecom investors sense less heady times ahead.

One key point of the commission's proposed terms, expected to be finalised by the end of the year, is especially likely to spell trouble for the company. The wholesale rate Telecom can charge other ISPs is being lowered to $26.57 a user which, on its own, is good enough to spur an overall lowering of the commercial price of broadband access. But more importantly, the wholesale rate will continue to be tied to the overall average commercial cost of broadband and will be reviewed quarterly.

What that means in the long run is that Telecom is going to have to decide between lowering its own prices, or watch its market share evaporate.

If ISPs can drop prices because wholesale costs are lower, they're going to start pulling customers away from Telecom. If Telecom responds and lowers its prices, the overall average price will drop, and so will the wholesale cost. That potentially means an ever-declining wholesale cost and a continual price war, which would, of course, be excellent news for consumers but bad news for Telecom's bottom line.

The company could choose to maintain its own high prices and thus keep wholesale rates up, but doing so would be risky. It could end up like Telstra in Australia, which kept its own prices high and thus leaked 60 per cent of the broadband market to competitors.

At some point, Telecom is going to have to find a tolerable threshold between earning wholesale income from competitors and keeping its own retail customers.

Either way, the free ride looks to be over - especially since regulators are getting all the ammunition they can handle towards finally pulling the trigger on Telecom.

The OECD last week released its latest broadband uptake rankings, which showed New Zealand continuing to wallow in the doldrums at 22nd out 30, unchanged from six months ago.

To make matters worse, Telecom stuck its collective foot in its mouth by blaming the poor uptake on free local calling, which it said was keeping people on dial-up.

That angered not only internet experts, who said the argument was absurd, but the public as well - as a selection of letters on this page illustrates. Even the normally staid OECD secretariat took exception to Telecom's excuse and issued a rare rebuttal, saying the company was abusing its market position.

Telecom, which reports its latest quarterly results on Friday, has also fared poorly with its own wholesale scheme. The price it paid for that stay of execution two years ago was the promise that it would add 250,000 broadband customers by the end of this year, one-third of whom would come through wholesale. It has only managed about half of the wholesale target, and once again stuck its foot in its mouth by blaming that on TelstraClear, which has thus far abstained from playing under Telecom's wholesaling rules.

So with both feet in its mouth, does Telecom have a leg to stand on?

Hardly. Telecommunications Commissioner Douglas Webb said earlier this year that he was tired of Telecom's poor attitude. Communications Minister David Cunliffe has promised repeatedly that "action will follow" if - more likely when - Telecom fails to meet its wholesale target.

It's tough talk that has been heard before, but there's a feeling in the industry that the regulators are serious this time. If that is indeed the case, it's no wonder investors are looking to sell.