KEY POINTS:
Telecom's rivals could struggle to make their broadband investment profitable, even though the price they will pay to use the local loop is lower than expected, analysts say.
The Commerce Commission on Tuesday released a draft ruling that set the price telcos will pay to access Telecom's copper
wire network at $16.49 per customer per month in urban areas and $32.20 in rural areas.
Citigroup's Kar Yue Yeo said despite the urban price being lower than the consensus average of $21 to $23 he expected broadband investment from competitors would struggle to hit $200 million, let alone the $2 billion expected by policymakers.
Telecom's share price has been hit by the Commerce Commission announcement, falling 16c, or 3.4 per cent, to close at $4.49 yesterday.
In a research note, Yeo estimated only $691 million of Telecom's $3 billion in fixed-line revenue is at risk to competition via unbundling and naked DSL (broadband without the need to rent a phone line).
"Based on the investment outcome to date of ULL (unbundled local loop) in other markets, the impact on incumbents' revenue and earnings has been less negative than first expected," said Yeo.
Yeo said that on the surface the investment payback from unbundled local loops looked attractive for Telecom's competitors but the risks of the copper network becoming obsolete could double the time it took to get a return on investment.
As Telecom decommissions its local exchanges and rolls out its next generation fibre-to-the-node network, competitors would need to reinvest in broadband equipment, said Yeo.
"We believe the negative impact of ULL on an incumbent's earnings is often initially overestimated and overpriced," he said.
However, JP Morgan analyst Laurent Horrut said he believed new chief executive and former head of British Telecom's wholesale business Paul Reynolds was unlikely to pursue major fibre roll-out in New Zealand. "In his previous functions at BT, he made it ostensibly clear that he thought there was no business case today for a deep fibre strategy," said Horrut. "We expect this would be his position in NZ as well."
UBS analyst Richard Eary said it estimated 5 per cent of residential phone lines will be unbundled by 2011, with Telecom's average revenue per residential customer falling 2.2 per cent per annum from the current $83 per month to $77 over that period.
Industry analyst Leith Campbell of Ovum said although Telecom is likely to lose some market share, incumbents are usually in a good position to fight back against competition.
"This regulatory step ... is not sufficient to create a highly competitive market. That depends on which players come into the market and how well they compete," said Campbell. "It takes a long time for the dominance of the incumbent to be worn away."
UBS' Eary said in addition to the final price for unbundling due at the end of the year, Telecom faced uncertainty with a Government review of the mobile market, the outcome of the Government's plans for operational separation and the potential for new market guidance when Reynolds joins in September.
Telecom is reporting its full-year results tomorrow, with an expected operating net profit after tax of between $875 million and $895 million.
TELECOM CALLS
ABN Amro - Hold - $4.62
UBS - Neutral - $4.50
Citigroup - Buy - $5.00
JPMorgan - Buy - $5.12
