Christopher Niesche: Telstra had little choice in broadband deal

Telecom and TelstraClear have been pilloried over the past week or so by internet users, who say the broadband deal between the two telcos is a betrayal, condemning users to slower internet.

Putting the hysteria aside, TelstraClear had little choice but to make the deal, Telecom can't be blamed for negotiating better terms, and internet users won't be much worse off, if at all.

Under the January 13 deal, Telecom will supply TelstraClear access to its Unbundled Bitstream Service - the part of the network that carries the fastest internet - at download speeds of 3.5 megabits per second at a monthly wholesale rate of $30.

Previously the Commerce Commission had ruled that Telecom had to supply TelstraClear download speeds of up to 7.6Mbps - twice as fast as Friday's deal - for $27.87. Telecom had been planning to appeal against that ruling in the courts but decided not to after the deal.

For TelstraClear, the deal provides certainty after it wasted about a year arguing through the commission and in its own negotiations with Telecom over broadband access. (It also signals that TelstraClear is unlikely to take such a principled stand again and in future will do what's best for itself and its customers.)

During all the to-ing and fro-ing with Telecom and the Commerce Commission, TelstraClear was being left behind in the internet market.

Although it could offer broadband through its own networks in Wellington and Christchurch, TelstraClear was losing customers around the rest of the country where it can offer only dial-up internet. Reselling Telecom's Jetstream broadband service was a stopgap at best. Its customers have been migrating to other broadband suppliers such as ihug, Orcon and Telecom itself.

Also, the price of TelstraClear's dial-up internet has been forced down as low as $10 to $15 per month as its many other dial-up competitors dropped their prices.

So TelstraClear was left in a position where it had fewer and fewer internet customers and was getting less and less revenue from each of them.

The company has over 200,000 internet customers, around 100,000 of whom aren't supplied broadband by its own network in Wellington and Christchurch.

It had to get nation-wide broadband as quickly as possible so it could convert those 100,000 people to broadband before even more of them deserted.

And the longer it waited, the more the dial-up prices would have dropped, making the price step from cheap dial-up to the much more expensive broadband steeper and harder to sell to customers.

Telecom could easily have held up the Commerce Commission's ruling in the courts for another six months or a year. Whether or not the company ever explicitly made that threat is irrelevant - TelstraClear knew it had to get broadband as fast as it could.

Of course, Telecom didn't make this deal, which helps a competitor, out of the goodness of its heart.

The deal will significantly boost Telecom's number of wholesale broadband subscribers and hence significantly boost its chance of evading tougher regulation.

The Government - which wants to lift New Zealand's woeful rate of broadband use - set a 2005 target of 250,000 broadband users around the country, 83,000 of whom had to be wholesale customers - that is, customers who get their internet through a supplier which bought the connection from Telecom.

Telecom hit the first target but not the second, and with the Government looking as though it's losing patience with the telco, the threat of unbundling the local loop is nearing.

The deal will see TelstraClear buying wholesale broadband connections from Telecom, helping it reach that goal (albeit late) and further reducing the chance of it having to share more of its network with other competitors.

What upsets internet users about the deal is that they'll get only half the speed which supposedly would have been supplied by the Commerce Commission ruling.

But this is nonsense. It's unlikely broadband users ever would have had downloads up to 7.6Mbps. Telecom's network simply isn't capable of supplying such speeds to large numbers of users, some industry observers say.

Speeds like that would require massive investment by Telecom in its network. And as the company was expected to make this extra investment for no extra revenue than it would have got for supplying 3.5Mbps, it may not have bothered to inject the money at all.

The more realistic goal of 3.5Mbps will allow Telecom to better manage its capital expenditure across its network and put the investment where it's needed to ensure that users actually do get that speed.

In the end, everybody won out of this deal - maybe even internet users.