Simple solution to telco problem: break Telecom in two

John Third, MD of Guinness Gallagher, has the solution to NZ's telco problem

Telecom’s current dual role, as both network-owner and retail services company, is destroying shareholder value and reducing the company’s ability to respond to demand, says John Third, managing director of Guinness Gallagher, a Wellington-based consultancy.

Third knows what he’s talking about — he’s currently helping the Mongolian government privatise and break up its own telco incumbent, and Guinness Gallagher has a track record of advising governments on how to tackle the thorny issue of monopolies.

Third says it’s actually not that thorny a problem — it’s quite straightforward.

“Infrastructure is a monopoly and you have to treat it as one.”

He recommends breaking Telecom into two divisions: a network company (“NetCo”) and a services company (“ServeCo”). Initially, this would be a simple accounting separation. But, this would change over time.

“Once the board and shareholders see that they’re getting [relatively] low returns from NetCo compared with higher returns from ServeCo, they’ll decide to spin it off into a separate company and sell it to someone else.”

Why? Because networks, by their very nature, attract a different kind of investor to service companies, says Third. He offers an example from his own experience as to why the two companies should be separately owned.

“I live just outside Wellington and the exchange I’m connected to is one of the older exchanges. The phone stopped working one day and Telecom ran fibre out to the cabinet and then new copper out to the households that were affected.”

Because of the upgrade, however, Third could no longer receive JetStream broadband at home.

“If that upgrade had been undertaken by a network company, it would have seized the opportunity to put in a mini DSLAM to offer the service. It makes sense for a network company to offer the best service possible.”

Instead, says Third, because Telecom’s network is driven by its retail services division, that decision was reversed.

“They didn’t put the DSLAM in because there’s no competition, so there’s no need to spend the money to stay ahead of the pack.” Third says this juxtaposition means Telecom, as it stands today, is destroying its own value.

“If the network was open, and operated only as a wholesale provider, the retail service companies could trust it not to compete with them.”

Third suggests the approach being suggested in Australia today — that of a “club-owned network” — is worth considering as an interim step. A number of Australian telcos have banded together to offer to build one fibre-based network between them, rather than allowing Telstra to build it in exchange for protection from future regulation.

“It wouldn’t be long before the service companies floated off the network company and concentrated on the job at hand.”

He says the process is simple and very effective, which may be why governments have been reluctant to engage Telecom at this level.

“First, you introduce accounting separation. In a year or so, the company itself will realise it doesn’t need to own the network to compete and will float it off.”

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