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Why Telecom NZ doesn’t oppose government copper intervention

Despite the headlines in some media, Telecom NZ hasn’t gone as far as backing government plans to over-rule the Commerce Commission on copper network pricing. Its position is more nuanced.

In its submission to the Review of the Telecommunications Act 2001: Discussion Document, New Zealand’s largest telco says government intervention will provide industry certainty during the UFB fibre network roll-out. Telecom NZ goes on to argue the wholesale copper access price should sit at the low-end of the government’s $37.50 to $42.50 per month range.

Some telcos, like CallPlus and Orcon, are part of the Coalition for Fair Internet Pricing formed to campaign against the government’s intervention. New Zealand’s second largest telco, Vodafone, is not part of the Coalition but has spoken out against the intervention.

Telecom NZ’s relatively neutral stance is at odds with other telcos. It tells us something interesting about the company’s position in the market.

Telecom NZ fence-sitting

IDC Research senior telecommunications analyst Glen Saunders says Telecom NZ’s position is more like sitting on the fence than taking a firm stance on either side.

He says Telecom NZ faces a different situation from other carriers: “Telecom has a different set of inputs to worry about, it doesn’t have an investment in unbundling”.

Unbundling is the process that lets telcos install their equipment in telephone exchanges and roadside cabinets to sell services over the copper network. Vodafone, Orcon and CallPlus have all invested millions so they can buy and resell copper services from Chorus. This is how they compete selling broadband and voice services to consumers and business.

Saunders says Telecom NZ faces three choices. It could continue operating as it always has, invest in local loop unbundling – that is install equipment on the copper network or it can choose to put all its eggs in the fibre basket.

A fibre future?

Any investment in the copper network needs to pay-off fairly quickly. Eventually people in the towns will move to fibre. Saunders says it’s still possible for Telecom NZ to make a good return on a copper investment. This is especially true outside the UFB areas where he says it is an attractive option thanks to the averaging of urban and rural copper prices.

But he thinks Simon Moutter and Telecom NZ are taking a longer term view. Given the government’s determination to move to a fibre future, it makes sense to take Telecom NZ in the same direction.

Saunders believes the government’s approach to fibre and copper pricing does a good job of balancing everyone’s interests. It’s important to send the right signals to carriers about where their investment priorities should be. He says it’s important to remember that telcos need to make substantial investments to support fibre, so they need certainty.

Telecom NZ’s role is critical

In particular, the government needs to create conditions where Telecom NZ’s shareholders will be happy with the company investing in fibre – something that’s essential for the whole UFB project to succeed.

Saunders says Telecom NZ is vital for a number of reasons. First, it’s the largest telco with the largest number of customers, especially fixed line customers. This makes it the obvious conduit for Netflix, Quickflix, Google, Microsoft and other companies looking to sell online service over fibre. Vodafone is nearly as large, but internationally the company tends to form tight, exclusive content partnerships.

Not just another retail telco

Shortly before Telecom NZ shareholders voted on the Chorus demerger, former CEO Paul Reynolds told me Telecom NZ would eventually be seen as “just another telco, albeit the biggest one”.

In some ways that’s true, but in others it isn’t. The company’s post demerger position, with no unbundled kit, sets it aside. Because Telecom NZ is larger and national, it would have difficult cherry picking exchanges to unbundle – which is what the other telcos have done. A fresh investment in copper technology would have to be all or nothing.

And despite Vodafone’s TelstraClear acquisition making it closer to Telecom NZ in scale, it still doesn’t carry the same market heft. The government and Chorus need Telecom NZ to get behind UFB far more than they need support from the other telcos.