Market weighs up telco deal impacts

By Richard Braddell

WELLINGTON - The seismic wrench to the telecommunications landscape wrought by the Telstra Saturn merger is a jolt to all the players in the pay-television and telecommunications market.

A merger at some time always seemed likely. But its size, at least $1.2 billion in new infrastructure to wire up the CBDs as well as residential Auckland, Wellington and Christchurch, and the with which speed it could happen, came as a surprise.

Telecom, whose share price for once stuck its head well over the $9 parapet last week, shrank back to $8.89 yesterday as news was absorbed by the market.

But as one analyst said, valuing the merger's impact on Telecom at this time was an art, not a science.

Telecom was in no doubt that something significant had happened, with chief executive Theresa Gattung on the day putting out a release casting itself in the role of the biblical David welcoming the new Goliath.

Taking into account the sharemarket capitalisations in the order of $US41 billion for Saturn and Telstra's parents, Telecom was but a tot with capitalisation closer to $US9 million, she said.

But if the merger is reason for Telecom to be on its mettle, an analyst said it also reflected the reality that the days were over when telecommunications resellers with little infrastructure other than a switch could foot it against facilities based players with their own networks.

"Only God can save Clear now," he said given its reliance on Telecom, whose local network it wants unbundled.

But while Clear spokesman Ross Inglis said Clear's future was secure given the latest $120 million injection of new capital by British Telecom, it has also been interpreted as a carrot to get Telstra back into negotiations.

Negotiations in which Telstra would have bought Clear from British Telecom collapsed before Christmas.

Meanwhile, the merger opens up all sorts of possibilities for new arrangements in the pay-TV market.

Telecom yesterday confirmed that it was having talks with content providers, including Sky Television and international players.

But while a strapping Telstra Saturn might at last allay competition concerns that have stymied attempts to put Telecom and Sky together in the past, Telstra Saturn's chief executive, Jack Matthews, said such an alliance would still be open to regulatory review, particularly if amendments to the dominance provisions of the Commerce Act were passed.

Meanwhile, the question remains of how Telecom would effect such a content deal. Its aggressive roll-out of high-speed ADSL capacity is data-oriented and in its current form would almost certainly struggle to deliver full video content.

Another option would be to replicate the network planned by Telstra Saturn by reactivating and extending the hybrid fibre coax (HFC) network built for Telecom's disbanded First Media which already passes 70,000 homes in Auckland and Wellington.

But the additional capital demands of implementing a "Second Media" for the rest of New Zealand could result in the share price being hammered.

If anything, Telecom is seen as likely to enter a "virtual" bundling of Sky with its existing services in the same way as one of the electricity retailers already resells Sky as part of its service package.

Sky Television's chief financial officer, John Fellet, declined to discuss what discussions might be taking place with other carriers. But he accepted that it could be commercially attractive to use either a Telstra Saturn or a Telecom network in place of satellite distribution, thus avoiding the upfront cost of subsidising satellite dishes for digital TV.

Telstra Saturn's Mr Matthews said it would have an excess of bandwidth and the two companies had come close to completing a distribution deal prior to Sky's float two years ago, but that had fallen over "at the last hurdle."

Mr Fellet said any deal would be non-exclusive and Sky would insist on its own set-top box so that it could provide interactive television and maintain contact with the customer.

He said ith that in place, details such as who did the billing were not an issue.