KEY POINTS:
Telecom chief executive Paul Reynolds told a press conference in the viewing lounge of the Sky Tower management were "on top of the world" announcing a $218 million upgrade of the company's new 3G mobile phone network.
But expansion costs for its WCDMA network - including a $33
million loss from the company dropping GSM technology adopted just 15 months ago - suggest investors will remain grounded.
The technology shift saw Telecom cut its earnings forecast by up to 8 per cent.
In spite of this, long-term investors may be pleased that Telecom is stepping up to the challenge of beating Vodafone rather than adopting an inferior technology.
But investors who have seen Telecom shares sliding since long before the current global upheavals were far more down to earth.
The NZX fell yesterday by 1.5 per cent but Telecom fell by 5.4 per cent, or 15c, to $2.44 on news of the plan and capital programme,.
The full 3G network added $391 million to the $2 billion capital expenditure budget for two years.
Financial analysts said Telecom's move to develop a full 3G network covering 97 per cent of the country by June next year - upgrading an earlier proposal for a poor man's version using GSM technology - made sense.
Forsyth Barr telecommunications analyst Guy Hallwright acknowledged there was nothing to ease the concerns of people about the short-term returns for the stock which is already in the midst of large-scale upheavals and capital expenditure.
"I am a little surprised by the size of the additional cost."
The upgrade was essential if Telecom was to challenge its multinational rival Vodafone, which is ahead on mobile and attempting to take some of its fixed-line revenue.
Vodafone - whose 021 service has 53 per cent of the mobile market compared with 47 per cent for Telecom - has marketed a 3G service for five years.
Reynolds said the upgraded WCDMA network developed by Alcatel Lucent was offering fast speeds for internet downloads and "New Zealand's best mobile network". But Vodafone NZ chief executive Russell Stanners said Telecom was using hyperbole to describe a "catch-up" on what was already on offer.
"The statement is a gross exaggeration. If it is the world's best network it is a copy of our one which is already in existence.
"The programme was to start in November, [but has] slipped eight months. They have had to change technology and the announcement is a way of papering over a big miss," he said. Stanners said Telecom now faced a $33 million "impairment" charge as a result of dropping the GSM technology. Telecom confirmed the $33 million charge - for GSM technology installed over the past 15 months.
Telecom spokesman Mark Watts said the telecoms landscape had changed rapidly over the past 15 months, since the first WCDMA announcement.
"No one has perfect foresight in such matters," he said.
An analyst who declined to be named also cautioned about viewing the $33 million impairment cost as being "squandered" saying such procurement contracts were often very complex. The nationwide rollout of WCDMA (Wideband Code Division Multiple Access) technology would use a frequency of 850MHz (megahertz).
"It's a really positive technology choice and they have to bite the bullet but clearly the market response relates to the cost and the time," said the analyst.
The full 3G network would enable it to earn more revenue from its mobile customers.
"This is the first management decision the present team have made and I think they are asserting themselves in the business," said one analyst.
Reynolds confirmed that the company faces a major marketing push starting soon to sell the new 3G service, and would be attracting existing CDMA customers by offering special deals on new handsets.
The old CDMA network will be closed down in 2012. Reynolds said that no decision had been made on whether handsets would be subsidised to increase uptake.
But the delay in implementing the service will make marketing phone handsets in the run up to Christmas challenging given some of them will be based on technology that will be obsolete in four years.
Reynolds and the board of directors may be on top of the world - he says there are no signs this year of revenue being impaired by an economic downturn.
PHONE SWITCH
* Telecom's existing technology cannot provide extra revenue from new mobile internet services.
* It planned a new WCDMA network offering 3G internet services in main cities and - initially - GSM services elsewhere.
* Then Vodafone - which says it reaches 70 per cent of the country - said it would expandits existing 3G network to 97 per cent by April 2010.
* Yesterday Telecom announced it was expanding to a full 3G service to reach 97 per cent by June 2009.
