KEY POINTS:
Telecom has been lobbying hard these past few weeks to avoid the fate British Telecom met when it was forced to split itself into three separate business units.
But Telecom's proposed alternative to such a plan, which it claims will discourage it from investing in its network and be too complicated to manage, has gone down like a lead balloon with the rest of the industry and with the Government.
Submission papers released this week by Internet NZ and the Internet Service Providers Association, which represents many of Telecom's competitors, panned Telecom's simpler counter-proposal, which would see Telecom's retail and wholesale units operating separately and its network assets held in a different company.
"Telecom wholesale must develop a culture of treating its customers equally, regardless of whether the customer is Telecom retail or another [internet provider]. This can only be achieved through independent oversight and a clear operational separation of the wholesale business unit," wrote association president David Diprose in his submission.
The likes of Orcon, ihug and CallPlus just want to get the ball rolling on local loop unbundling as quickly as possible. They're keen to see the three-way BT operational split put into practice here.
That plan allows for Telecom to be separated into three units - retail, wholesale and network - with independent regulatory oversight. Ideally, any player trying to buy services from Telecom would then be treated the same way Telecom treated its own business units, which would be divided by "mirrored walls".
What has really irked Telecom's competitors is that the company isn't really interested in discussing the pros and cons of operational separation, but instead wants to push its own plan, which isn't even in the scope of the telecommunications legislation.
Some observers suggest Telecom is actually happy enough with the proposed operational separation model but wants to come across as an aggrieved party in the hope of winning some concessions. But its response is similar to the delaying tactics it has always used when it comes to regulation.
Telecom has a few allies in opposing the three-way operational separation, such as its technology partner Alcatel-Lucent, which faces higher costs dealing with three separate business units, and lines company Vector, which believes that a "cleaner, simpler ownership separation is an attractive option and should be given careful consideration".
TelstraClear, which has the most to gain from the operational separation of Telecom, even acknowledges that its future depends on Telecom continuing to be able to make a decent profit.
"The important issue for a challenger such as ourselves is that we don't go rushing around putting equipment into any exchange we can find, that we understand which exchanges are going to have fibre, where the investment in fibre-to-the-node is going," TelstraClear boss Allan Freeth told the Herald this week.
With an ineffective, rearguard action from Telecom in response to the Government's plan, it's likely the proposal will get the rubber stamp it needs and be put into action next year.
Still, a structural separation of Telecom is attractive to the rest of the industry.
"Telecom is always free to propose a more workable structural separation after operational separation is under way," said Internet NZ.
If Telecom had its heart set on seeing its network spun off into a separate company that all players could have equal access to, it should have proposed it years ago.
That it didn't have a more compelling separation proposal in the pipeline shows just how complacent it had become about the threat of regulation by the time the Government set the ball rolling on unbundling last year.
Structural separation has its merits. It could be less complicated and more transparent than an operational separation model, for everyone concerned.
Things really start to get interesting with the prospect of that separate network company being owned by a company other than Telecom. It means that a series of private investors and even the Government as a co-investor could pool their resources to build one decent network.
There would be less duplication of resources, because it would be in everyone's interests to put their capital expenditure into the same pot.
If the shareholders in that company thought it worthwhile to push fibre-optic cables further out into neighbourhoods and business parks, it would be easier to co-ordinate with one company involved.
With total Government ownership, the plan becomes even simpler because, as Wellington businessman Rod Drury suggests, the network company could be run on a "cost-plus" basis, the Government setting prices at what it needs to cover its costs, plus a margin of reasonable profitability.
With no shareholders breathing down their necks demanding a dividend, the managers of the network company could then focus solely on building the best network possible. Competitors would be free to innovate and develop their own offerings based on decent infrastructure.
If you think this sort of plan is too ambitious, think again. The Australian Labor Party has proposed spending A$4.7 billion ($5.3 billion) on such a network if it ousts John Howard in the next election. Telcos such as Optus, which face similar network access problems, are keen to contribute as well.
With no support for such a scheme from the Government, the National Party or the industry, structural separation is off the agenda for the moment - but shouldn't be ruled out for the future.
