New rules could see broadband costs leap

21:38, Feb 17 2009

The cost of broadband could soar to as much as $45 a month after the Government's changes come into effect, Sydney-based telecommunications analyst Paul Budde says.

So-called entry level prices are now around $25 a month from most Internet providers.

Smaller telecommunications companies were ill-prepared for the new rules coming into force next year and faced being eaten up by bigger companies unless they adapted, Mr Budde said in Wellington yesterday.

Companies like CallPlus and Kordia had "panicked" when Telecom recently unveiled plans to extend its fibre-optic network past its exchanges to roadside cabinets as part of a network upgrade.

Under the Government's new unbundled local loop regulations, companies including state-owned Kordia's Orcon, CallPlus and Vodafone-owned ihug had planned to install their own Internet equipment in many of Telecom's urban exchanges. But when Telecom announced its fibre-to-the-roadside plans they had to reconsider, Mr Budde said.

Telecom's "cabinetisation" announcement largely cancelled out the chance for economic returns from local loop unbundling, but the plans were five years in development and should have been no surprise, he said.


Telecom's competitors now faced thin margins from accessing its network through its wholesale business. Telecom had failed so far to come up with sustainable wholesale deals and that would result in price rises, Mr Budde said.

With operational separation splitting Telecom into retail, wholesale and network businesses in March next year, companies should expect to face a highly focused and strategically minded competitor, he said.

"Telecom is moving and it is looking to be more professional and sophisticated in its approach to its competitors."

The problem for Telecom's competitors was that while they had adopted a wait-and-see approach to the new regulated market, Telecom had been highly proactive in its preparations. The sector's future did not lie in providing networks, in effect commodity trading, but in value-added products carried by the networks, Mr Budde said.

With Telecom extending its fibre network and the promise of delivering broadband speeds of at least 10 megabits per second to 80 per cent of the country, delivery of cost-effective education and health services via the Internet was coming closer to reality.

Fibre connections to businesses would allow an expansion of commercial data centres, content hosting and network management opportunities.

The greater scope provided by this digital industry would be the main area of revenue growth and Telecom's retail and wholesale businesses and its subsidiary Gen I were better-positioned than their competitors to take advantage of it, Mr Budde said.

Though Telecom's revenue is expected to shrink by 1 per cent in 2007-08, the low level of competition facing the company meant it would retain its market position with relatively high margins, he said.

TelstraClear's lack of a coherent strategy had put it in a "dangerous" position and it needed to change its business model and invest more in marketing and sales, he said.


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