Telecom on a path to creative destruction

There's nothing like "creative destruction"; every so often, a new technology comes along and replaces whatever it was that went before, such as cars replacing the horse and cart.

There's nothing like "creative destruction"; every so often, a new technology comes along and replaces whatever it was that went before, such as cars replacing the horse and cart.

Like many, I have long believed that Telecom New Zealand imposes excessive monthly line-rental charges. Certainly, they are much higher than the rates that equivalent telcos charge in the UK or Australia.

For example, BT in the UK can offer line rental for as little as £10 (AU$15) per month, while Telstra charges from AU$22.95.

For "dear" old Telecom New Zealand, monthly line rentals start from around NZ$40 (AU$30) per month, depending on where you live, costing around NZ$50 in some areas.

Now, to be fair to Telecom New Zealand, it does have to carry the lines over long distances for such a small population, and for many years it has had to fund the Telecom Services Obligation (TSO), and then a successor levy, which meant subsidising rural services and offering free local calls.

However, the fact that line rentals were still too high was confirmed in an international study commissioned by the New Zealand Commerce Commission , which last week reported that such rates led to high charges for voice services overall by the incumbent telco.

ComCom blamed this on a lack of competition in the fixed-voice market, something confirmed by the fact that Telecom varies its monthly line rentals depending on whether a region faces competition from Telstra-Clear. Wellington does; provincial New Zealand does not!

The government regulators, however, did note that broadband prices in New Zealand are, by contrast, relatively low compared to other countries, something that commentators credit with the unbundling of the "local loop" some years back, fuelling a competitive market for broadband services.

Taken together, ComCom concluded that this could lead to consumers switching over to cheaper digital services sold with broadband; in other words, consumers switching from fixed-line voice to voice over IP (VoIP). And lo and behold, this is already happening!

A few months back, Orcon, an ISP, launched a VoIP and broadband package called Genius, where customers pay no line rentals.

Despite some consumers complaining of poor customer service from Orcon, sales of Genius are going "gangbusters", with the company claiming "tens of thousands" of customers as it rolls out the service to the rest of the country.

If Telecom is not careful, it may well lose tens or hundreds of thousands more customers. Telecom must consider slashing existing monthly line rentals significantly for the company's own benefit. At the current rates, they are only accelerating the digital threat to Telecom's longer-term survival.