Telecom NZ Ditches HFC, Puts Kiwis in ADSL

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The first casualty has hit the dirt as New Zealand's
pay television market begins to heat up.

Telecom NZ Ltd. will close its 15-channel First Media
cable-TV service July 31, after halting its rollout of the hybrid fiber-coaxial network in
the cities of Auckland and Wellington, in order to investigate the feasibility of
providing asymmetrical-digital-subscriber-line services over its existing copper telephone
network.

The move leaves the telco's $NZ70 million ($US37.14
million) broadband network, which passes 68,000 homes, idle, and a two-year plan to be the
market's leading cable-TV player in tatters.

Telecom NZ said a change in market conditions forced the
decision to shut down the HFC network, with consumers apparently more interested in
high-speed-data services than in cable TV.

"First Media was set up when Telecom was considering
how best to provide broadband services to residential and smaller business customers. HFC
was logically the first technology to use, drawing on overseas experience," said
Simon Potkins, Telecom NZ's group manager of operations. However, "it became
plain that alternative technologies may be more cost-effective as a way of delivering
broadband services and ... that fast data and Internet access would be a more valuable
service to customers," he added.

Telecom NZ is putting its resources into ADSL technology to
see how it can best deliver voice and data at high speeds over its existing copper
network, and it is currently running a trial to 200 homes in the capital city of
Wellington. The First Media service was also part of that trial, but it will be taken off
that system.

Telecom NZ will take a $NZ25 million ($US48.7 million) loss
this year on the closure of the service.

Industry observers suggested that First Media may have been
hampered by the strong industry incumbent, UHF operator Sky Network Television Ltd., which
is 48 percent owned by News Corp., and by new pressure in video and telephony from HFC
operator Saturn Communications Ltd., which is owned by United International Holdings Inc.
and Sasktel International.

Additionally, First Media's network lineup, while it
was extensive, may have lacked blue-chip programming. Sky New Zealand, with only five
channels, was able to woo subscribers with precious rights to local rugby matches and
stronger movies, general entertainment and other sports.

And as Telecom NZ retools its strategy, competitors are
pressing full-steam-ahead into new businesses.

Sky, with 300,000 UHF subscribers, is being marketed
similar to News Corp.'s highly successful British Sky Broadcasting, and the company
is planning to launch a direct-to-home service in the next few months.

Saturn has established its cable-TV and local and
long-distance telephony service near Wellington, undercutting Telecom NZ's rates by
about 15 percent. The company is also testing high-speed-data transmissions and, according
to a New Zealand newspaper, it will expand its Wellington HFC network over the next 12
months to pass 135,000 homes, up from the current total of 30,000.

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