KEY POINTS:
As a disaffected market unenthusiastically awaits Telecom's annual results this week, all eyes are on three key regulatory decisions expected in the next month, which should give shareholders a clearer idea of just how reduced a creature the former monopoly will become.
Guy Hallwright, Telecom analyst at Forsyth
Barr, is expecting pre-tax profits to be between $810 million and $830 million, but what people are waiting to hear is the first decision on pricing to come from the Commerce Commission as early as this week.
Draft determinations on the price and non-price terms for Telecom's unbundled copper local loop (UCLL) and co-location regulated services are due at the end of this month.
Draft determinations for the unbundled bitstream access (UBA) will be released at the end of August.
Naked DSL and LLU (local loop unbundling) pose threats to Telecom's fixed-line access relationship with customers and could accelerate the rate of decline in traditional telephony such as voice calling, says Australian telecoms analyst Paul Budde.
The third regulatory decision, coming at the end of August from Telecommunications Minister David Cunliffe, will be a decision on what kind of break-up the company will go through, structural or operational.
In a statement to the Herald on Sunday, Cunliffe says: "Good progress is being made on the operational separation of Telecom. We are exploring structural options with Telecom as well as progressing the operational split required by the act. My determination should be released around the end of August. The MED team is meeting regularly with the Telecom team and working through proposals set in the Government's operational separation discussion document."
Although the sentiments are positive, the Government has its own agenda after leaving Telecom alone all these years.
"Cunliffe has decided he's heading to the top, so he's got to play the tough role," says Brian Gaynor, Milford Asset Management director, who says the minister's ambitions to be the next prime minister could influence his stance.
The Telecom board, headed by chairman Wayne Boyd, has meanwhile rejected the Government's draft of an operational break-up as too complex and one that goes significantly beyond the model of British Telecom in the UK, as well as failing to address investment issues.
Telecom's proposal includes a structurally separated access network company that would have the ability to earn an acceptable rate of return.
It would be a simpler separation model so resources could focus on faster delivery of local loop unbundling and Naked DSL, says Budde.
"The challenge for the new CEO is ... setting up this all-important structural change programme, speeding it up and making sure it stays on course.
"There are literally hundreds of different systems and projects, all with their own self-interested perspectives, that must be amalgamated into an integrated structure and this is the most difficult operation any telecoms operator can face.
"Telecom needs to change from a subscription-based telephone company to a wholesale-based, internet economy, infrastructure company. And the cultural change will be as significant as the technical change."
Telecom's situation is far from unusual. Every country in the world has had a dominant telecommunications player, normally state-owned, which has been broken up and other companies invited to come in and compete. Some countries have worked through this process with more grace than others.
At the end of last year Budde said: "Telecom is between a rock and a hard place. It has been allowed to maintain a monopolistic market position for much longer than any other telecoms company in the world. It was only in early 2006 that the Government indicated enough was enough."
The company's "head is in a noose," says Gaynor.
Coming in, new CEO Paul Reynolds, who has been through the break-up of British Telecom, has a huge task ahead of him. "One positive aspect is this CEO cannot try to operate from a position of monopoly which is the way Telstra in Australia, for instance, is handling this change," says Budde.
"The NZ Government has blocked off that avenue and it is important they reinforce this at every opportunity to prevent Telecom from reverting to its monopolistic mind-set."
Telecom is likely to concentrate increasingly on its role as a national infrastructure provider. It is also dedicated to speeding up its next generation network (NGN) upgrade and is likely to talk more on this at the results next week.
As the Government deliberates, Telecom customers are impatiently waiting for that world-class broadband offering they were promised.
TUANZ chief executive Ernie Newman, which represents business users of telecommunications, says the lull in activity is poorly timed for NZ business with such big strides being made in telecommunications overseas.
"Telecom has not had the wallet out as much as it should do," says Newman, and the imminent $1.1 billion capital return going out to shareholders angers him.
Meanwhile Telecom shareholders, who have enjoyed the regular dividend yields, are probably "lighter in the stock than usual", says one analyst.
"The main theme has been one of uncertainty, both in respect to the break-up, and the rules of separation," says Guy Elliffe, senior portfolio manager at AMP Capital Investors.
"The incumbent is in a particularly strong position. The amount of competition is going to be increased and there will be some shift in prices and market share."
But Telecom is financially stronger than most of its competitors.
Forsyth Barr's Hallwright says while the pie is being broken up it is growing, since demand for all forms of telecommunications is growing.
So what should shareholders do? One fund manager says he is holding the minimum in the stock because it could go either way.
Citigroup has said Telecom's fixed-wire line business is potentially worth far more as a structurally separated entity and that it should be sold outright by Telecom if it is spun off as a separately-listed asset.
If there is a complete separation of the businesses, the non-network operations - unaffected by Government regulation - would be devoured by private equity, says Gaynor.
Another group taking a realistic view is Vodafone, now number two in the telecoms sector after its Ihug purchase. General manager of corporate affairs Tom Chignell says its aim is to be number one in NZ but it has some sympathy for Telecom.
"The separation [strategy] and the local unbundling are big programmes. It does not seem Telecom is being given much leeway from the Commerce Commission or the Telecommunications Minister," he says.
