Axon uneasy over Gen-i’s place in Telecom split-up

Axon remains concerned about the long lead-time to separation and about new forms of anti-competitive behaviour

Telecom’s IT services business, Gen-i, will be designated a “retail” unit under the plans to split Telecom into three operationally separate divisions.

However, competitor Axon — the only organisation to make a submission to the Government’s separation consultation that directly addressed Gen-i — remains concerned about the long lead-time to separation and about new forms of anti-competitive behaviour.

“Gen-i will have to buy regulated services off the wholesale units,” says Mark Ratcliffe, Telecom chief operating officer for technology and enterprises.

“Other wholesale customers will be able to buy similar services.”

Telecom will have two wholesale businesses: Access Network Services, which will own the copper in the ground; and an unbundled bitstream unit, he says.

Axon chief executive Scott Green says there are still perceived risks because of the common ownership of the separate Telecom divisions.

“That’s always been at the heart of operational separation versus structural separation,” he says.

One of his concerns is the duration of the separational process.

“It starts in March next year but will take four years to complete,” he says. “You’ll be familiar with the saying ‘make hay while the sun shines’; it’s still very unclear what this is going to mean for the industry.”

Green says it’s also unclear whether there will be any volume-based price advantages that could benefit Gen-i.

“They have many customers through their heritage, and that could make it difficult to compete,” he says.

“The intention of the separation is quite robust in terms of stopping anti-competitive behaviour around pricing but there is a risk of non-pricing-based anti-competitive behaviour. By that I mean that where the wholesaler and retailer have the same ownership, they can do other things to make a competitor less successful.”

Those reservations aside, Green says Axon will explore the opportunity to become a customer of Telecom wholesale.

In its submission to the Ministry of Economic Development, Axon noted that Gen-i should be considered a retail unit of Telecom, but went further to argue for structural separation. The company also supported a “three box model” under which each unit would have its own chief executive.

Axon argued that cultural change within Telecom would be hard to achieve under the MED’s proposal that unit heads still report to Telecom’s chief executive.

Under the Government’s separation determination, unveiled by Communications Minister David Cunliffe last week, Telecom’s chief executive can direct the three units subject to requirements for transparency.

The separation will also be overseen by an internal watchdog committee comprised of three independent member and two Telecom members. The committee is able to report directly to the Commerce Commission.

There has been some recent speculation that Telecom might look to sell Gen-i.

That seems to have been based on the fact that the new chief executive of Telecom, Paul Reynolds, has a wholesale background.

However, a senior Gen-i executive, who did not want to be named, says it would be too difficult to distentangle the company from Telecom.

“They’re so intertwined,” he says.

Gen-i posted revenue of $380 million in the year to June 30.