Peter Griffin: Privatised BCL is better way to go

It was a heart-warming affair - and a great bit of PR for Broadcast Communications (BCL), the Government-owned transmission arm and fledgling entrant to the telecoms market.

The children from Meremere School had just finished singing the national anthem in Maori and English - a performance delivered to a roomful of telecoms industry and Government bigwigs in Wellington via a teleconference link, operating on the Meremere side over BCL's new Extend wireless network.

Green-shirted pupils capped off the launching ceremony by hoisting up a painted sign: "Go BCL".

The room erupted in applause, but as I watched I wondered just where BCL is going.

The first alarm bells came with Telecom chief Theresa Gattung's offhand comment to onlookers as she breezed into the early morning launch that Telecom was "basically underwriting the whole deal" with BCL to sell services on the Extend network, which will bring broadband to the backblocks in many parts of the country.

What form does that underwriting take? Neither Telecom or BCL will say, but industry sources indicate that it involves Telecom undertaking to sign up 10,000 subscribers within five years.

Nothing inherently wrong with that sort of deal (despite the conservative numbers), but when combined with my second concern, that the new wireless service comes with expensive set-up costs and no immediate signs of delivering voice calling, an alarming picture emerges.

BCL has aligned itself with a company reluctant to cannibalise its fat phoneline rental business with a cheaper but comparable service delivered via wireless.

In doing so, BCL may have killed off prospects for a wireless voice service and undermined the business plan of its technology partner, Airspan.

Airspan's business here and worldwide relies on voice being a main component of the wireless package. Its gear is expensive, about $1500 including installation, because it is designed to support "wireline-equivalent" voice channels - equal or better to what you get from Telecom's copper.

At the moment that capability lies dormant. Telecom hasn't made any definite noises that it will begin to provide voice through the Airspan kit any time soon. In fact, it has sweetened its offer to Fonterra farmers taking up the Xtra Wireless package with deals aimed at tying them to their monthly phoneline rental..

BCL may bring Extend to more built-up areas, but Telecom is not going to push a service that eats into the most profitable area of its business.

Therefore we have subscribers buying a box that does a fraction of what it's capable of.

Ihug and Iconz, the two other retail partners, are happy to go along with BCL for the ride risk-free. But neither has obligations to sign up customers and neither is all that optimistic about winning significant custom. Providing voice calling, which still contributes 70 per cent or more of the incumbent's revenue, allows new operators to subsidise the access equipment, so Airspan can ship more gear and reach profitability. At the moment the company is far from that point.

It lost US$6.8 million ($10.8 million) in the three months to September 28 and said revenue from the BCL deal was lower than expected due to "project phasing" - things didn't happen as quickly as Airspan expected.

The Extend deal could have been so different. A few years ago, before the Fonterra-Telecom joint venture emerged, the dairy giant and BCL, along with Swedish equipment-maker Ericsson and Timaru internet provider BayCity, began putting a plan together for a national broadband service for dairy farmers.

BCL and Fonterra are understood to have considered technology from Breezecom, a company that subsequently merged with Floware Wireless to form the Tel Aviv-based Alvarion, which is now one of the leading wireless companies.

The Breezecom equipment was built mainly for data, supplying voice calling via a voice-over-internet protocol service in much the same way that Woosh Wireless intends to do with its IP Wireless modems.

But the arrangement stalled and BCL eventually cut BayCity, Ericsson and Breezecom out of the picture, doing its own deal with Airspan and Telecom, which meanwhile had stitched up a deal with Fonterra.

Had that deal panned out we may have had a viable alternative to Telecom for data and voice.

About now, new subscribers would be paying their last monthly phone bill to Telecom and signing up for a new bundled voice and data service. But BCL chose the safer option and partnered with the incumbent.

That ultra-conservative attitude is BCL's biggest problem. Because it is Government-owned everything it does is seen as using public funds.

Therefore there's none of the "build and they shall come" mentality employed by venture capital-backed start-ups such as Woosh.

To get any sign-off from its bean-counter bosses, BCL has to go out and sell its service before it invests in building networks.

That's what it did to secure the $25 million needed to build Extend. Telecom became its cornerstone partner.

Without the millstone of public ownership, BCL might have been more vigorous in pursuing a deal that carried more risk in the short term but proved more fruitful long-term.

So here's what I'd do if I was the Government: flog the thing off. Privatise the broadcasting and broadband infrastructure, putting the proceeds into making TVNZ a world-class public broadcaster, ready for the move to digital television and delivering a better standard of charter-type programming.

BCL would be able to invest in its future without a guilty conscience, avoiding mistakes like the telecoms non-compete contract it signed with Clear Communications - and later had to spend $35 million extracting itself from.

The new owner would agree to upgrade terrestrial television to digital (estimated to cost about $20 million), with a Kiwi Share-type arrangement by the Government ensuring that analogue broadcasting is maintained for at least a decade and that a set amount of digital content is broadcast.

The Commerce Commission would naturally vet the sale process to ensure that a Rupert Murdoch didn't come in and scoop up the terrestrial assets, letting them sit idle so satellite can thrive.

Who knows how much the sale might net the Government, but a conservative guess is at least $500 million.

Buried in the accounts of TVNZ (because the BCL figures are not broken out) is revenue last year of $91.6 million from transmission linking and broadcasting, transmission operation and consultancy services.

The book value of TVNZ's transmitters, masts and aerials is $101.3 million.

BCL and Telecom would carry on with their Project Probe rural broadband work, keeping pledges they made in order to win funding to service the regions. And BCL, due to its non-exclusive deal with Telecom, would be able to go out and sign up new retailers, targeting metropolitan areas.

BCL would develop a retail face, cutting out middle-man relationships. And forget the wholesale model. Sure, let competitors hang their kit off BCL tower, but own the service itself.

Privatisation of broadcasting infrastructure has been done worldwide, but comes with its own troubling questions. Yet it would allow a private company the freedom to pursue competitive deals, with resulting benefits for the country.

* Email Peter Griffin