TelstraClear sale to Vodafone could limit UFB take-up, academic warns

If Vodafone buys TelstraClear it may extend the life of the copper network, at the expense of the government-backed Ultra Fast Broadband roll out, says academic Brownyn Howell.

Telstra confirmed it is in talks with Vodafone over the possible sale of Telstra's New Zealand division TelstraClear in June, and speculation is increasing that an announcement about a possible sale is due soon.

Howell, general manager at the New Zealand Institute for the Study of Competition and Regulation, says if the sale goes ahead a combined Vodafone and TelstraClear would have around 30 percent of the fixed line broadband market.

Both companies have considerable local loop unbundling investments in the copper infrastructure (Vodafone has unbundled 51 exchanges, mostly in the Auckland area and TelstraClear has unbundled 61). Howell suggests that working as competitors it has not been commercially attractive for the telcos to undertake sub-loop unbundling (because the number of potential customers in a roadside cabinet is considerably less than in an exchange) but if the two companies are put together the equation becomes more attractive.

“The merger is thus likely to extend the life of the copper network beyond what it would have been had the merger not occurred. The risk is that this will decrease the economic efficiency as the two networks (copper and fibre) will run in parallel longer than would have been the case without additional merger-induced investment,” she writes.

The alternative would be for the incoming telecommunications commissioner Stephen Gale to “increase the copper access price in order to discourage investment in sub-loop unbundling in the first place, or to accelerate substitution to fibre after the fact,” Howell writes.

However, Howell points out that the commissioner’s “primary regulatory responsibility is the promotion of competition on the copper network.” Certainly the outgoing commissioner Ross Patterson has appeared to support this view by signalling that copper access pricing will decrease.

Vodafone head of corporate affairs Tom Chignell said copper network pricing will be an important issue for Gale when he assumes the post on Thursday. In a Radio New Zealand interview last week Chignell said “the re-pricing of those (copper) services will set the scene for the intermediate period from now through to when fibre becomes pervasive.”

In response to follow up questions from Computerworld, Chignell says he can’t predict when fibre will be the dominant technology.

“I don’t think anyone really knows what the uptake of fibre will be and therefore how long copper and UCLL will be around and viable. It’s pretty tricky when assessing unbundling business cases,” Chignell writes in an email.

“Obviously the cost to connect is a key driver and, as you know, we are keen to get clarity on this issue as soon as we can. Particularly with respect to non standard installs.”

Chignell says Vodafone is trialling UFB technology with customers but couldn’t say when the company will launch services more widely. “All I would say is that there is a great deal of work for a retail service provider to do to prepare for market.”

Chignell wouldn’t comment on Howell’s suggestion that a Vodafone/TelstraClear merger would see greater investment in the copper network.

Before a TelstraClear sale to Vodafone could take place, Howell suggests it will require clearance from the Commerce Commission.

She writes that the proposed sale would give the newly merged company 30 percent market share in the fixed line broadband market, with market leader Telecom around 50 percent.

“As the three-firm concentration is over 70 percent (indeed, it is nearly 80 percent) and the market share of the combined entity is more than 20 percent it would seem that in respect of the internet access market at least, an investigation is warranted.”

Howell's paper on the proposed merger of TelstraClear and Vodafone is available here.