Opinion: All power to the lines companies

Leadership by lines companies in broadband build an attractive opportunity

There’s nothing new in electricity lines companies crossing the wires to provide telecommunications infrastructure. Counties Power and Vector are two local companies with the vision to see the natural synergy years ago.

But the convergence we are starting to see now goes way beyond the cherry picking of high-density metropolitan markets, or the branding crossover in more rural areas. A future in which electric lines companies are the backbone of our telecommunications infrastructure is now a very real likelihood.

Such a future has many positives.

Telcos have a history of founding their business on a vertically integrated business model. Ever since privatisation, incumbents have used the natural monopoly of their lines to leverage a position of dominance in downstream markets. It’s an outcome that was perfectly rational in a commercial sense. But it should have been foreseen at the outset.

It has reduced the economic benefits of privatisation, led to a great deal of conflict, and resulted in a labyrinth of regulation and intervention to protect the interests of users.

Lines businesses have no such history. They seem happy with their role as transporters of electrons. They don’t care what use you and I put them to. They don’t seek a position in the market for light bulbs or heated towel rails, and they don’t bundle appliances along with the electricity in anti-competitive ways.

That’s not to say the electricity sector is humming along flawlessly — from the outside it looks like a muddle — but it has avoided the key telco traps.

All of which makes the government’s broadband investment, and especially the likely large scale leadership by lines companies, a dramatic and attractive opportunity.

The government has sent two very strong signals in its draft proposal. The first is that fibre is the way forward. Steven Joyce’s announcement effectively started the clock ticking towards the “use by” date for copper.

The second is that the telecommunications infrastructure of the future will avoid the man-trap of vertically integrated market dominance. Local fibre companies that control the fibre infrastructure won’t be allowed to play in the retail market.

There’s little doubt there will be a large response to the government’s call for proposals. Some areas will be heavily contested by competing propositions, while in others the aspirants will have formed their teams in advance and prepared a joint proposal. But it’s a fair bet that lines companies are going to be there with a huge potential to make a contribution. The traditional telcos face a run for the government’s money.

Does it matter? I think not. Consumer welfare will be improved by the removal of the vertical integration.

For the players themselves, long term it will secure their business model. The downside of heavy vertical integration is it disguises inefficient layers of the business; by focusing on a more shallow market segment the forces of competition kick in more effectively. And many telcos here and globally, big and small, have found there is absolutely nothing wrong with basing a retail-focused business on infrastructure owned by someone else.

Telecom will face the biggest adjustment. I feel for them. Paul Reynolds and his team have worked very hard to accommodate the demands of unbundling and operational separation, as well as repairing the company’s tarnished brand. It must feel unfair that just as some breathing space seemed to be approaching, these fundamental changes are charging at them like a runaway horse.

But they’ll work through it. Reynolds is a top operator who has put some impressive people around him. Wholesale and Chorus appear from outside to be well-oiled machines.

Retail, once the brand confusion around Telecom, Gen-i and Xtra is sorted, can bounce back on the foundation of the new trust and confidence that the public increasingly has in Telecom.

However, the big winner will be the consumer. Fibre, in the words of David Isenberg, is part of a move from managing scarcity to creating abundance. No longer will telcos be able to ration out technology to New Zealanders — market forces will see to that.

Already we see the effect of competition on investment in the mobile market with Telecom’s mobile re-birth and NZ Communications’ likely market entry, and we can look forward to the fixed lines going the same way.

We need to move fast. Telecom-munications is the sector with the greatest potential to lift the world economy out of recession. The more isolated a country or a citizen, the greater are the economic and social benefits of broadband. New Zealand has more at stake than most.

So all power to the line companies. They’ll bring a new dimension to the telecomms space. It’s a growing sector with a huge and increasing role in people’s welfare, with plenty of room for all.

- Newman is CEO of the Telecommunications Users’ Association of New Zealand . This column was written before the release of Telecom's submission to the government's fibre plan.

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