Six challenges facing Telecom Retail after separation

What are the issues Telecom will grapple with should its shareholders vote to demerge Chorus?

Telecom intends to split into two separate companies nominally called Chorus2 and ServCo by the end of the year, in order to participate in the Ultra Fast Broadband network. Each company will have its own board, CEO, staff and an entirely separate public listing on the NZX.

Should Telecom shareholders vote in favour of structural separation, the asset split is likely to be a private negotiation between the telco and the government.

Telecom is being careful not to divulge any further public information about Telecom’s future business in advance of releasing more information for their shareholders to vote on. However, a hint as to how assets will be divvied up was given in October last year in a presentation by Telecom to analysts. Based on that presentation, a rough tally of ServCo’s assets would be: fixed line access, PSTN, mobile network, Ethernet aggregation, national backhaul, 50 percent share in Southern Cross Cable, AAPT, and Gen-i.

What are the challenges/opportunities for a Telecom without Chorus? Here’s Computerworld’s ‘big six’ issues for ServCo.

Fixed to mobile substitution

The $45 or so monthly rental that most New Zealanders pay for their phone line in order to receive “free local calling” remains Telecom's cash cow. It is why Telecom lined up behind Vodafone in fighting mobile termination rate – despite Vodafone having more than 68 percent of the all-important Auckland mobile market.

If ServCo retains the lucrative fixed-line voice access, how will it manage the transition of its customer base onto the mobile network? Or will it use its market position to cling to those fixed-line voice revenues? Mobile voice calling remains expensive, but eventually, given the pressure on mobile termination rates and – with possible intervention from the Commerce Commission if cross-net calling doesn’t pick up – the possible weakening of Vodafone’s on-net deals, mobile voice calling could become a realistic substitute for fixed-line voice services.

As an aside, what about the rural offering? Does ServCo intend to put equipment on those towers being built by Vodafone as part of the Rural Broadband Initiative?

It seems unlikely that ServCo would ditch high-value farming communities and if it doesn’t participate in the RBI, how would the government view its bid for the 700MHz spectrum that comes available in the digital switchover?

Broadband

Based on Telecom’s track record, ServCo is likely to leave the speed game to the more nimble players. (For example, Computerworld understands that Telecom Retail pulled out of Telecom Wholesale's VDSL2 soft trial, possibly because it is too hard to explain to a mass market that unless your house is a 1km from an exchange or cabinet, you won’t get it).

With a potential 54 percent share of the retail broadband market, ServCo would have impressive scale, but Crown Fibre Holdings says that a Retail Service Provider’s scale won’t influence the price at which it can purchase layer 2 services.

“Any discounts would be subject to non-discrimination terms between RSPs under the Deeds of Undertaking which are enforced by the Commerce Commission,” it clarified in an email to Computerworld

But scale should give ServCo the ability to negotiate better content deals. Last week it announced a deal with Sky TV to market content to its retail base. The next step is iSky, where ServCo could offer unmetered access to Sky TV’s iSky content-over-broadband service. This puts SkyTV in the box seat, but Sky isn’t the only content player. Could ServCo negotiate a deal with Apple for unmetered access to Apple TV, or help bring a Netflix (on demand movies) type offering to New Zealand?

Branding

This is possibly the biggest marketing challenge in the country. There are three brands that need addressing – Telecom, Gen-i and XT. All of them carry baggage. XT has the biggest question mark; last year’s outages have – in many ways unfairly – tainted perceptions of its performance in the consumer market, despite large companies such as Fletchers and Fonterra opting to go with the mobile network.

Then there is the Telecom brand itself, which also has baggage – it is not hip like Vodafone or home-spun like 2degrees (ironic given that 2degrees is majority owned by American billionaires).

The business market probably cares less about branding than the consumer. So it could be a good time to ditch all three and create one unifying brand. Then, in order to appeal to the consumer market create one or two sub brands (maybe a thinly disguised MVNO that appeals to the youth market?).

Device deals

Telecom’s track record on this has been, quite frankly, woeful. At a recent presentation to medium businesses, Telecom CEO Paul Reynolds talked up the fact that iPhone connectivity was faster on XT than on any other network and Gen-i Chris Quin tweets about his iPhone going missing. Okay, but Telecom doesn’t distribute the device – so why talk up something your company has failed to acquire the rights to?

Advice to ServCo CEO – get the executive team to take a lesson from your phone rangers on how to operate Android OS, and ensure you distribute devices with the latest Android OS, rather than one that was released a year ago.

Backhaul

There is some competition in the national backhaul market – with FX Networks providing an open access national backhaul fibre network, something ServCo is unlikely to be offering anytime soon.

The advantage of transporting IP traffic on your own network and charging all the other players a premium for it, will give ServCo a massive advantage.

ServCo is unlikely to be a competitive player in the backhaul market because it will not want to sacrifice consumer retail profits. Good for ServCo, not so good for competition.

As for international connectivity - the 50 percent stake in Southern Cross Cable will continue to provide a nice dividend to ServCo, although this is likely to shrink if Pacific Fibre is successful in its efforts to build a competition cable.

Big end of town

Gen-i has a fight on its hands for the government’s ICT dollar. It has got competition from Dimension Data (rebranded company following the Datacraft/Integral/Axon merger) in the form of the one-govt, and newly launched one.voice products.

Gen-i is one of four finalists for the whole of government contract (competition – IBM, Revera and Datacom).

If Gen-i wants to play at the top end of town, it may have to invest large amounts in datacentres to compete with the multi-million-dollar investments being made by HP and IBM.

But it is hard to see ServCo investors parting with the tens of millions necessary to create a compelling on-shore Infrastructure-as-a-Service offering.

Easier perhaps to sell the ICT division and focus on core telco services. The deal announced yesterday sell Infosys its software solutions practice could be just the start of this process.

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Tags structural separationservcoChorustelecomChorus2Paul Reynolds

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