How Telecom won the broadband war

Come June, Telecom will move to ambush the ADSL2+ crowd

Telecom has comprehensively lost the recent PR battle and its share price dipped substantially in the process. The stock market didn’t falter, it didn’t fail and bankers weren’t seen throwing themselves into the streets of Wellington as a result.

Having said that, Telecom doesn’t appear to be terribly worried by the bad publicity, or by the share price dip. I think I’ve worked out why: Telecom may have lost the PR battle but it’s won the regulatory war. Let me explain.

Telecom must surely realise it’s facing certain unbundling. It would be a weak government indeed that made as much noise as this one without actually following through. Come the middle of the year, minister David Cunliffe will gravely announce that after much thought and assessment it’s time to revisit the issue of unbundling.

I don’t think Cunliffe will direct the Commerce Commission to simply introduce unbundling. I imagine there will be a referral back to the Commission to re-investigate the matter. That’s another six months of consultations and the like. Telecom will resist, it will fight, it will roll out analysts, economists and other experts who will explain why the whole thing is wrong and it will seek redress in the courts.

But really, Telecom won’t care. Because by that time it’ll be nearly the end of this year and it will have won the battle entirely.

In June, Telecom will announce that it is ready to roll out ADSL 2+ and will do so, I expect, at little or no extra cost to users. Those on enabled exchanges will simply download the firmware upgrade for their routers — all those routers Telecom is giving away today are ADSL2+ compliant, by the way — and they will be able to receive a speed bump that takes them from 3.5Mbit/s to, say, 8Mbit/s.

Competitors will cry foul because as usual Telecom will be seen to be introducing a plan at the last minute to avoid regulation. In this case, that’s not what will be happening. Telecom will introduce the plans to kill off any hopes other competitors will have of leapfrogging Telecom’s offerings with their own.

Look at Ihug’s parent company, iiNet, in Australia, which made its money by offering ADSL2+ services before Telstra has got its act together. Telstra’s retail plans look feeble and insipid next to iiNet’s.

Optus, the number two telco in Australia, has also got into the game and sure enough, Telstra has heaved its weight out of bed and finally dragged itself to the broadband table. It too will be offering ADSL2+ as soon as it can.

Ihug’s plan for New Zealand was to follow suit. Ihug wants to get in ahead of Telecom with its faster offerings. Ihug’s advantage is its size, its experience with ADSL2+ and its willingness to move quickly. Telecom would be expected to simply fight the regulatory rear guard action and wouldn’t introduce ADSL2+ for some time.

Instead, Telecom will pre-empt the market, launch ADSL2+ ahead of everyone else, take the wind from their marketing sails and generally rain on the new players’ parade.

Telecom’s disadvantages — its size and its willingness to protect its existing markets — will turn into strengths. Telecom will use its greater economies of scale to offer cheaper service to a wider range of customers while dragging its unbundling programme and making life difficult for those new players that want to install their own kit on its network.

Incumbents around the world have done this, with tales of dastardliness and sheer bloody-mindedness coming from all corners. Telecom can probably do that for another six months at the least, which means that when we sit down in a year’s time to review the first months of the bright new unbundled regime we’ll find Telecom still has the lion’s share of the market, and customers are somewhat better off, but the bulk of the ISPs are still earning crumbs from under the table.

There really isn’t any way to avoid this. Come June, Telecom will move to ambush the ADSL2+ crowd and there’s not a lot that can be done to stop it. The only thing I can see spoiling the plan is if Cunliffe stands up and doesn’t call for unbundling but directs the Commission to begin implementing a full, structural break-up of Telecom.

The Commission probably has enough evidence on its side to call for such a move. It is still seeking legal redress against Telecom for abuse of its position of power. It also recently said Telecom probably misled it over the Counties Power spectrum purchase.

Misleading the Commission isn’t taken lightly — it’s a criminal offence and the Commission is investigating even as I write this.

But seriously, can you see any minority government calling for the dismemberment of the country’s largest listed company? It would be a bold move indeed.

I guess we’ll all find out in the middle of the year.

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