Shock for Telecom on fibre subsidy

IF THERE was any doubt about Telecom's interest in bidding for the government's $1.5 billion broadband subsidy, Communications Minister Stephen Joyce has destroyed it.

After announcing the final blueprint for a 10-year fibre optic roll-out last week, he told the Sunday Star-Times there were only two ways Telecom could take part. One split itself in two. The other accept someone else's control over its investment.

"In terms of Telecom's participation, they could participate in a couple of ways," he said.

"Obviously the Australian model of structurally separating out Chorus [Telecom's lines company] is one option for them, but we're not requiring that or even requesting that. The other option would be for Telecom to invest in a fibre-based entity with the Crown [and] accept they wouldn't have majority control of the operation."

Neither is acceptable to Telecom.

Asked whether he would like to see Telecom structurally separate ie, sell Chorus Joyce said he was "agnostic".

"Obviously if you were starting again from scratch that might be the way to go," he said, "but of course, nobody ever starts from scratch." To propose such an option, he said, was "a very big call, a massive call".

"From my perspective that's too interventionist and, I think anyway, unnecessary to force that call on any company when we have these options that we have."

The government's scheme will see it invest the $1.5b in local fibre companies alongside one or more private-sector partners who will put in at least the same amount. These companies will build networks of "dark fibre" the raw physical links of fibre optic cable connecting schools, businesses and homes over the next 10 years.

Any business wanting to provide high-speed internet or data services will then be able to rent a fibre connection from the government joint venture, add its own electronics to light up the fibre, and start marketing to customers.

But with Telecom indicating it will not co-invest in fibre CEO Paul Reynolds on Wednesday said "the model announced today does appear to preclude Telecom's involvement in the government's process, just 18 months after operational separation formally came into effect" the prospect of the industry's biggest player competing rather than co-operating could handicap the government's plans.

Telstra-Clear has also indicated it will compete with government joint ventures where it already has high speed infrastructure, particularly Wellington and Christchurch.

One market source called the government's move "puzzling".

"They've basically excluded Telecom from the process," he said an ironic development given the efforts to "operationally separate" it so that Chorus, while still in Telecom ownership, must offer services to competitors on equivalent terms.

"Is operational separation achieving its goals? If yes, why do you need to ownership separate [to bid for the subsidy]? If no, maybe they should review the regulations."

Asked whether the creation of government fibre companies ultimately made operational separation pointless, Joyce said there was "a lot of water to go under the bridge" before that was the case. "It all depends on what the shape of the industry is and the level of duplication of networks, and you don't know who the partners are and what combination."

Some see Joyce's decision as a watershed for Telecom. While a spinoff of Chorus was urged by shareholder Elliott International last August, Telecom has consistently rejected that option under Reynolds.

Industry consultant Paul Winton, of Temple Capital Investment, said a review was in order. "This will very quickly throw the question of structural separation back on the table. Telecom has had two years to plan for this, so you'd hope there's a glass case on the wall labelled `smash in case of fibre co-rollout'."

WHAT HAPPENS NEXT

In the next month the Ministry of Economic Development will issue an "invitation to participate", seeking co-investment in fibre networks. Potential co-investors include network companies such as Vector and councils such as Christchurch City.

A Crown-owned investment company, Crown Fibre Holdings, will be formed in late October. It will be responsible for assessing proposals and selecting partners. Co-investment proposals are due by December. Partners selected and contracts signed in June quarter next year. Areas not covered by initial contracts will be subject to further bidding rounds.

Fibre due for rollout to 75% of New Zealanders by 2019.

- © Fairfax NZ News