A loosening of the regulatory shackles on its retail arm could be driving Telecom to split its business, says an industry analyst.

Telecom is considering a demerger that would see it split its business into a network company, Chorus, and a retail arm to participate in the Government-backed ultrafast broadband scheme (UFB).

Rosalie Nelson, of IDC, said in the face of a challenging business environment freeing the business from its regulatory handbrake is a factor in the Telecom decision to split the business.

"I think it goes beyond the UFB. It felt to me that the company is facing some real challenges with the way that operational separation has been structured for its business, particularly for wholesale," said Nelson.

She said year-on-year earnings before interest, tax, depreciation and amortisation (ebitda) to December 2009 for Telecom retail was down 14 per cent and -15 per cent for Gen-i.

In contrast, Chorus' adjusted revenue grew 3 per cent and ebitda was up 2 per cent, Nelson said.

She said wholesale, which sells broadband and phone services to other internet service providers including Telecom's own retail arm, is in the difficult space of being highly regulated but also expected to be commercial without being seen to be anti-competitive by the regulator.

Last year operational separation cost Telecom $73 million and in the first three quarters of this year it spent $125 million - investment that may be marginalised by the Government's fibre plan, said Nelson.

She said a split which would see regulated products, including those managed by Telecom wholesale, hived off into the Chorus business would leave the rest of the company free to compete without the "wrapping of regulatory compliance".

In exchange for splitting, Telecom is seeking some roll-back of its regulatory strictures.

Nelson said it is likely a line will be drawn between regulations that continue to deliver competition and end-user benefits and those that will no longer be relevant in the new industry structure.

How a demerged Telecom retail business would structure its business is unclear given there are few examples worldwide of incumbents moving to a retail-only model, said Ovum's David Kennedy.

He said telco operators would need to become niche-marketing focused businesses with the ability to move fast and accept higher levels of risk.

"The more separation that happens the easier it is for new players from outside the telco sector to come in," Kennedy said.

"I think that some of the media organisations and the internet-based companies are thinking about what they might do in this space. They have capabilities, and arguably in some cases better understanding of consumer demand, than the telcos do," he said.

Nelson said there are opportunities for Telecom to use its technical expertise to become a wholesale provider to service-based companies.

"If you're a Google or you're an international provider do you want to have to develop the systems and structures here in New Zealand or would you rather work with a wholesale provider that can manage the data services, that can manage the backhaul and the provisioning and deal with the complexity of integration between fixed and mobile," she said.

Kennedy said a wholesale relationship would also raise questions around how much telcos would help third-party content providers versus supporting their own content strategies.

"The challenge they face is quite unique. They are simply going to have to do the innovation and experimentation on their own," said Kennedy.

Nelson said a lot will come down to where telcos position themselves in the new environment - especially given the number of service providers, such as Google, who can innovate faster than telcos.