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2Degrees future?

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In the last 24 hours 2 stories have broken that cause me to pause and look a bit closer at 2Degrees, from a TUANZ perspective we have encouraged the competitive impact of having a 3rd mobile network and we have walked much of the journey with 2Degrees.

So here are the stories, the first is a blog post by Australian (Global?) telco commentator Paul Budde which asks a number of hard questions about 2Degrees and challenges a number of key assumptions about their performance and their future prospects.

“Five years on and to a certain extent it is a bit of a wonder that the company still exists.

Most operations launched, similar to 2Degrees but in other parts of the world, have since been gobbled-up by others or have simply disappeared.

Of their one million or so customers perhaps as much as 80% are people visiting the country, many only for a few weeks or months.

if the country believes it is in the national interest to have effective competition in the mobile market the only way to achieve that is to change the market structure through regulatory intervention.

Over all the years we have discussed these issues nothing has happened at a regulatory level to improve the market structure in New Zealand, and this would indicate that it is most unlikely the government will step in any time soon to address the situation. That being the case, it is with considerable certainty that we predict very little future for 2Degrees, and this is a very sad story indeed – from the perspective of economic development, competition and jobs.”

— Paul Budde – Buddeblog

The second story broke in this morning’s edition of industry newsletter TechDay about Indonesia’s largest telco being about to buy a 27% stake in 2Degrees as the second largest shareholder in 2Degrees after Trilogy Partners looks to sell out.

“Indonesia’s largest telco is reportedly about to buy a 27% stake in 2degrees.

Earlier this week, Syarif Syarial Ahmad, the chief executive of Telekomunikasi Indonesia International, or Telin – a subisidiary of Telekomunikasi Indonesia, or Telkom – was reported in Indonesian media as saying the company was negotiating with an unnamed New Zealand telecommunications operator.

Sources within 2degrees have confirmed to Techday that the Kiwi telco is in negotiations with Telin and Telkom.

Meanwhile, Netherlands-based Tresbrit BV owns 27.07% of 2degrees, according to Companies Office Records, sparking speculation that it could be the party exiting 2degrees. Tresbit took over the shares of UK-based Communications Ventures Partners in 2011.

Speculation has been running high for a while that 2degrees was likely to be sold. The company was a late entrant to the Kiwi mobile market, entering a market that was a duopoly between Telecom – now Spark – and Vodafone, and despite some positive inroads, has largely struggled to compete alongside the two, much larger players.

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— Techday NZ

 

Read together both stories are in sharp contrast to the quite celebratory piece that appeared in the print edition of last weeks NBR, its not online but I’ve got a scan of the articles here. and here.

This is a story that is going to develop so I’m not going to speculate much further about what’s happening at 2Degrees, what I want to quickly reflect on is what this means for our overall market structure and system.

There have been 2 really big telco issues this parliamentary term beyond those set in train by the 2011 Telco Act (ie UFB, RBI, Copper Wars & the Chorus Crisis) and they have been the Vodafone purchase of Telstra Clear and the 700Mhz spectrum auction.

In both cases we have seen light handed approaches from the political and official realms often citing the success of 2Degrees as proof of a robust competitive market. The Vodafone / Telstra Clear deal has created a seriously capable, vertically integrated telco with no regulatory constraints or oversight and the spectrum auction again has taken the cash over the wider needs for a balanced mobile market moving forward.

There are additional issues around the long term success of the Maori spectrum and subsequent investment in 2Degrees. 

Personally I’ve been a 2Degrees customer for the last 5 years and I want to see them prosper, we need agile and innovative challengers, I hope the new investor shares this desire.

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Fishhooks

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The Commerce Commission’s monitoring report is a tale of two halves.

On the one hand, you have a highly competitive market with prices well below the OECD average and fierce competition. Customers are being offered more for less and new offerings come to the market regularly.

Customers can buy data, voice, TXT, they can go on prepay plans or on account and they’re loving it.

The other market consists of prices up to 190% of the OECD average, limited market energy, little or no competitive pressure and a distinct lack of creativity.

The reason for the difference is clear – 2Degrees.

The first market is the low-end prepay and on account segment where 2Degrees has vigorously burst onto the scene only a handful of years ago. The third entrant has radically changed the dynamic and the other two network incumbents have been forced to respond in kind.

Suddenly we see bundles on offer at $19/month that only months earlier had sold for $70/month. The drop in price has been matched by an increase in value – customers get more TXTs, more minutes, can call more friends and family members in more calling groups and have more data to use on their shiny new smartphones than ever before.

Since it arrived, 2Degrees has fought well in this market and achieved a great deal. It’s customer numbers have long since passed the million user mark and are still rising. It’s very successful, so long as your measure of success doesn’t include “breaking even” because clearly the cost of spending on network deployment (and the impending launch of 4G as well) is not a trivial matter. It will be quite some time before 2Degrees is in the black.

The other market, however, is failing to deliver on that promise. High end business and corporate plans, and larger on account offerings, simply aren’t seeing the same level of movement to 2Degrees and I’m wondering why.

It’s not as though the plans on offer don’t appeal to business or high end customers. The same price points are attractive across the board, and while business customers care less about the costs associated with the service, the CFO certainly does and typically buying decisions are made at that level.

So why is it that 2Degrees isn’t carving the same level of fat out of this market?

I suspect it’s a combination of factors, not least of which is the speed with which customers can disentangle themselves from their contracts.

Prepay customers are free to move quickly and easily between providers. On account customers face many barriers to switching, not least of which is the ever present “early termination fee”, which is often applied even if you’re moving within the same provider to a better suited plan.

These fishhooks mean there is a lag in movement for on account customers. Instead of simply picking up and shifting to a new provider, OA customers must wait until a certain time period has passed, or until they’ve paid off their new “free” handsets (which of course are never free but rather “$0 up front” and which must be paid in full before customers are allowed to move on).

Early termination charges often include an extra fishhook – rather than simply repaying the cost of the device, they attempt to recoup the worth of that contract to the provider. Sign up for two or more years and you’ll find your “worth” is quite a bit and if you want to get away early, the break fee can be quite astonishing.

I think it’s high time we called these zero dollar handset subsidies what they really are: hire purchase agreements. You get to take the phone home with you, but you’re tied to a provider for years and end up paying more for the service than you should.

It’s time, I think, that the Commerce Commission had a closer look at all of this, and I’d go a step further and call on the government’s inquiry into the Telecommunications Act to consider the issue as well.

The numbers are clear for anyone to see – something’s stopping on account customers from migrating to 2Degrees and it’s not the price point.

Lost Opportunities and hypotheticals

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In 2002 TelstraClear approached the Auckland City
Council with a view to rolling out its cable TV network in Auckland. A FUD
campaign by the New Zealand Herald put an end to that (read the intro to
Bernard Orsman’s piece) and Auckland missed out on the opportunity to
have the Holy Grail of telco deployment – network competition.

Imagine the scenario if TelstraClear had been given
the go-ahead. Auckland would have provided a customer base of well over a
million potential customers, giving TelstraClear the ability to scale its
services up far more than it could with just parts of Wellington and
Christchurch. It would have become a power house in the home broadband market
at a time when regulation was “light handed” to put it mildly. This
was before unbundling, don’t forget, when you could have any broadband you
liked so long as it came from Telecom.

A resurgent TelstraClear would also have given Sky TV
a run for its money in the content world. Less than a year earlier,
TelstraSaturn (as it was then) and TVNZ had signed a joint venture to provide
set-top boxes throughout the market to offer a new wave of TV services. The
content market would not be quite so one-sided and we’d have at better range of
choice in the  market, even without regulatory intervention.

Unbundling may or may not have happened. I’d like to
think Telecom would have gone out of its way to win other retail partners to
its network, competing on price and service, instead of “walking backwards
slowly” fending off regulatory and competitive pressures. If TelstraClear
had opened its cable network to the wholesale market we would have two
well-placed providers offering network competition at both domestic and
national level. I would expect that within the decade both would be fighting to
deploy their own fibre upgrades to these networks and by now we’d be well on
the way to a fibre to the home service. Competition in the pay TV space would
have been far more dynamic and we’d have multiple operators offering
differentiated service.

Instead, TelstraClear was knocked back and couldn’t
compete in Auckland. The Commerce Commission decision not to allow unbundling
put the company back even further and eventually, as we know, the whole thing
was sold to Vodafone and Telstra exited the market, turning its attention to
Asia instead. Sky TV is the only pay TV operator in the market and Telecom was
forced by the government to split into two businesses. We’re now on to our
third Telecommunications Act in a decade and a significant competitive
opportunity was lost.

—

Mobile network operator 2Degrees has made a huge
impression on the mobile network, offering products and services the other
mobile operators seemed reluctant to consider. Shared data, rollover minutes,
simple pricing tariffs.

But 2Degrees is a mobile-only operator, which means
the big guys still hold sway in the all-important “one throat to
choke” market segment. Plenty of customers, business and residential, want
to deal with one provider and if 2Degrees is mobile only, that limits its
appeal to the truly cost conscious.

What if 2Degrees had bought Orcon? The combination of
fixed-line capability, including unbundled exchanges and cabinets, plus a
mobile network would open doors that previously hadn’t existed for 2Degrees.
Not only would the customer base be able to opt out entirely from the big two,
but 2Degrees would in turn be large enough (and diverse enough) to offer
wholesale services to smaller ISPs.

In the fixed line market there isn’t much margin, to
put it mildly, but in mobile 2Degrees would be able to undercut Vodafone and
Telecom in terms of MVNO offerings, and essentially use that as leverage to
shake up the entire telco market.

Years ago I read a paper about the psychology of the
Apollo space missions (back when the human race cared about such things) and why
having three astronauts was important. You never end up with a split decision –
each decision is either overwhelmingly for or against – it’s always two to one.
That gave the mission a kind of stability that was vital when you’re millions
of miles from any kind of command or support structure.

Markets operate in much the same way. With two players
the opportunity to “take a breather” and to “sit back for a bit
and recoup on our investment” becomes an option. We see the “cosy
duopoly” form and any dynamism is muted.

With three players (or more – I’m happy if we have
more so long as it’s sustainable) that situation never arises. You can’t rest
on your laurels and eyeball the other guy across the divide because that
whipper snapper will jump up and bite you on the leg. And if you and the new
guy reach some kind of stalemate you can be the other big guy will have some
offering that you have to respond to.

Having 2Degrees in the total telco market would, I
hope, do something along those lines. It would keep the other players honest
and would potentially mean we see more differentiation right across the board.

It’s an expensive business though, being a fixed-line
ISP, and with narrow margins and an impending 700MHz spectrum auction, I can
well understand 2Degrees’ decision to stay out of the bidding for Orcon.

—

Vodafone has yet to announce its plans for UFB retail,
but it has announced a trial of LTE in rural areas.

I’ve been using Vodafone’s LTE for a couple of weeks
now and while the speed is quite variable (ranging from download scores of
3Mbit/s up to 80Mbit/s) it clearly provides a competitor to a fibre network I
won’t see for at least another four years.

So imagine if Vodafone decides not to bother with UFB.
Imagine if, instead of deploying its marketing might on fibre, it pushes big
into 4G throughout the country.

Vodafone could quite easily deploy LTE capability
around New Zealand prior to UFB arriving in town. It could bite the bullet and
introduce far greater data caps (50GB, 100GB) on its LTE network and take the
hit in the short term for long term market share gain.

(By quite easily I mean “if money were no
object” naturally. This is a hypothetical).

After all, given the choice between 50Mbit/s download
speed today, but with a smaller data cap, and 30Mbit/s download in four or five
years’ time, I know which I’d opt for, especially if Vodafone did away with
capped plans and let me use data and pay for it as I go as I do with
electricity or voice calling at home.

Vodafone would gain market share, but more importantly
the customers would be on its own network, free from regulation and from
government intervention. No need to worry about the price of copper or the cost
of the fibre deployment artificially hiking it up – just put all the customers
on your own networks (unbundled, cable and 4G) and move on while the rest of
the market gets bogged down in regulatory reviews, UBA pricing determinations
and all the rest of the distractions that come with the current market.

Telecom would dominate the UFB market, Chorus would
still have to offer fibre backhaul from the RBI towers at a regulated rate,
Vodafone would eventually move all of its traffic over to its own fibre
backhaul (thanks TelstraClear) and would use cable and LTE for the last mile
service to customers. Eventually you could even see Vodafone deploying its own
last mile fibre connection, if it really wanted to, using open access ducts.

But without Vodafone’s support in the UFB market,
uptake rates would be a lot lower and potentially Chorus would miss its
targets. The other LFCs would, presumably, still make theirs but for large
swathes of the population, UFB deployment would cease as the money-go-round
stopped. Either the government would have to rethink its level of investment or
do something else equally as radical.

The upside to it all is that you’d have infrastructure
competition, albeit in the bizarro world of fibre versus LTE, and that I for
one would get better speeds sooner, which is clearly a win for me, but the
downside is the possible failure of the UFB and that’s not something I’d like
to see.