Daily Sharechat: Telecom

By Jenny Ruth

Friday 26th June 2009

The Commerce Commission's final determination on the pricing of sub-loop unbundling, the process of allowing other companies to compete with Telecom, probably means those competitors will find it uneconomic in most cases, says Guy Hallwright at Forsyth Barr.

"It seems likely that Telecom's moves to push fibre deeper into the network and increase broadband speeds will also have the effect of reducing unbundled-local-loop-based competition," Hallwright says.

Telecom is part-way through a program to install roadside cabinets, or mini telephone exchanges, aimed at cutting copper line lengths and thereby boosting broadband speeds and the commission wanted to provide open access to those cabinets.

Hallwright says in larger roadside cabinets, an access seeker with more than 35% market share could find its costs similar to or even slightly lower than Telecom's "but we would expect this scenario to be rare."

He says it's clear access costs compared with Telecom's increase rapidly at lower market shares. "This seems likely to deter competitors from attempting to use sub-loop unbundling."

In Britain, where sub-loop pricing is similar, there has been very little take-up by competitors, Hallwright says.

He says Telecom's share price implies more substantial declines in longer-term return on invested capital than he thinks will eventuate but the short-term profit outlook "remains fairly uninspiring."

BROKER CALL: Forsyth Barr rate Telecom (NZX: TEL ) as hold.

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