Telecom's IT buy-up leaves ball in TelstraClear's court

By ADAM GIFFORD

Telecom says its buying spree in the IT business is over, but there is expected to be more consolidation in the market, driven by TelstraClear's need to stay competitive.

IT services companies Axon and Datacraft and even Datacom have been touted as possible targets for TelstraClear. Axon chief executive Matt Kenealy said he was told his company was now owned by the Australians. Not true, but it's hard to keep such rumours in check.

TelstraClear spokesman Matthew Bolland refuses to discuss possible acquisition targets.

The problem for TelstraClear, according to communications analyst Paul Budde, is that it is not competing in the same race.

Budde said the failure of the regulator, communications commissioner Douglas Webb, to recommend local loop unbundling, means TelstraClear cannot guarantee the connectivity it needs to build a similar services business.

"It is not in charge of its own destiny, and you can't make expensive decisions if you can't control your own destiny," he said.

Sceptics suggest the buying spree is window dressing, to allow Telecom boss Theresa Gattung to tell the annual meeting that a growing percentage of revenue is coming from services rather than the traditional connectivity business - even though that revenue may not generate any profit.

But Budde said Telecom showed it had a good understanding of how the telecommunications market was moving.

"The market will be far more IT-driven, and Telecom has started to put systems in place to start profiting more from IT development," he said.

"In 10 years time it will look more like an IBM or a Microsoft than an old telco.

"Now more than 70 or 80 per cent of its income comes from voice services. In 10 years, 90 per cent will come from broadband applications.

"There will be whole new industries round e-commerce, datacentres and ASP [application service provider] models."

Telecom had an early go at ASP with its esolutions joint venture with EDS and Microsoft, which ended up being folded into its Advanced Solutions group - the same organisation which will swallow Gen-i, and possibly Computerland.

"Not all these moves will be 100 per cent right. As a telco moves into IT, there will be cultural problems and challenges, but it is good to see Telecom as one of the first incumbent telcos in the world to start that transition," Budde said.

Indications are that tensions are already emerging over who should control the customer relationship - the Telecom Advanced Solutions account manager, who gets the bigger cheque each month, or the Gen-i managers who add more value to the customers' businesses.

"The problem with incumbents is they are not innovative. If this is to become an applications based industry, it would be very dangerous to rely on one incumbent monopoly," Budde said.

So what has Telecom bought for its $26 million? The obvious answer is a company with 360 staff in Auckland, Hamilton, Wellington and Christchurch, and a further 220 employed by Computerland franchisees in all the provincial centres.

Many of those franchisees dominate their provincial markets, giving Telecom a significant channel for its products.

Computerland chief executive Chris Mackay said the deal was strategically the best thing his company could have done.

"It extends our market reach and extends our value proposition for customers," Mackay said. "We now have a local shareholder which is interested in what we do. Singapore Computer Services' growth is in India and China, and that is where its attention has been."

Long-term, Telecom's IT play may have implications for its partnership with IT services giant EDS. Telecom will be competing with EDS in areas such as desktop and server design and support. However, its contract with EDS stretches through to 2012 ruling out a parting of the ways any time soon.


Telecom's IT buy-up

* Telecom has spent close to $90 million buying Gen-i and Computerland.

* Axon, Datacraft and Datacom are being picked as potential IT acquisitions for TelstraClear.

* Telecom is set to become a significant IT services player, second in size to EDS, the IT company taking care of Telecom's own in-house IT systems.