Telecom's earnings will fall nearly 10 per cent in the next two years, but the threat from competitors was overstated and the "empire would strike back", Macquarie Equities says.

The broker forecast that, in a draft ruling due out later this month, the Commerce Commission would set the price for access to Telecom's local loop at $25 a month per customer.

Macquarie's research report also said Vodafone would be one of the few to invest much in its own fixed-line infrastructure.

It predicted that Vodafone would announce in the next few months that it would make a big investment in putting its own equipment into Telecom exchanges.

However it said the economics of either local loop unbundling or wholesaling Telecom's network were not compelling.

"Communications Minister David Cunliffe has dropped some strong hints that he has `market sensitive' information about investment plans. The likely interpretation in our view is that Vodafone, clearly Telecom's most significant competitor, will announce a significant dslam investment programme.

"We also expect TelstraClear to undertake dslam investment while some of the smaller players will no doubt make some token efforts," the report said.

Macquarie said Telecom faced a huge challenge implementing "deeply intrusive and expensive" operational separation while replacing its public switched telephone network with an Internet protocol-based next-generation network.

"Failure to execute on this could see anything from government fines to an ongoing deterioration in Telecom's technical capability as key staff give up the fight and depart to greener pastures."

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David