Peter Griffin: Vodafone move may finally deliver real alternative

Vodafone's purchase of third-ranked internet provider ihug is the first major side effect of the Government's move to open up Telecom's fixed-line monopoly.

The spirit of ihug's founders, the Wood brothers, has been well and truly laid to rest. Ihug is now owned by a huge multinational that in May reported Britain's largest ever corporate loss - £14.9 billion - and is looking to convergence between mobile and fixed line services to get its business back on track.

But, more than anything, the Vodafone-ihug marriage will intensify the fight for the number two spot in the market for phone and internet services and TelstraClear is likely to be the big loser.

When Telstra bought Clear Communications in 2001, there was hope that for the first time we would have a real alternative to Telecom. Indeed, we were initially promised that as chief executive Rosemary Howard repeated her "choice-and-competition" mantra.

Then came disaster - a Government ruling not to unbundle the local loop and TelstraClear's failure to win permission to run overhead fibre optic cables in Auckland.

Since then, TelstraClear has had a muddled image in the consumer market; a result of the shift in focus after Howard's departure - she had wanted Telstra Clear to become a real competitor across the board.

Now that ambition lies with Vodafone and ihug who, with the help of the Government's u-turn on unbundling, may have the first real stab at delivering that triple-play offering of mobile, broadband and fixed-line voice services so crucial to the economics of being a mass market telecoms player. Both companies have the advantage over TelstraClear of being popular with business customers and consumers. TelstraClear lost much of the goodwill it had with consumers when it merged Clearnet and Paradise.

TelstraClear has complained for years about the restrictive nature of its resale deal with Vodafone and its weakness in not having its own mobile network is going to become more obvious as the Vodafone-ihug relationship beds down.

Vodafone wants us all to have one handset that acts as home phone and mobile and owning ihug will help deliver it.

Most of TelstraClear's 029 mobile customers are business customers but the mobile business is low-margin for TelstraClear and Vodafone doesn't appear predisposed to offering it a virtual network operator deal.

TelstraClear's revenue increased just $11 million to $727 million in the year to June 30. The company is effectively in limbo as it waits for regulation to deliver lower cost access to Telecom's network.

The most significant development at TelstraClear in the last six months has been its decision to spend $50 million on a wireless network - in Tauranga.

TelstraClear is still the second biggest player in the fixed-line world but, without the breadth of focus of Telecom and Vodafone, has much to lose from the latter's move into fixed-line services.

At the launch of ihug's new flat-rate calling plans last month, chief executive Mark Rushworth said it was likely ihug would initially take more customers off TelstraClear than Telecom. There's little love lost between those fighting it out in the shadow of the ultimate foe - Telecom.

When you can get your ihug broadband and home phone line on the same bill as your Vodafone mobile account are we going to start seeing significant customer "churn" away from Telecom and TelstraClear?

That depends on how unbundling pans out in practice.

Ihug boldly stated last year it would spend $20 million if unbundling went ahead, an investment promise more likely to happen with Vodafone as owner than if internet provider Orcon had been successful in its $30 million bid for ihug.

If Vodafone commits to a serious investment in putting equipment into Telecom's exchanges and preserves ihug's strong identity, we may begin to see that real alternative we were promised.