Alternative carriers are coming under increasing pressure from above and below in a market continually redefining itself, specifically with the rapid roll out of full IP-based networks which allow delivery of carrier grade voice services alongside internet and data.

Margins in the voice and ISP market have been savaged in recent years and while many ISPs and second tier carriers now resell Telecom’s DSL this is driven by the lack of alternatives and the need to provide a full range of services.

Consequently the consumer or small to medium business in suburban or outlying areas has seen little in the way of competition and it is only the growing activity of wireless providers and emerging community partnerships that show any immediate promise.

Our telecommunications environment could be seen as a multi-tiered cake – the bulk of which is owned by Telecom, TelstraClear and Vodafone with those in the next tier covetous for anything left that has icing on it.

Dozens of ISPs with their eye on the big time have already gone belly up or been acquired and several players who once offered phone cards or toll by-pass options including Freedom, Communica, Pacific Gateway Exchange and GlobalOne are now no longer with us.

Shake-up overdue

Telecommunications Commissioner Douglas Webb is coming under increasing pressure to promote a greater level of competition through fairer interconnection fees, wholesaling and local loop unbundling. If he decides to bring New Zealand into line with many other countries by allowing competitors to have equal access to the last mile this could shake-up the carrier market and give competitors a fairer chance at the $6 billion cake.

Meanwhile uncertainty has led to a very nervous second tier telco industry. Telecommunications Review lists 19 players in this middle ground who aspire to be full service telecommunications providers or operate in the wholesale arena reselling bandwidth, tolls or internet services.

Murray Young telecommunications specialist with TeleConsultants believes second tier carriers are in for a hard time. "They’ll be squeezed based on the restrictions placed on first tier players by the commissioner. The smaller players will want an interconnection deal similar to that struck between Telecom and TelstraClear or they’ll be kept in niche markets and not able to generally provide a full service."

He says after deregulation there were plenty of second tier players mainly offering discounted tolls – the few who remain tend to have a robust business in a particular market segment, moved into the ISP market or partnered with others to survive. "Some of these may be driven out of the market, others will change form and need to work hard to maintain their position. Those with their own bandwidth may be more viable," says Mr Young.

The lack of competition has spawned a number of community-based networks where universities and research institutions have teamed up with industry to create their own citywide or campus wide networks and wireless players are finding a growing interest in their offerings.

United Networks and Counties Power have also entering the telecommunications market, alongside independent companies such as CityLink who’re pouring cash into CBD fibre.

Wellington-based CityLink has over 50kms of fibre-optic cable above and below the streets of Wellington’s CBD with more than 500 connections to 250 buildings. It also has a ‘modest’ network in central Auckland.

"No longer is bandwidth doled out in expensive multiples of 28kbit/sec in Wellington, it is liberally supplied at 10, 100 or even 1000Mbit/sec at cost-effective rates. Companies don’t have to tolerate point-to-point circuits with expensive tails at each end and a cost for each new link they simply take a connection to PublicLAN and VPN to any other CityLink customers," says CityLink managing director Neil DeWitt.

The biggest challenge is sourcing sufficient investment to grow the network and expand the types of connectivity available including voice services and its CafeNet wireless broadband business.

Power giant Vector, which has over 600,000 customers connected to its electricity network in Auckland and Wellington and its own Tangent data and telecommunications subsidiary, acquired United Networks and its fibre optic network late in 2002.

It is still trying to figure out how to capitalise on its combined telecommunications assets which includes fibre covering 950 square km in the Auckland CBD and running parallel to the Vector line network out to Manukau and Papakura. The focus is mainly in the business-to-business market but it also supplies wholesale bandwidth to ISPs and carriers.

Wired Country a division of community-owned electricity network Counties Power is not only providing wholesale "bandwidth and lots of it" to parts of the Franklin and Papakura districts for voice and data its also moving into high-speed wireless coverage

Number portability

Among its partners is Auckland-based wireless technology provider UCC Technology and ISP Iconz which will offer internet connectivity of between 128kbit/sec and 100Mbit/sec. Counties Power chief executive Neil Simmonds is keen to see the new things the community does when it gets hold of this service.   "We don't want to eat other people's lunch. We want our customers to be able to access services from any telco or ISP across our network."

The major obstacle to growth is the lack of ‘practical number portability’ – in other words the ability to take on customers from other networks and have them retain their original numbers.

UCC Technology, is using 3.5MHz licensed spectrum to establish network services in Franklin and Papakura and in conjunction with Counties Power also has its sights set on Northland, and Auckland. The first tower will be operating in Auckland by the end of April delivering voice over IP and data speeds up to 4Mbit/sec.

Managing director Leicester Chatfield says "many millions of dollars" will be spent on the network with the infrastructure including the towers bring built by Counties Power.

Management changes at Auckland-based Walker Wireless have also bought a tightened focus on extending its unlicensed national fixed wireless technology and gearing up for a major roll out of a more flexible and affordable Wideband CDMA network.

Walker Wireless was given a $20 million cash injection last year - $6 million of which was invested in the year long trial of the new generation technology. Full deployment, according to general manager of sales and marketing Alan Leigh, will require "substantial" investment. "Customers are hanging out for alternative broadband options and there’s been a level of jubilation about our new offering," he says.

Walker Wireless is using a licensed 2.1GHz service, akin to a cellular network delivering internet or data connections to the home or business. The plan is to deliver to 70 per cent coverage of the country over three to four years. Connection speeds will vary from low-end internet residential at 128kbit/sec up to 1Mbit/sec.

‘Carrier grade’ voice over IP will be bought into the mix by the end of the year. Service will be offered across Auckland, Wellington Christchurch and other high-density areas first before progressing outward.

BCL the government-owned transmission network formerly a division of TVNZ has invested $100 million in upgrading its data network to a fully digital microwave backbone capable of 155Mbit/sec and most recently created a bi-directional wireless local loop access platform from Airspan. A network capable of reaching into the majority of rural and outlying areas is being built in conjunction with Telecom.

"The wireless access market in New Zealand is relatively immature and the challenge for BCL and others is to ensure the right business model is used and products are affordable, competitive and yet profitable," says BCL chief executive Geoff Lawson.

Another challenger in the wireless market is Compass Communications, which says it’s invested millions of dollars in globally proven technology to build its national and international network. It has its own ISP, tolls offerings, and through its acquisition of wireless provider Radionet a national presence from Whangarei to Queenstown. Its target market is small to medium enterprises with about 2500 business customers to date.

Satellite option

Ihug is one of the pioneering ISPs in New Zealand is providing satellite bandwidth for relatively high-speed (1Mbit/sec) connections as well as reselling fibre, frame relay, DSL, tolls and other services. A recent restructure saw the company settle refocus on its role as a carrier and ISP. It recently launched an Australia-wide network.

Despite attempts at cracking the local market the fact is second tier telco carriers have made little impression over the past few years. Telecom’s share of the contestable fixed voice market has only slipped from an estimated 85.4 per cent in 1997 to 78.8 per cent by 2002 with a further 1.2 per cent drop expected in 2003.

It’s similar in the data market where the high price of leased lines and terminating circuits or tails is a source of regular complaint by businesses, reliant on moving increasing volumes of data about the country.

Looking across the Tasman the signs aren’t encouraging with evidence suggesting a gradual creep back to a telecommunications monopoly despite second tier carriers having access to full range of services and wholesale local loop access.

Telstra still reaps over 95 per cent of the profits, retains a 95 per cent market share of the local loop market, 75 per cent of the long-distance telephone and broadband market and 50 per cent of the mobile market.

Despite Optus, AAPT, Orange, Vodafone and OzEmail being owned by powerful international companies none have been able to break the power of Telstra and most have scaled down their investments in Australia.

Aussie carriers fading

Today there are six second-tier competitors – significantly less than there were seven years ago and second tier revenues only amount to around $100 million annually. Further consolidation is ongoing.

Analyst Paul Budde says the major players have more or less abandoned the wired residential market and are limiting their operations to corporate markets and mobile services. "This means there is little or no hope for infrastructure competition in Australia."

He claims competition is simply not working, with the focus more on shareholder value than the national interests of telecommunications and competition. "Without any residential competition Telstra is now drip feeding the fixed broadband market critical to the social and economic future and doesn’t want to invest in the domestic market where it reaps annual profits of around $A4 billion. It is making it impossible for its wholesale customers to make a profit, margins are often well below 10 per cent," says Mr Budde.

The future of New Zealand’s telco counterparts is tenuous. Without wholesale access to the last mile of Telecom’s network they’ve had little incentive to deliver services other than discount tolls, internet access and business bandwidth in the main centers.