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Telecom NZ faces "Separation Day" — Who's next?

It is "separation day" today for Telecom NZ, as the New Zealand Communications and Information Technology Minister announces his approval of the company's plan to split itself into three operational segments.
Written by Suzanne Tindal, Contributor

It is "separation day" today for Telecom NZ, as the New Zealand Communications and Information Technology Minister announces his approval of the company's plan to split itself into three operational segments.

"This is a highly significant step for the telecommunications market, and I'm pleased to announce the successful implementation of the operational separation today — 31 March 2008 or 'Separation Day'," the Minister, David Cunliffe said in a statement.

From today, the plan will be legally enforceable, with hefty fines of NZ$10 million for missing separation deadlines as well as NZ$500,000 for each day the plan is breached.

It all started in 2006, when a swathe of reforms introduced by Cunliffe prompted incumbent telecommunications provider Telecom NZ to voluntarily split itself into twain — wholesale and retail.

"Our wholesale business, delivering next generation connectivity to service providers through New Zealand, has been operating in a separated way for two years," Telecom New Zealand chief executive Paul Reynolds said today in a statement.

From there the New Zealand government called for a three way split of the company into network, wholesale and retail parts.

According to a document from the Minister's office, this separation has been imposed on the company to avoid discrimination.

"Separation will increase the transparency of Telecom's business operations, and remove or limit the incentives and ability of Telecom to engage in discriminatory behaviours that lessen, damage or exclude competition in downstream markets.

"Our strategy is to improve market conditions to increase competition, innovation and investment to support New Zealand's transformation to a stronger, more productive knowledge-based economy and society," Cunliffe said in a statement.

New Zealand's move increases the momentum for the separation of incumbent telecommunications companies, according to Ovum research director David Kennedy.

"Up until this event in NZ, the only country in the world that had really gone down this track was the UK with British Telecom (BT)," he said, adding: "BT was more an anecdote than a trend."

Apart from New Zealand, Singapore is also making moves on separation, he said.

If there is a competitive market, and a desire to get the regulator out of industry matters, a separation is worthwhile, he said. "Regulators are getting bogged down in price issues. Separation makes that a great deal easier."

Seeing New Zealand and Singapore tackle separation makes governments more interested in the structural issues, Kennedy said, adding that for any incumbent such as Telstra, it can be worrying.

The way the business is run has to change with separation, Kennedy said. "The network side of the business is going to come up with a standalone business case for the infrastructure."

Previously, according to Kennedy, some things could operate at a loss, because the telco knew it could get the money back in another area of the business. With a separated telco, that is not possible, he said.

Access pricing for the National FTTN Broadband Network would be much easier under a separated incumbent telco, he said. Calculating access pricing is an accounting exercise, he said: "There is a certain arbitrariness in the way access prices are done."

With the network side of the business separated, however, working out the right price is simpler. It would only be necessary to look at the bottom line — if the network was doing badly, prices are too low. If there are super-orbital profits, they are too high, he said.

It will take two to three years to see whether the plan is workable, Kennedy said — the amount of time it took for the UK to see the results of BT's separation. "The fact that it worked in the UK is no guarantee it will work in New Zealand," he said.

There will need to be a form of review after two years, Kennedy said, to see if the separation is working and to make sure the lines of the separation are in the right place for evolving technologies.

In the plan, there is a clause which specifies that after 31 December 2009, Telecom New Zealand can request a review of the workability of its undertakings.

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