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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.

Cash versus competition

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Say what you like about the mobile market in New Zealand, but competition has finally arrived and it’s been worth the wait.

With 2Degrees joining the fray, we finally have a market that’s beginning to deliver results in favour of the customers.

Roll over minutes, shared data, more realistic pricing for roaming – all of this has come as a result of 2Degrees entering the market.

Having three network operators has meant a healthy tension between parties. With one player you get ripped off. With two you get the cosy duopoly, but with three you have a natural balance that means the telcos can never sit back and relax but instead must always fight for market share.

So why has the government decided to give all that away in favour of raising a few million dollars more for the consolidated fund?

One of the key bedrock components of a mobile network is radio spectrum. If one network has a lot of it, they can jam more customers onto your network than a network that doesn’t have a lot of it.

It’s simple really – more customers or more speed or, if you’ve got enough of the stuff, both.

Currently the 4G wars are just starting out. Vodafone launched first, and Telecom has just jumped in as well. Both offer 4G services on existing spectrum, but both they and 2Degrees want to move to the holy grail of spectrum, the 700MHz range, as quickly as possible. Most of New Zealand would be considered “rural” in any other developed country and the lower the radio spectrum range, the further the signal propagates. That means 700MHz is much better for 4G than 1800MHz or 2600MHz or any of the other bands the telcos have bought.

Spectrum is sold in pairs and Vodafone and Telecom have both bought the maximum they could – 2x15MHz each. Newcomer 2Degrees has only bought 2x10MHz, which leaves 2x5MHz sitting there.

Instead of waiting till later to sell the chunk, the government has decided to allow Vodafone and Telecom to cage fight until only one is standing. And it will be a fight, because neither company can afford to allow the other one to have that advantage in the market.

Currently both have paid $66m for their chunks. Whoever wins this fight will have to pay considerably more per megahertz for the next block and that’s just stupid. That’s money that is better spent on the network itself not on a piece of paper.

Telecom has already said it would rather not fight over the remaining spectrum and supported putting it on the shelf. Vodafone, however, was happy to remain in the competition and since Vodafone has said it will bid, Telecom has kept its options open by saying it will as well, if forced to.

It means this government is quite happy with a 4G world where one player has double the spectrum of another player, with all the downside that means for the third entrant and for the customers as a whole.

Another way to look at the spectrum share is to consider the entire sub-1000MHz category. Telecom and Vodafone both have a huge chunk of the available spectrum and 2Degrees is battling along with only a fraction. This extra auction does nothing to address that imbalance, instead it exacerbates it.

It will be very difficult for 2Degrees to challenge the big two in the 4G world now. It was always going to be difficult because it’s late to the 4G party, has a smaller marketing budget and still needs to build out its network coverage. Now it has to win market share with a lesser allotment of spectrum as well.

From a competition point of view this is the worst outcome on offer.

Essential Services

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The news coverage of the weekend’s swarm of quakes in central New Zealand has included plenty of advice on disaster recovery kits and as ever, we’re now including information on cellphones and staying in touch.

Send TXT messages to keep the lines clear for emergency phone calls. Update your voicemail message or post on Facebook to tell everyone you’re OK – that way if you can get word out without tying up the phone lines.

Phone lines. It’s one of those phrases that rolls off the tongue but doesn’t really relate well with what we’re talking about. It’s a left-over from those years when the primary form of communication was a voice call from the phone attached to the wall.

Today of course we’re mobile. We rely on these phones to connect to the network so we can call for help, check on loved ones, update friends and family, talk to colleagues.

They’re an essential service. We simply couldn’t get by without them.

So why is it that mobile phone companies have such a hard time building the infrastructure we have all come to rely on?

Cellphones don’t work in isolation. If there’s no network coverage, there’s no connectivity. What provides network coverage? Cellphone towers, and (these days) fibre cable backhaul and of course electricity.

There is a lot of fear about cellsites. Radiation concerns, based largely on poor information about just what radiation is, seem to be the primary problem. Local residents oppose cellsites for health reasons, for property value reasons, all of which have been proven over and over to be unfounded, but still the opposition continues.

This puts local councils in a very difficult position. The evidence says there’s no problem – the rate payers say otherwise and any council which ignores its rate payers can end up looking for a new career.

So we have public consultation meetings that please no-one. There’s shouting, swearing, crying, threats, NIMBY anger and fear and no-one goes away happy.

We have prolonged and costly resource applications that demand the sites be put somewhere, anywhere else, and much mapping and planning to determine just where that could be.

If you want cellphone coverage, you have to have cellsites. There’s just no way round that – you can’t have one without the other. Councils need to do more to ensure cellsites are included in any new greenfields deployment. They need to do more to make sure the sites work for both telcos and residents.

And yes, once again, we’re calling on central government to make a change to its model as well. The Resource Management Act should include a set of national, standardised processes that guide local councils and developers whenever they build something new. That should come from central government and it would take the heat off councils and ensure we have coverage where people live and work.

The simplest and easiest thing to do is also the most effective. We should change the way roadside reserves are governed so councils can allow telcos to put the cellsites on council-managed property. That way the cost of building the network comes down, the council can manage the process more smoothly for all concerned and the site itself will be as far away from residents’ front doors as possible, while still providing coverage.

It’s events like these we’ve seen this past weekend that make us realise just how much we’ve come to rely on cellphones and the networks that support them. Let’s make sure these devices are there when we need them the most.

Mobile

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Telecom has announced its plans for a 4G network rollout. Starting in October, the country’s biggest telco will start with the main centres and work its way out to smaller centres, deploying an 1800MHz network similar to Vodafone’s.

I’ve been using the Vodafone 4G network around central Auckland for the past week or so and two things have become apparent – speed tests suggest quite a degree of variability at this stage, and the speed test app uses quite a bit of data. I’ve hit my 1.5GB limit for the first time ever and still have half a month to go to the end of my period.

The variability is a concern. I’ve only tested when my phone says it has an LTE connection but the range extends from 3.3Mbit/s down, 1.39Mbit/s up through to 88.69/47.22, which singed my fingers ever so slightly. I typically see a score in the 20Mbit/s range for download and about 15Mbit/s up.

This is only a category three device, of course. The Cat 4s are out later this year and both Vodafone and Telecom say they’ll have them on offer – that raises the lid on theoretical maximums to 150Mbit/s which quite frankly is astonishing.

My usage has changed as a result. If I’ve got downtime somewhere I tend to flip through the news stories and now each one pops as if I were in the newsroom itself. No lag whatsoever. I’ve had to hit refresh a couple of times thinking the Stuff app had stuck again on old news, but no. It was brand new news. Even BBC video clips load with an unheralded ease.

Which of course means I can watch more, and do more, with my phone. Which means I use more data. Which means I will need more data and if Telecom can offer that, I would hope it will see the competitive nature of the telcos brought to the fore, which will be very nice indeed.

Both Telecom and Vodafone have said they will roll out 4G services on the RBI towers and this for me is the best part of the whole launch. Rural New Zealand is poorly served for broadband and mobility – having both delivered in a timely fashion will be great news. Better still, once you’ve got a tower in place with fibre backhaul the speeds per customer off each of these towers should be really quite good. Your rural LTE experience could well be better than the urban equivalent, with its higher density of users per tower.

Because the towers are paid for as part of the RBI programme the cost of rollout is greatly reduced and that means the telcos will be more likely to put kit on those towers.

But both telcos have said they’ll need to wait for the auction of the 700MHz spectrum before they do so. My understanding of radio frequency issues borders on the ignorant (although not as ignorant as those cell tower protestors) but my understanding is that the footprint of each tower at 700MHz is far superior to that of 1800MHz and that the ability to operate over rural landscapes (trees, cliffs, water) is much better.

Vodafone tells me the amount of spectrum available will influence the speed capability. It has a lot of 1800MHz spectrum and will end up with a lesser amount of 700 so that too will impact on the speeds and throughput, but all told whatever the rural user gets it’ll be a lot better than today.

So where are we at with the auction? The minister has said we’ll have one (step one) and that they’ll announce details later on this year (step two) but we’re none the wiser as to how the auction will be run, what size blocks of spectrum will be allocated or what the reserve price will be.

In Australia the reserve price set by government was so high Vodafone Australia pulled out of the auction entirely.

There will be a degree of tension within the government regarding the auction. On the one hand, Treasury will (I’m sure) be pushing the government to maximise its return on investment. That is, make sure the auction brings in as much money as possible. Perhaps we’ll see one block of 20MHz and two of 15MHz (or similar) in order to push bidders towards the bigger block. The more spectrum the more throughput so that will be attractive and that will drive up the bidding.

On the other hand, the economic value of the spectrum lies mostly in its use and the less the telcos spend on spectrum the more they’ll have for network deployment. The cost of spectrum in the UK in 2000 saw BT almost bankrupted and in Europe several telcos did indeed go to the wall. The rollout of 3G was far less aggressive than we’d hoped and the user uptake took several years to get going.

Three equally sized blocks would lead to only a couple rounds of bidding while the three telcos sort out which one is going to buy each block and then they’ll stop bidding. That means less income for the Crown but a faster deployment of network in rural areas.

TUANZ would like to see three equally sized blocks and a reasonably low reserve price to encourage the telcos to deploy. My concern is that 2Degrees be squeezed out of the 4G race with too high a price and that would be a disaster for the industry as a whole, particularly given how much change a truly competitive industry has delivered.

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Virtual competition

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In the UK Tesco is a major supermarket chain but also
a serious player in the telco space. It’s gone from simply selling mobile
phones in blister packs to the full suite of Tesco-branded services, from
mobile to fibre. You can download movies, listen to unmetered streaming music,
buy toll calling packages and so on.

Tesco isn’t alone in this. Virgin Mobile is one of the
world’s leading mobile brands and has shaken up every market that it’s entered.
It operates in eight countries around the world, including Australia, the US
and UK, and it regularly scores highly in customer satisfaction surveys.

Neither company owns a network or ever intends to.
They are virtual operators and I’m curious as to why we have nothing on the
same scale in New Zealand.

Mobile virtual network operators (MVNOs in the
parlance) are operating here, but are so far below the radar as to be
non-existent.

Black+White launched with much fanfare but has almost
vanished since then. CallPlus and Orcon –both big-name brands in the ISP space
– have mobile offerings but you’d be hard pressed to find anyone using them.
The plans seem uninspired somehow and certainly can’t compete with the big
names, Vodafone and Telecom, despite using their networks.

In Australia MVNOs account for 13% of the market, yet
in New Zealand the total for all MVNO offerings is probably in single figures.

I think I can see why – MVNOs in New Zealand are on
account only, and New Zealand is predominantly a prepay market. Immediately,
most of New Zealand’s customers are unable to consider switching to an MVNO
provider because there is no prepay option.

Neither Telecom or Vodafone offer prepay MVNO services
and I wonder why that is. Vodafone in particular has a large percentage of its
customer base on prepay – could it be that Big Red doesn’t want to risk
cannibalising its own customer base?

Until MVNOs have access to prepay services and can
build their own plans and tariffs, we’re not going to see the kind of dynamic
marketplace that the UK or Australia has and that’s a loss for customers.

We’ll be asking the government to explicitly include
MVNOs in its review of the Telecommunications Act with a view to better
understanding the barriers to competition and why it is that a model which
works so well overseas simply doesn’t in New Zealand.