Peter Griffin: Tiny Woosh a threatening cloud on Telecom's horizon

I expected Telecom to take a hit in the market yesterday, and lose maybe 10c off its share price.

That's not because Allan Bollard warned that further interest rate hikes are ahead or because we may see a change of Government tomorrow. I expected it to dip because Telecom has a new rival in the telephone market, one that's tiny at the moment but stands for one of the biggest threats Telecom and its vast profitability faces.

The share price held up, trading above $6, but Auckland internet provider Woosh Wireless is finally in the phone business and it's undercutting Telecom's pricing.

On offer are free regional calls between Woosh users, free local calls for residential and business users, 10c-a-minute calls nationally and to Australia, the US and Britain. Woosh does a price comparison with Telecom services on its website.

Many observers thought Woosh would never make it, that the considerable delays in getting its phone service out indicated that wireless technology wasn't up to it.

But I received my first call from a Woosh VoIP (voice over internet protocol) phone yesterday. I could tell it wasn't a regular network call - there was a slight fuzziness in the sound and background noise broke up, but it was perfectly listenable. And I'd be happy making a Woosh call knowing I was paying less.

Woosh, unlike TelstraClear, ihug and CallPlus, operates completely independently of Telecom's network, its subscribers connecting wirelessly to a series of base stations around the country.

The little wireless modem Woosh subscribers use to access the internet is also the gateway to Woosh's phone network. Those taking up the new phone service will have to stump up $100 to $200 for the equipment that will let you plug in your regular phone to make calls over the internet.

And you'll have to take up a high-speed internet account with Woosh if you haven't already got one (packages range from $55 to $90).

Internet telephony has a reputation as unwieldy and too technical for the masses. But the technology has come a long way. If it's straightforward to do a simple self-installation with the Woosh equipment, the final barrier to taking up VoIP falls away.

Woosh joins Slingshot (Slingshot.co.nz) in providing internet calling via regular phones.

Telecom likes having Woosh around because it's an example of the infrastructure competition Telecom prefers to having rivals clamber on to its network to sell their services.

But the little wireless internet company with its 15,000 customers is a form of competition with economics that completely undermine Telecom's.

Woosh doesn't have any massive monopoly to protect. It's willing to take a lower margin on a lower average spend by customers. As the momentum builds, the equation can only get better.

It's a different story for Telecom. At stake is billions of dollars of revenue from calling and line rental charges. It is facing a potentially radical redistribution of these revenues among VoIP players such as Woosh, CallPlus and potentially TelstraClear, should they pull off the VoIP transition.

The rot has already set in. In the year to June 30, Telecom's revenue from calling, the mainstay of the business, dropped 7 per cent on the previous year to $1.3 billion. Local service revenue - what we pay in line rental - dipped nearly 2 per cent to $1.1 billion.

The number of call minutes is decreasing - down 5 per cent for the year - which means more people are making calls over other networks.

The only reason Telecom's revenue grew overall by 7 per cent to around $5.8 billion for the year is because it is experiencing huge growth in an area of its business called "solutions" - IT systems Telecom puts together for business customers.

Telecom's world is changing and the signs from overseas are that VoIP, a technology that has been around for years, is about to hit its sweet spot.

Just this week internet auction giant eBay made a deal to buy internet telephony provider Skype (Skype.com). The purchase is valued at up to US$4.1 billion if Skype meets its performance targets. Skype has 53 million users, most of them free.

US VoIP operator Vonage (Vonage.com) now has over a million customers. Microsoft's getting in on the act with its purchase of Skype rival Teleo and even Google has a foot in the internet calling camp with its Google Talk messenger service.

Telecom has its own consumer VoIP trials under way but whatever it launches. the reality remains that the golden weather is almost over. It's all downhill from here as far as the cream pot of local access and calling revenue is concerned.

Pricing will have to fall further to meet the competition from new VoIP providers and Telecom, if it is to continue to grow, will have to look to other parts of its vast business to make up the numbers.