Telecom investors shrug off fees red flag

By PETER GRIFFIN

News that the fees Telecom receives from competitors could soon reduce sharply has failed to dent its share price, which closed up 5c yesterday at $5.10.

A draft determination from the Commerce Commission indicating that Telecom's interconnect pricing should drop from 2.6c a minute to between 1.21c and 1.42 did not ruffle analysts, who say they have seen the same story played out many times overseas.

UBS Warburg telecoms analyst Paul Richardson said the impact of a lower interconnection rate for TelstraClear would not hit Telecom's results significantly.

"It's not likely to be disastrous. Other telcos around the world are on the same or lower prices, and TelstraClear hasn't been paying the full amount [of 2.6c] anyway," said Richardson, who valued Telecom's shares at $5.20 each.

Longer-term, TelstraClear and others would probably gain market share through their ability to compete better with Telecom, but chipping away at Telecom's fixed-line monopoly would still be a slow process, he said.

Telecom made $111 million from interconnection fees in the year to June 30.

The bulk of it is believed to have come from TelstraClear, or the separate entities of TelstraSaturn and Clear Communications before they merged in December.

During part of that period Telecom requested payment from TelstraClear at the rate of 2.6c a minute, a request TelstraClear largely ignored, paying Telecom at a rate it believed fair - thought to be about $6 million to $7 million a month.

Under the proposed new rate, TelstraClear's payments could be shaved to a few million dollars a month.

Smaller toll-call operators such as CallPlus, Worldxchange, Compass Communications and ihug currently face higher interconnection rates of at least 3c a minute.

They also stand to gain as the commission's determination sets a precedent for the industry. By how much they all gain is the big question.

Worldxchange operations manager Paul Clarkin said he had not worked out how much money the company would save if the final determination, expected next month, reflected the same pricing.

Forsyth Barr analyst Jeremy Simpson said the commission's pending determination on the rates paid by TelstraClear to Telecom for wholesale services could be more significant for the industry.

He pointed out that a comparatively low interconnection rate imposed on Telstra in Australia had not helped the fortunes of Telecom subsidiary AAPT and second-ranked Optus.

The wholesaling determination would influence the price at which rivals such as TelstraClear bought network services from Telecom and then sold them to their own customers.

Clarkin said Worldxchange would view the wholesaling determination with interest and might begin wholesaling services from Telecom - something it had previously been excluded from because it was unprofitable at the asking price.

"If it makes good business sense, we'll be into it.

"It's been such a ridiculous regime and that's why we haven't been [wholesaling]," he said.

"We get a few per cent off the retail price and you can't compete with Telecom's bundles."