How hard will Government axe fall on Telecom

With Telecom missing a key broadband customer target last week and some sort of regulation looking certain, the question on analysts' minds is how hard the axe will drop.

"It is looking quite likely. Really, everything could be on the table," said IDC telecommunications analyst Chris Loh.

In the run-up to the spring election, Communications Minister David Cunliffe said he would examine several options - including structural separation of Telecom's retail and wholesale arms - if the company failed to meet customer targets.

Telecom staved off regulation in 2003 that would have opened up its high-speed internet network to competitors in a process known as local loop unbundling. The company convinced the Government to try its proposed wholesale scheme instead, wherein it would have 250,000 residential broadband customers by the end of last year. One-third of those were to be wholesale, through other internet service providers.

The company reached the first goal but fell short of the second, with only 22 per cent coming through wholesale. Telecom now denies agreeing to the target.

Cunliffe said last week a regulatory review was under way with an announcement planned for mid-year. The public would be given the opportunity to comment shortly.

Telecom will again try to fend off regulation by releasing a "wholesale charter" in the next few weeks. Chief operating officer Simon Moutter said it would outline commercial terms to be offered to internet service providers and would be in line with the recent unbundled bitstream agreement signed with TelstraClear.

Telecom would soon be addressing the issue of upload speeds with new offerings. He said: "We got the message loud and clear."

Loh said regulatory options included:

* Unbundling.

* An enforced improvement of wholesale terms.

* Large-scale structural separation of the company.

* Abolition of the Kiwi Share.

* "Naked DSL." That would involve separating phone services from internet services, allowing providers to sell one without the other.

Loh said better wholesale terms would be the easiest option, although not necessarily the most preferable. Separation, Kiwi Share abolition and naked DSL would be the most difficult to implement.

"It appears that revisiting the [unbundling] decision is a prominent option for the Labour Government."

Telecom chief executive Theresa Gattung wrote to the Government in 2003 and said that unbundling would cause the company's stock to take a 30c hit.

Company spokesman John Goulter said Telecom's position was unchanged.

"We have no reason to believe that the view would be any different now than it was then."

But analysts do not think that would be cause for concern.

"Thirty cents is not a hit," said Forsyth Barr analyst Jeremy Simpson.

He said Telecom's stock tended to bounce around that much anyway so a major decline would require harsh regulations or major competition - both of which were unlikely.

"Even with local loop unbundling, I wouldn't expect a massive influx of competition into this market."

Simpson said the most extreme form of regulation - structural separation - was probably not on the cards.

"It's unlikely we'd go from one of the softest regulatory regimes to one of the harshest in one move."

Another financial analyst said the effect on the share price would depend entirely on the scope and scale of the regulation. But, he added, time was running out for Telecom.