TelstraClear dipping toes in murky water

TelstraClear is poised to become New Zealand's third mobile network operator, but a long list of analysts say the company is crazy to be even considering the move. It is too expensive and the returns will not justify the cost, they say.

New Zealand is the most expensive country in which to own a mobile phone, according to the OECD. Yet the same analysts who condemn TelstraClear for thinking about building a network also agree that a third entrant would lower prices for consumers.

But if it doesn't make financial sense for a third player to enter the market, does that mean prices will remain high?

Not necessarily, industry observers say. Some argue that the mobile market still has much growth in it, so there's room for everybody. Others argue that the incumbents have made it overwhelmingly difficult to enter the market, and a change is needed.

TelstraClear currently has a reselling agreement with Vodafone, which gives it a tiny sliver of the New Zealand mobile market - "in the single percentages," according to the company. Vodafone is the leader, with a customer base of 1.89 million as of the latest March quarter, or 55 per cent of the market. Telecom is right behind with 1.52 million customers, or 45 per cent.

TelstaClear, which offers landlines and broadband internet on its networks in parts of the country, wants to be a full service provider with its own mobile network. It has used the threat of going solo against Vodafone for years, one analyst says, to force the company into a better reselling agreement. But that bluff hasn't worked, so now TelstraClear may be forced to make good on its threat.

A recent research report from Citigroup analysts decreed that TelstraClear was indeed bluffing. The analysts said a network would cost the company almost $600 million to build, and the best result it could look forward to would be a 16 per cent market share by 2016, translating into a net positive value of just $78 million.

But the company's new chief executive, Alan Freeth, last week disputed the report. "We're not bluffing," he said.

The company is keeping quiet about its plans for the mobile market and refuses to comment on the viability of a network, but a spokesman has repeatedly said it "absolutely" wants to be in the business.

The Sydney Morning Herald on Friday reported that TelstraClear and Vodafone were on the verge of signing a roaming agreement, which would clear the way for such a network. The report said the move was likely just awaiting the final go-ahead from parent Telstra's chief executive, Solomon Trujillo.

Some analysts think building a network, from a financial standpoint, would be foolish.

"It makes business sense to include mobile in their total offerings, but not at all costs," says Sydney-based telecommunications analyst Paul Budde. A new player will only get a tiny percentage of the market, he says, or would have to resort to starting a price war, which is "not a very clever thing to do."

A price war would hurt the whole market, says IDC telecommunications analyst Chris Loh.

"If TelstraClear came on board and offered lower prices, they would immediately be reciprocated. That wipes out any advantage that the new price point would confer to the entrant."

There could be room for a third entrant, Loh says, but it will be tight. TelstraClear could, however, benefit from goodwill sentiment by getting into the market. "Maybe consumers would respond to TelstraClear favourably, just for the fact that it is motivating change in the market."

Customers definitely agree. Ernie Newman, chief executive of the Telecommunications Users Association of New Zealand, says three or four mobile providers would introduce real price competition. He also says that several countries in the OECD that are the same size as New Zealand - the Scandinavian nations, for example - support more than two providers and enjoy lower prices. There is no reason that can't apply here, he says.

A number of hurdles need to be cleared, however, before new providers can set up shop, Newman says. A roaming agreement is key in that it will allow new operators to share existing networks while they're getting up and running.

Cellular co-location, or allowing new entrants to put their radios on towers run by current operators, also needs to be established, as does number portability - the ability of customers to keep their phone number when changing providers.

Number portability is "years behind most countries", Newman says, although it is expected to be established by 2007.

"TelstraClear are probably waiting to get most or all of that in place," he says.

Other observers say those factors are roadblocks purposely put up to prevent new entrants. Tex Edwards, chief executive of Econet Wireless New Zealand, a subsidiary of a South Africa-based parent Econet Wireless International, says his company has been trying to set up shop here for years, but a lack of regulation has prevented it.

"It's instructive that Econet took two years to raise capital, because nobody wants to invest in New Zealand under that regulatory environment," he says.

Now, with more than 3.4 million mobile customers in New Zealand, or about 80 per cent of the population, there is not much room for a third provider to gain any traction, and it may be too late for a newcomer, he says.

Australia just had a fourth provider set up, Edwards says, "because their regulator was more aggressive on helping new competition level out the playing field".

The incumbents disagree, and argue there is still room for newcomers.

"The opportunity exists for anybody to come to the market," says Kevin Kenrick, Telecom's general manager of mobile, adding that many countries have a penetration rate of more than 100 per cent.

However, he adds: "I don't see huge gaps in terms of services that are not being offered in New Zealand."

Telecom and Vodafone both see big growth potential - not necessarily in new customers, but in offerings made possible by the new 3G networks such as multimedia "infotainment" and new applications such as mobile banking - "m-banking" or "m-commerce".

If TelstraClear or any other new provider wants to enter the market, they will need to think creatively and offer something that Vodafone and Telecom do not, Kenrick says.

Budde agrees. He says he has urged Telstra to forget about existing mobile networks - including 3G - and make a "quantum leap" by investing in emerging wireless mobile technology, like Intel's WiMax, that can enable applications such as voice over internet protocol (VoIP).

"If TelstraClear were to do that, it's not going to simply overbuild an existing mobile network, it's basically introducing a totally new infrastructure," he says. "That would start making sense."