Telecom ultrafast strategy revealed

BY TOM PULLAR-STRECKER

EXCLUSIVE: The momentum behind the breakup of Telecom is becoming unstoppable. A majority stake in network arm Chorus will be sold to the Government and other investors.

Chorus, recapitalised with $1.35 billion of taxpayers' money, will take responsibility for connecting three-quarters of the country with fibre-optic cable delivering ultrafast broadband. Electricity lines and fibre companies may be given a piece of the action.

Chief executive Paul Reynolds will exit gracefully through Telecom's now spinning revolving door, able to claim he has led the company and the country into a radical, world-first telecommunications environment.

There are plenty of details to be ironed out and it is still possible it might not all go to script.

Taxing negotiators' minds at the moment is where Telecom's Public Switched Telephone Network should sit in the new structure and how it should be regulated. There remains the possibility of cold feet from Telecom's board.

Insiders say a final agreement on separation will probably need to be put in front of shareholders for a vote. Mr Reynolds will have an opportunity to start preparing the groundwork for that on Thursday, when he is due to brief analysts at Telecom's annual investor day in Sydney and is tipped to concentrate on "the big stuff".

But it is a deal both Telecom and the Government want to do, and that shareholders may feel they have no choice but to accept.

Vector chief executive Simon Mackenzie says investment bankers are circling, sensing a commission.

While the talks are ostensibly between Telecom and Government investment vehicle Crown Fibre Holdings, Treasury officials – rumoured to be boosted by secondments from the Prime Minister's office – now have a hand on the reins, a sure sign the race to the fibre future is entering the final furlong.

"Six months ago we would have said the New Zealand ultrafast broadband initiative was a field of dreams," says Geoff Johnson, a Brisbane-based analyst at Gartner Group. But now he would not be surprised if a "heads of agreement" was struck before Crown Fibre is due to announce its preferred partners to build the ultrafast broadband network in September.

"My suspicion is this could come together faster than some of us expect."

Industry analysts such as Mr Johnson are adamant that most Kiwis have underestimated the scale of change that is coming, inured perhaps by years of often vacuous debate over the importance of broadband and seemingly arcane to-ing and fro-ing over the minutiae of telecommunications regulations.

Throughout it all, Telecom has been the cornerstone of the sharemarket and the company many Kiwis – particularly those north of the Bombay Hills – have loved to hate.

But peel away the layers through the planned divestments of Australian business AAPT and parts of Telecom International, and the question Telecom's strategists are now confronting is what, if anything much, is left?

Mr Johnson says that in five years there will be nothing recognisable about Telecom beyond its brand and its logo. Behind the facade "near as damn it, everything changes".

IDC Research analyst Rosalie Nelson is equally blunt. She says there is a "total lack of awareness" about how much Telecom could change.

"My impression is most people know there is something going on around fibre, but that is about it."

Under a proposal put forward by the former vice-chairman of British super-regulator Ofcom, Richard Hooper, Chorus would own Telecom's copper and fibre, taking charge of ripping out phone lines and replacing them with fibre-optic cables capable of delivering phone, ultrafast broadband, pay television and – broadband enthusiasts hope – new, as yet undreamt of services.

Chorus would be a public-private monopoly, part-owned by Telecom at least for a time, but effectively under the control of the Government which will set the rules that will determine how it can be used to deliver services and at what cost.

Other investors will be invited to buy into Chorus. One rumour is that electricity lines company Vector could be subcontracted by Chorus to string up fibre in Auckland and that CityLink could get the job in Wellington and perhaps Christchurch.

The whole notion both inspires and scares Paris-based Organisation for Economic Development and Co-operation expert Taylor Reynolds, a close observer of the New Zealand industry scene and a fibre fan, who nevertheless fears the creation of an unresponsive network monolith that will be slow to innovate and to fix faults.

The sell-down of Chorus, which probably accounts for more than half of Telecom's $4.2b sharemarket value, will carve a huge chunk out of the company. But the changes will not end there.

Telecommunications Users Association former chairman Chris O'Connell and Telecommunications Industry Group boss Rob Spray have mused about Telecom, Vodafone and 2degrees establishing a single shared mobile network, using shared radio spectrum, when the operators move to the next generation 4G mobile technology in a few years' time.

Even Ben Verwaayen, the chief executive of Telecom technology partner Alcatel-Lucent, says it is an idea he could warm to.

The alternative, according to Mr Spray and former CityLink managing director Neil de Wit, is a proliferation of perhaps another 2500 to 10,000 cellphone towers.

The logical business to operate that mobile network on behalf of the three providers will be the newly-separated Chorus, which will own the fibre connecting the towers.

Telecom, Vodafone and 2degrees would become brands selling "washing powder" from the same factory, although in different packaging.

Both Ms Nelson and Gartner's Mr Johnson expect Telecom will probably hang on to revenues from the PSTN. It would pay Chorus about $20 a month to access each copper phone line, but would own the electronics that sat on top of the network, meaning it would still get the lion's share of the cash flow from toll calls and phone line rentals.

But the PSTN is a raft that is sinking. Gartner's Mr Johnson says the amount of money spent on toll calls is falling by 10 per cent to 12 per cent a year in most Western economies, as customers switch to making calls over the internet, on mobiles and with cut price providers. The PSTN itself will become redundant with the switch to fibre, when all telecommunications services will be delivered over broadband.

"It is not obsolete yet, but it is into its sunset years."

Following the new dawn, every service now provided by Telecom could be equally well delivered by Telstra from Sydney, or from Google in San Francisco.

And that is why the really big question that Telecom's top brass is grappling with is not how to participate in the ultrafast broadband scheme, but rather how to reinvent Telecom Retail.

Mr Johnson sees Telecom running data centres and hosting web services for the likes of Microsoft and Google which will be providing online services to customers.

Craigs Investment Partners analyst Geoff Zame is less certain there is an obvious role for Telecom. "The issue is that they just can't capture any of the value chain. People probably don't understand the ramifications at an industry and a commercial level of what the Government is proposing. I don't think the general public realise the gravity of the situation."

Ms Nelson says it is a billion-dollar question whether Telecom will still be a top-10 stock in five years time.

"At the end of the day this is a company that has considerable scope and scale and I don't perceive it losing a leadership position, albeit with increasingly strong competitors breathing down its neck."

"The question comes down to `can Telecom transform itself on the kind of scale required?' and the transformation we are talking about is quite fundamental."

- © Fairfax NZ News