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Broadband bombshell

By Chris Keall

Thursday 29th June 2006

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As Theresa Gattung gasps for air, let's replay David Cunliffe's sucker punch: competitors will be able to install their own broadband gear at Telecom's exchanges, letting them offer their own broadband products rather than reselling Telecom's JetStream DSL. The really ugly part, for Telecom at least, is that the likes of Ihug, Orcon, TelstraClear and Slingshot/CallPlus will be able to sell 'naked DSL'. That means being able to buy a broadband account without being forced to add $40 or so for a Telecom phone account (as most people have to do today). Instead, you could go cellphone-only, or make your calls via VoIP.

Worse, as a precaution against, for example, Theresa dragging her feet on unbundling or charging for local residential calls, cunning Cunliffe has asked Telecom to account for its wholesale and retail businesses separately - the easier to break up the company if it refuses to cooperate.

Cheaper plans are a certainty. Orcon is already musing about $10 a month broadband. But faster? Another government move, forcing Telecom to disclose a 7Mbit/s theoretical speed limit on its DSL network, has as much practical purpose as making Transit New Zealand admit a car could go 180km/h on Auckland's motorway, then saying everyone can now move faster at rush hour.

While it's good rival ISPs (and Telecom) have already revealed plans to install so-called ADSL2 gear in Telecom's exchanges, I'm still cynical about how the creaky old copper that runs to your front door could do justice to ADSL2's theoretical speed limit of 25Mbit/s. (DSL speed fades the further your house is from an exchange. Though just imagine if the furtherest Mercury Energy customer in the street had faded lights.)

My fear is the likes of CallPlus and Ihug will now put most of their money into piggybacking on Telecom's network rather than pursuing their respective experiments in WiMax and satellite alternatives to copper. TelstraClear, hopefully, will see new reason to resume its residential fibre-optic network, which now only takes in parts of Wellington.

The only sure thing is Telecom's rivals will be inside its exchanges, taking some of its broadband customers, and savaging its margin on those it retains.

But even that's not so bad. The killer, for Theresa, is learning nobody loves Telecom. The public has watched the government announce its intention to invade a private company's property and share its resources with competitors ... and said, 'Good job. When do we get our cheaper broadband?'
Well, they could be waiting a while. As I write, the government still has to introduce the unbundling legislation. And the new law won't be a Budget night quickie. Even assuming Telecom plays nice, and opposition parties bar ACT close their eyes and think of the polls, there are fiddly private property issues to work through. And the actual mechanics of unbundling and working out a fair price for access - not to mention a morass of technical issues - will cause many a migraine at sub-committee hearings before the final legislation is hashed out. The upshot is we may not see any change until well into 2007.

It could be longer. I've been advising a recently arrived UK journalist who's been shocked at the lack of broadband choice, and high pricing. He left a comparative broadband paradise in London, where around 50 providers competed for his dollar. But although British Telecom voluntarily unbundled (quickly walking the plank before being pushed), it took four years for the new, competitive situation to flower.

So Telecom could have some breathing space. But it will need it to address challenges that were looming with or without Cunliffe. In some cases, unbundling will make these challenges worse. In others, it will spur our sleepy giant into action.

For example, everybody knows VoIP will replace traditional voice calls at some point and VoIP leader Skype has been breaking out of its PC-to-PC geek-niche. Skype's model has been to charge a few dollars a month for calls to regular phone numbers. But mid-May it suspended all charges for its US customers in a move to grab market share. In March, Skype's software added free video calls, and later free text. And companies like Nokia, Cisco and Netgear are making the deal look more grown-up by releasing Skype-compatible desk- and mobile phones. By Theresa's own reckoning, 100,000 Kiwis have registered for Skype. Telecom seems to have taken it for granted businesses would ignore Skype and opt for its own VoIP services. Unbundling could accelerate its plans.

Then there's Google, whose US local search directories are a clear and present danger to telcos' Yellow Pages. During April, Google announced it was looking for a local search partner in Australia; New Zealand Google-istas are being hired as you read. Here, Telecom has already been active, with its Ferrit site slowly emerging as a Yellow Pages alternative.

Then there's the issue of net-neutrality, or the emerging industry consensus that not all internet traffic should be charged for equally (for example, you'd pay more per megabyte to receive a video than a straight website). Earlier this year, that development looked like a potential cash cow - and a way to keep rivals to Telecom's coming internet TV service at bay. It's unlikely, however, that David Cunliffe would go for that one. Remember that new rule Theresa: forget the dividend, and keep Uncle Dave happy. That way, you'll have a chance of making the next shareholders meeting.

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