Simon Hendery: Telcos jostle for market position ahead of local loop unbundling

Last week's announcement that Vodafone had signed wholesale deals with Orcon Internet, Compass Communications and M2 Telecommunications Group offered revealing evidence of the corporate jostling under way as we await local loop unbundling.

On the face of it, there may appear to be little relationship between the Government's intention to open Telecom's fixed-line copper network to competing phone and internet providers and Vodafone striking deals with some smaller fry to on-sell its mobile services.

However, there is a significant connection and it relates to bundling. Not the copper type of bundling that most in the industry are celebrating the demise of; this is the bundling of various telecommunications services into a discounted package that makes for an attractive combined offer to consumers.

We first got a hint of what was going on back in June, just weeks after the local loop unbundling decision was announced.

Back then, Orcon dropped the price of its cheapest broadband plan to $19.95, creating the ISP equivalent of what retailers call a "loss-leader" - a hyped-up offering that costs the company money but gets customers through the door in the hope they will also chuck some of your high-margin product into their shopping cart.

Orcon's $19.95 deal was quite a gamble, given the company was paying $21.50 to Telecom per customer to buy the wholesale service it was reselling to customers at a loss.

The move was recognition on Orcon's part that the ground was shifting significantly under the feet of ISPs as customers began to migrate en masse from high-margin, dial-up internet accounts to low-margin broadband.

At the same time, local loop unbundling presented the opportunity to wrench customers completely away from Telecom if the former monopolist's smaller competitors could come up with attractive telephony offerings on top of the internet services they have been providing.

To be truly effective, however, a bundled telco offering needs to include a mobile component, hence the need for the likes of Orcon to strike deals with Vodafone.

IDC telecommunications analyst Chris Loh warns that as ISPs follow the new economic reality and transform themselves into broader-service telcos, some of the smaller players will fall by the wayside.

The corporate shakedown has already begun with Woosh acquiring ISP Quicksilver and Australia's iiNet putting its New Zealand subsidiary ihug on the block.

Again showing its aggressive willingness to expand, Orcon has been among those to put its hand up as a potential buyer of ihug.

But as Loh told the Herald last week: "The problem is, if people wanted to buy tier-two ISPs (the likes of ihug, CallPlus and Orcon) they should have done it before May when they could have got them for a much better price, because everyone appreciates the opportunity in the market now."

Life in ISP land is going to remain tough, particularly since everyone is flying blind as we wait for the final details of how the unbundling is going to look.

That will not be clear until the final shape of the Telecommunications Amendment Bill, the Government's unbundling vehicle, is determined.

Even then, there are many in the industry forecasting another round of legal rumblings before the scene finally settles down.

The buzzwords for what the industry needs to offer consumers are "triple play" (bundled voice, data and internet TV) and "quad play" (triple play plus mobile). The bad news for the tier-two ISPs is that Telecom starts at a strong advantage, even with its loop thrown open.

Telecom may be reeling from the rude shock of unbundling but it still has a strong package to offer off the back of its fixed and mobile infrastructure.

The likes of Orcon, Woosh and CallPlus are talking about spending tens or even hundreds of millions on building their own networks to enhance their competitive position.

(A $30 million ADSL2+ build in the case of Orcon and developments of up to $300 million around wireless WiMax technology in the case of CallPlus and Woosh).

Those are big investments in an environment of uncertainty, with low margins and a dominant incumbent competitor. So time will tell if those investment plans actually come to fruition. In the meantime, from a consumer perspective, some cheap deals are on offer at present.