A big ask for Telecom

It's time for Telecom to radically reshape its business model or face marginalisation in its own home market.

It's time for Telecom to radically reshape its business model or face marginalisation in its own home market.

I know we've probably said that in the past, but this time the writing's clearly on the wall for the ex-state-owned enterprise's way of life.

The situation is simple at the moment. Telecom sits at the heart of practically every telco deal in the land: DSL rollout, broadband to the masses, national and international traffic, number portability, next-generation cellphone networks, ATM, fibre, wireless, ISP business. If Telecom doesn't own the segment it's certainly the biggest player in it and it's a case of the other players having to compete against the monolith. That's all about to change.

The Commerce Commission has released a discussion paper on interconnection and is signalling its intention to use the TSLRIC (total service long run incremental cost) pricing model in its pricing review for interconnection.

I'm not going to make an attempt at reviewing the TSLRIC and its various formula, you'll be glad to know, because I can't count. Nor am I going to go through the various companies' submissions on TSLRIC that are available on the Commerce Commission website for all to see. TSLRIC is the commission's chosen model for interconnection and the companies are now jostling for position, so that's pretty much that.

But interconnection is only one of the four areas the commission will be addressing in the coming months. The others, an international benchmarking review of interconnection, the costs and benefits of TSO (telecommunications service obligation) and an assessment of the wholesale (retail-minus) pricing regime, all impact on Telecom's business model in a major way.

Wholesaling is our preferred option over unbundling of the local loop. Telecom will have to offer services to its competitors at wholesale rates. Wholesale can be defined as retail price minus costs, and there are again dozens of formulae for working that out. Telecom will obviously want to keep that margin as high as possible. If its competitors are unable to offer substantial reductions to any service Telecom also offers then it wins by default: it has that whole one-bill capability that no other telco has. The commission will be assessing the pricing regime with the costs to the end user uppermost in its mind.

The TSO is the replacement to the Kiwi Share Obligation (KSO), under whose provisions Telecom was sold the local loop. Telecom had to provide free local calls, a certain level of price parity between rural and urban, and a couple of other things. This has morphed into the TSO and now applies to all telcos. The review will work out how much it costs Telecom to maintain the rural network (which Telecom claims is hundreds of millions of dollars a year), but also how much it makes from the rest of the local loop (something Telecom has never revealed). Other telcos will be expected to share the cost of network maintenance. Telecom has already been issuing bills to that effect. The commission will have a look at just how much it does cost.

Each review has the potential to take a huge chunk out of Telecom's business, and the company is basically fighting a rearguard action against those changes.

Telecom's biggest problem is its mindset. It still views the likes of TelstraClear and the other ISPs as rivals when in fact they are its biggest customers. I understand management has to be seen to be defending the share value, and I'm sure the government doesn't want to upset that too much given the importance of Telecom to the New Zealand sharemarket, but it has to shift its point of view from "defensive" to "innovative". It's only by adding value (terrible phrase, I know) to its basic product, bandwidth, that it can avoid becoming nothing more than a network supplier to other companies.

Telecom does seem to have started down this path -- its IP network will accelerate that movement -- but it really has to position itself for the new environment rather than fighting a battle to maintain one that no longer exists. If Telecom is to avoid becoming a dinosaur it must evolve into something more agile and be willing to do the very things its competitors have failed to do overseas in their own incumbent markets. It must be willing to let go.

Brislen is IDGNet’s reporter. Send letters for publication in Computerworld to Computerworld Letters.

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