Breaking up hard to do for Telecom, say analysts

Telecom will become a stand-alone retail business - selling phone, internet and mobile services to customers. Photo / Sarah Ivey

Telecom retail will be a fundamentally different company when it splits with Chorus and will need to shave costs to survive, say analysts.

Following its win of the bulk of the Government's ultra-fast broadband contracts, Telecom will split from its network branch, Chorus, and become a standalone retail operator - selling phone, internet and mobile services.

Chorus will be responsible for the roll-out and management of the fibre internet network and become a separate public company, with its own listing on the stock exchange.

The split is due to happen towards the end of the year, subject to Government and shareholder approval.

In the new fibre-based world, the retail business will have the opportunity to "transcend the traditional boundaries of telephony" and offer products like internet television, said Goldman Sachs' Tristan Joll.

While this was positive, Joll said Telecom would be operating in an increasingly competitive market.

"On the flip side, [the split] does mean more competition and possible margin pressure," he said.

"They're going to have to become a lot more nimble - they're probably going to have to reduce costs in the long run. That was the situation anyway, but having more competition might expose it more quickly," he said.

IDC's Rosalie Nelson also saw challenges for Telecom following the split, and said it would no longer be able to rely on Chorus' revenue.

"Previously the network had delivered the revenues and the costs had been weighted to the retail side of the business - but through separation there is a disconnect. So [the company] will need to move to a very different cost platform," Nelson said.

Australian telecommunications analyst Paul Budde said the split would be keenly felt and was not sure how Telecom retail would cope.

"It will be quite significant, there's no doubt about that - we should not underestimate it. It will have an enormous change to the culture of Telecom. Despite all the talk, Telecom has never been really competitive. For it to change [to have] a competitive culture it's going to be quite a challenge."

Because Telecom retail will still own and run the mobile network, Nelson said the company could make the "interesting play" of encouraging users to consume more internet on the move.

"They may have a real incentive to begin to drive as many users on to the mobile network as they can because they've got control over that," she said.

"Even though mobile is a complement [product] and doesn't substitute fibre ... for a lot of users, they're going to value the flexibility of mobile over the speed they get with fibre."

Joll said the retail business could look to offer more package deals.

"What they've dabbled in in the past and could do more of is bundling but it feels to me that a lot of that innovation will start occurring after they're through the separation phase," Joll said.

GREAT DIVIDE

Telecom's standalone retail business:

* To split from the network branch Chorus before the end of the year, subject to a shareholder vote.
* Will continue to sell mobile, internet and fixed-line services
* Has the opportunity to sell new products like internet TV but analysts say it will have to change its cost structure.
* Will have no control over the copper or ultra-fast network, but will hold on to its mobile network.