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November 22, 2011

Telecom New Zealand Completes Structural Separation: What Next?

By Gary Kim, Contributing Editor

On Nov. 23, 2011, Chorus, the wholesale business including assets that once were part of Telecom New Zealand (News - Alert), will start trading on the New York Stock Exchange.

The listing means Telecom New Zealand now is now longer a facilities-based service provider, but will lease capacity from Chorus, as will other New Zealand service providers competing in the fixed-network business.

There was an earlier BT precedent for thinking about structural separation, SingTel (News - Alert) also operates under similar principles, and though most people don't realize it, Rochester Telephone in New York also agree to structural separation, in exchange for freedom to pursue unregulated business opportunities.

In the interim, investors likely will be cautious about how the allocation of value between the retail Telecom New Zealand and Chorus entities develops. Investors are cautious. In fact, in appears some investors have been moving out of Telecom New Zealand in anticipation of the full separation. Telecom New Zealand a sell?

Despite the changes, Telecom New Zealand will retain its ownership of mobile services, making Telecom a more-focused mobile play, in a sense.

But observers will be watching for signs that Telecom can continue to be a successful and perhaps dominant retailer in a market where it no longer controls its own network, but simply buys broadband and voice services wholesale, like any other contestant in the retail services market. 

In principle, the structural separation is supposed to help ensure that, in fact, Telecom loses much of its original market share. In most other markets where robust wholesale mechanisms, if not full separation, have occurred, incumbent share has fallen dramatically.

It might be unreasonable to expect a different outcome in New Zealand. Telecom shares were trading down 22 percent in the morning of Nov. 20, 2011. Telecom New Zealand separation

In some cases, the drive for separation occurs in markets where a monopoly company originally government-owned is first privatized. That would be the case for Telecom New Zealand. In other cases, an operator itself agrees to separation in order to pursue other interests, and the separation is a precondition. That would better fit SingTel and Rochester Telephone.

Though there has in the past been some talk of structural separation in the U.S. market, the closest analogy would be the breakup of the old Bell system in 1982. In that case a single monopoly company was broken into eight separate parts, but there was no formal separation of retail from network operations.

Unlike many other countries, U.S. communications providers always have been privately owned, and also, unlike most other countries, privately-funded, facilities-based broadband competitors, in the form of cable companies, now serve virtually all markets (98 percent of homes, or thereabouts). For that reason, structural separation would have to deal with two distinct classes of competitors, and possibly important wireless providers as well.

The point is simply that the institutional drivers for inducing higher levels of competition make more sense where there is but one ubiquitous network. It is less a compelling argument where there are two or more competitors, all privately owned, in virtually all local markets. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves
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