Make-or-break year for wireless operators

By PETER GRIFFIN

For telecoms trainspotters, 2003 was a very busy year as weighty investment and regulatory decisions were made that will shape the progress of the industry this year and beyond.

Providing communications is big business in New Zealand. According to Sydney-based telecoms analyst, Paul Budde, the industry will be worth $6 billion this year, with services revenue expected to increase about 7 per cent.

It will be a year that will make or break wireless operators like Woosh Wireless and Wired Country, see potentially hundreds of millions spent on mobile networks by TelstraClear and Vodafone, and witness the rise of new technologies that will turn the traditional voice calling market on its head.

Of all last year's significant developments in the industry, one shows out - the final pre-Christmas recommendation from Telecommunications Commissioner Douglas Webb not to fully open Telecom's "last mile" phone network to competitors.

A watered-down recommendation back-tracking on a previous decision favouring full unbundling of Telecom's local loop sends a clear message that if you wish to compete with Telecom, you have to do it largely under your own steam.

Webb instead offered access to Telecom's network to deliver a limited range of Jetstream-type high-speed internet services.

Several players were expecting this year to be allowed into Telecom's phone exchanges to install their own equipment. That now appears highly unlikely.

Communications Minister Paul Swain will have the final word on unbundling in the next few months. He is understood not to favour unbundling so the commission's recommendation is likely to stand.

Budde described TelstraClear, Telecom's major competitor in voice and data services and until now the consumer's main hope for more competitive telecoms deals, as a "very serious loser" based on the unbundling recommendation.

"Over a year ago the company basically abandoned the roll out of any new fixed infrastructure themselves and their future now depends on utilising Telecom's national network wherever it can," he said.

With Telstra's former wholesaling chief Rosemary Howard at the helm of TelstraClear, her strategy was always to wholesale her way to success in New Zealand.

The about turn will likely bring about a management change at TelstraClear as the strategy is re-written and it dusts off plans to build its own network.

For second-tier telco operator CallPlus, the decision is also a serious blow.

Managing director and founder Malcolm Dick said it was "by far the worst decision [Webb] has ever made".

"The only players who will get some benefit from this determination are the dial-up internet providers such as our Slingshot service, who now have a transition path to broadband."

Fledging wireless broadband player Woosh Wireless had sided with Telecom in opposing unbundling, arguing that new entrants flogging internet services using Telecom's network would undermine its own business case.

Chairman Rod Inglis said the fact Woosh was already delivering broadband services on a large scale and was preparing to launch voice calling in competition to Telecom, were signs that wireless networks were a viable alternative.

This year will see Telecom's competitors write out cheques to cover Telecom's Kiwi Share losses - the cost it bears of providing a mandated minimum level of phone and internet services nationwide. The loss is around $65.6 million on an annual basis, with that figure split among a handful of telcos based on market share. The final figure was $7.8 million a year lower than the commission's earlier calculation.

The commission also set wholesale prices for resold Telecom services and started an investigation into introducing number portability.

For Telecom, the country's largest listed company with a market capitalisation of more than $10 billion, 2003 just got better and things are also looking up for this year.

Its shares closed at $5.23 yesterday, no doubt delighting those investors sensible enough to buy in early last year when the share price threatened to sink beneath $4.

But a better than expected profit for the year to June 30, 2003 of $709 million, boosted confidence. Predictions from analysts that Telecom will increase its dividend payout later this year also helped.

Webb's decision added to Telecom's recovery.

More recently, the obligatory increase in line rentals by 55c a month, while angering consumer groups, again pleased the market.

Four brokers - ABN Amro, ABN Amro Craigs, Forsyth Barr and McDouall Stuart list Telecom in their top share picks for 2004.

All of that leaves Telecom in better shape than it has been in some time and as the argument goes, when Telecom is strong, the New Zealand economy is strong.

Budde suggests the decision may be a calculated move to stave off attempts by Telstra to take over Telecom.

"Might this political issue have played a role in the commissioner's decision? Does New Zealand want to make such a takeover more difficult?" he asks.

The real hotspot in the telecoms this year will be in the mobile sector, where Telecom is desperately trying to play catch-up.

A tarnished acronym after the illogical billions spent on its development over the last couple of years, "3G" (third generation) mobile services are now on the front burner.

Vodafone is forging ahead with plans to build a 3G network in New Zealand this year at a cost analysts have put anywhere up to $600 million. In reality, Vodafone is likely to stagger its network build, starting in main centres and equipping subscribers with handsets capable of stepping down to the existing network outside main centres.

TelstraClear also has a tender out for a 3G network and may work with Telecom to build it, possibly using finance from third-party investors.

Telecom is holding off on 3G, instead concentrating on its near-new 027 network which will have attracted half a million subscribers by the end of the month, most of them upgrades from the 025 network.

Telecom Mobile marketing manager Kevin Bowler said the milestone will be reached ahead of time and attributes the growth to Telecom's $10 flat-rate texting deal and the availability of better phones. While he won't reveal numbers he claims to be winning many customers from Vodafone.

New Zealanders' enthusiasm for ringing up mobile phone bills shows no sign of waning. The major winner is Vodafone which reported a profit of $90 million on revenue of $841 million for the year to March 2003 and is likely to better that for the current year.

With Project Probe, the Government-funded scheme to get broadband access to the regions largely signed and sealed, the next year will involve the harder task of making the services work in large scale deployments.