This month the NZ government released its radical blueprint for the reconstruction of New Zealand's telecommunications landscape. It's a roadmap that puts New Zealand at the leading (some may say bleeding) edge of redefining the industry for a fibre world. The government's Supplementary Order Paper and associated cabinet papers outline the proposed legislative and regulatory framework for UFB partners. These include the undertakings that will bind Telecom if it wins the majority of the government's $NZ1.35 billion fibre-to-the-premises initiative, and structurally separates its network and retail businesses. It does not imply a Telecom deal has been reached - the government is emphatic on this. Rather the framework has been released to allow for industry consultation whilst negotiations with Telecom continue. However just one week has been allowed for absolutely critical industry consultation - despite the fact that this will rewrite the regulatory regime until a scheduled review in 2018. First the facts. Telecom is proposing to a demerger that will separate its network business Chorus, from its retail business, ServiceTel. Shareholders will swap one Telecom share for shares in two new, separately listed entities. Chorus2 will own all of Telecom's existing physical copper and fibre network assets, including the regional backhaul network that connects communities and suburbs. It will also take over the regulated network access services currently provided by Telecom Wholesale as well as the new fibre-to-the-home services. The intent appears to be that the copper network will 'neutrally' co-exist with Chorus2's fibre services - an issue for ISPs hoping for infrastructure competition. Chorus2 will, in effect, become a national, government-regulated monopoly that is largely invisible to end users. Under the legislation, Chorus2 can only provide restricted wholesale services and must treat all clients equally - same prices, same processes, same terms and conditions. Nonetheless there is considerable complexity in a number of the open access terms, which we believe creates challenges in policing and governance. It is also important to note that Chorus2 is no state-owned enterprise, solely beholden to government. This will be a publicly-listed company, where the majority of the assets and investment will come from Telecom Group, with a fiduciary duty to shareholders. The government is only investing $1.35 billion into a fibre-to-the-premises network that will cost in total close to $5 billion (final numbers have not been disclosed). Yet whilst the government will, in investment terms, be a minority investor, it will nonetheless expect a significant degree of control - an expectation Telecom must somehow also align with shareholder best interests. It highlights the need for absolute clarity and sustainable expectations. On the one hand, it is critical we don't end up with a monopoly that has no incentives to invest in infrastructure due to shareholder expectations. On the other, neither can we afford an entity that fails to function effectively as a publicly listed company, requiring a taxpayer bailout. While much of the attention will be on the new Chorus business, perhaps the most radical changes will occur in the retail business, ServiceTel. ServiceTel will include the current retail business, and Gen-i. It will control assets such as data centres, national and international transport networks and - critically - the mobile network which is not subject to separation. Some of their current regulation will be lifted, such as forced migration off the fixed telephony notework; other undertakings will transfer to Chorus2. It will, however, continue to provide regulated access to the PSTN - it needs this business for cashflow. With no fixed network cashflow to support it, ServiceTel will be a much smaller business bearing more resemblance to Vodafone than Telecom as we know it. The retail business units carry the highest proportion of costs - labour, sales, marketing - but are failing to grow revenues. If ServiceTel is therefore to be a viable standalone listed business, it needs to totally recalibrate its cost base, its business case and margin expectations. It will be very focused on growth areas - IDC believes that means all things mobile, and all services managed. We also need to be prepared that it may equally be broken up and sold off to other players; such is the reality of the market we are creating. We need to state again: what is proposed here is a radical and deep government intervention. On the positive side, this will create an open fibre platform available to all - although whether the current complexity of relationships will allow for genuine ease of access and innovation for users remains to be seen. But we are also creating a hardline industry split when the demand is for convergence; we are separating mobile from fixed when demand is for mobile integration; we are changing investment incentives when the need for private investment has never been higher. There is a high risk of not getting the optimal outcomes for the industry - it is absolutely critical the emerging framework is well understood and fully consulted on, rather than fast-tracked in the interests of political expediency.
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