Vodafone and TelstraClear

The Commerce Commission is due to report back on Tuesday with its decision regarding the Vodafone purchase of TelstraClear.

Should it go ahead the takeover will redefine an industry that’s already undergone dramatic upheaval over the past dozen years.

We started in 2000 with the Fletcher Inquiry into the telecommunications sector, which recommended the creation of a stand-alone regulator to oversee the industry. This came at the end of a decade’s worth of nonsense that came about as a result of the government’s sale of Telecom lock stock and barrel as a monopoly. Funny that – monopolies operate in their own best interests and expecting Telecom to do any different would be like dropping a hungry timber wolf in a cattery.

By the mid-2000s it became apparent that the light handed regulatory approach was not going to deliver anywhere near the kinds of results we needed. The decision to unbundle the local loop – something most other countries had done many years before – was delayed until it was all but irrelevant. Finally, the bicycle courier debacle saw the government break cover and demand Telecom operationally separate.

By the end of the 2000s, that was also deemed to be a slow-moving train wreck. Telecom had continued to act in its own best interests and the industry had suffered as a result – although the Commerce Commission had actually used its powers to take on issues like Telecom’s “loyalty” scheme and the sub-loop extension service (SLES) problems which were designed to block competition from getting a leg up. So we embarked on the biggest project of them all – roll out a fibre to the home network that would either overbuild Telecom’s copper network or require Telecom to structurally split in two to take part in the venture.

Telecom chose the latter path – Chorus was born and we are starting to see the fibre network deployment take shape, albeit very slowly at first.

Telecom has a lot to do in the coming year. It has to compete while figuring out how to finish off splitting away from Chorus. It has a new CEO and has to compete in the nearest thing we’ve ever had to a level playing field.

On top of that, we now have Vodafone making the leap from a mobile provider, with an ISP, into a fully-fledged telco hopefully with a keenness for shaking up the market.

Here at TUANZ we thought long and hard about the ramifications. On the one hand we have a reduction in competition as our top three telcos become two. We have a consolidation at that end of the market where all the power lies and we see 80% of the market dominated by two telcos, telcos who have had a history of sitting pretty alongside each other in the mobile space.

On the other hand, Telstra was never going to allow TelstraClear to compete vigorously in the New Zealand market. Quite why Telstra bought Clear Communication off BT is something of a mystery – I put it down to Telecom’s purchase of AAPT and a desire to keep Telecom on a short leash. Mess with us in Australia and we’ll mess with you in New Zealand, was the warning.

AAPT turned out to be something of a mutt with fleas and so Telstra did the bare minimum for its fledgling Kiwi company. After the Auckland City Council refused to allow the expansion of TelstraClear’s cable TV business in Auckland (looking at you, New Zealand Herald for that particular nonsense) and the staggering Commerce Commission decision not to unbundle in 2003, TelstraClear really had no business plan for growth. Sure, it had a tremendous asset in the form of its fibre backhaul network, but its decision not to peer locally, its shambolic cellphone network deployment in Tauranga and multitude of brand names did nothing to build its business locally.

Rumour has it that TelstraClear approached Telstra about buying Vodafone New Zealand’s business in order to grow swiftly. Telstra baulked at the asking price (rumoured to be $3bn) and instead entertained a reverse deal that includes a clause to keep Telstra out of the New Zealand market for some time to come.

The upside to the deal, however, means we finally have a competitor that can take on Telecom in the fixed line market in ways Telstra simply wouldn’t entertain. Vodafone has very little business in the fixed line market. Sure, it bought iHug and has a consumer presence, but in the all-important business market, it’s a minnow. In order to really take on Telecom in its heartland, only Vodafone has the scale and with TelstraClear’s assets (both network and people) it would have the ability.

I’d expect the Commerce Commission to come back with an agreement to allow the deal to proceed, albeit with a variety of caveats regarding market monitoring. If there’s any sign of a cosy duopoly forming, I’d expect the Commission to act swiftly, but I have high hopes that won’t be needed. It’s up to Vodafone now to deliver on the promise of the Clear network. If it does that, we should have a more dynamic and interesting market. If not, the Commissioner will have to wield the scalpel once again.