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.

Terminate the early termination charges

Early termination charges are astonishing things.

On the one hand, ETCs are part and parcel of the telco
sector in New Zealand. If you take up a service and sign a contract, you’re
likely to get some kind of hardware for free or at a reduced price.

It’s not free, of course. If it’s a cellphone, the price of
the device is built in to your plan and you pay for it for the duration of your
plan. Sign up for three years and the cost of the handset is paid for many
times over. You’ll never see that magic money when you’ve paid it off and your
bill goes down in price.

Landlines also get their own ETCs relating to the hardware
you get from your ISP. Typically it’s a modem or router so you can connect to
the service you’re paying for.

Cellphones tend to cost up to $1000 (or more if you want a
smart phone of course, as we all do) while routers are a tad less traumatic on
the wallet, costing in the low hundreds.

Either way you’re likely to find your ETC is dramatically
more than the cost of the device, and the reason is the telco is charging you
for the lost earnings as well as for the hardware.

This is a nonsense and has to stop.

It brings to mind the bank break fee story that hit the
press a couple of years ago. Banks are allowed to charge a reasonable fee (not
really defined in the relevant legislation) for a customer to break the
contract and move to a new provider. Kiwibank and the HSBC interpreted this as
meaning it could charge a whopping great fee to cover lost earnings whereas
some of the other banks chose to interpret it in a more user-friendly “we’ll
cover the cost of admin” approach. Eventually the Commerce Commission stepped
in to warn them about their approach and both banks paid off some customers who
could prove they were affected.

Part of me says if you’ve signed a contract then that’s
that, you’re in for the duration. Part of me also says charging too much for a
break fee is anti-competitive and should be carefully managed.

Today in telco land we’re in the throes of rolling out the UFB
and, at this point in time, not all the retail service providers are on board
and selling service on it. That means customers who want to migrate from copper
to fibre run into a problem: they may need to move to a new ISP and if they do
so they’ll find they’re liable for ETCs.

In one business’s case, that amounts to $3500 payable before
they can get access to the fibre network we’ve told them is so vital to their

That’s clearly not acceptable. We want the UFB to succeed,
we want as many customers on board as possible and we want small businesses in
particular to get stuck in. Having to pay this kind of fee because your ISP
doesn’t offer fibre is counter-productive.

Besides, as the business in question says, while the ETC
might stop them moving today, the minute the contract is done they will move to
a new provider regardless of the offer on the table from the current telco
because of its attitude over this.

ETCs might seem like a good thing around the finance table
but for a really customer-centric business they should be avoided at all costs.
This industry is dominated by a massive amount of customer churn. The customer
who leaves you today is quite likely to come back at some point and if you’ve
treated them shabbily in the past, you’ve made it that much harder to win them
back in the future.

By all means, cover the costs of the hardware and the admin,
but trying to reclaim lost earnings is poor form.

The banks learned the hard way thanks to the Commerce
Commission and we’ll be asking that ETCs be addressed in the minister’s
telecommunications review. Hopefully we can get rid of this anti-competitive
practice once and for all.