Struggling Fairfax enters low-margin broadband market

A struggling media company moves into another unprofitable market.

At Business Day Fairfax journalist Tom Pullar-Strecker writes Stuff to enter the broadband market with Stuff Fibre. It’s a clumsy headline, but a safe bet managers would not allow the sub-editor to write a better one.

He says:

“Stuff is entering the broadband market, launching an internet provider that will compete with Spark, Vodafone and dozens of smaller providers”.

The announcement is for a run-of-the-mill offering. At first sight it is indistinguishable from existing fibre services.

Lookalike

Pullar-Strecker says the service launches in three months. It will offer uncapped 100 Mbps ultrafast broadband. that’s just like every other service provider.

Pullar-Strecker quotes Fairfax NZ chief executive Simon Tong, who says pricing will be competitive.

Every broadband provider in New Zealand says the same thing.

Tong also says Stuff Fibre’s customer service will “stand-out”. He also promises high-quality broadband routers.

There’s not a broadband provider in the country who doesn’t say the same.

Unsavoury filter

“Stuff Fibre managing director Sam Morse said parents would be able to filter out ”unsavoury“ internet content and reduce exposure to social media by changing account settings.”

This is a departure from the usual broadband sales pitch, but not by much. Any tech savvy parent can already do the same.

Offering to filter on behalf of those parents not able to track kids’ online activity may be a draw card. It’s also something rival broadband providers can do at the drop of a hat.

Broadband is a strange move for Fairfax. Everyone knows the newspaper business is in trouble. Industry problems are so deep Fairfax New Zealand wants to merge with rival NZME.

Both companies told the Commerce Commission they don’t make much money. They say margins are razor thin.

It makes sense to try something new.

Tough market

Telecommunications is a bloodbath

Telecommunications is a bloodbath – Commerce Commission figures 2015

Yet as anyone in the telecommunications sector will tell you, there’s not much money in selling dumb pipes. There’s some money selling broadband with value-added services to business customers. The residential market is a bear pit.

Broadband margins are as hard to find as media profits. Maybe harder for a newcomer. Getting into the market means a big investment.

It’s tough and crowded. There are around 90 internet service providers in New Zealand.

The big three

Three companies dominate. Spark, Vodafone and Vocus have 92 percent of the market. None of them make a lot of money from selling broadband. At best the entire sector breaks even.

NZ broadband market share - from Commerce Commission 2015 monitoring report

NZ broadband market share – from Commerce Commission 2015 monitoring report

At least one of the players among the remaining eight percent, TrustPower, sells fibre services well below cost.

Fairfax will play in that eight percent. Although it may be able to use its marketing clout to prise customers away from their providers, at this stage it doesn’t seem to have anything special to offer them, other than, maybe, sharpening the price pencil. Which means even lower margins.

Overheads

In the photo above a second Pullar-Strecker story Stuff Fibre a risk worth taking are five executives who will run the new business. You can rest assured these are not on minimum wage. Their salaries alone will be a large overhead for a start-up ISP.

Back to Stuff to enter the broadband market with Stuff Fibre, where Pullar-Strecker writes:

“Only 240,000 of the 1.5 million homes and businesses that are currently scheduled to get UFB have upgraded to fibre so far, leaving the bulk of the market up for grabs.”

While this is true, it’s not going to be easy pickings. Every single one of the homes and businesses already using broadband will have a service provider who will work to hang on to the business. Many will be happy with what they have.

Waiting for churn

There is customer churn. So there are sales opportunities for Fairfax. Yet as other market entrants have already found, winning them is hard. We’ve seen other big launches that have failed to dent the grip of the big three service providers.

Fairfax has one major advantage over broadband rivals. It is a media company. Most New Zealand visitors to the Stuff website will be broadband customers. It can carpet bomb compelling offers to this audience at next to no cost. Any unsold advertising inventory on its site can now earn its keep.

If Fairfax thinks the Stuff brand on its own is strong enough to attract customers to a broadband service, it is out of touch with reality.

On the downside, if Stuff Fibre fails despite wall-to-wall online marketing, it sends a negative message to the company’s advertisers about the effectiveness of its advertising.

There’s a real possibility Stuff Fibre will be an embarrassing flop.

Online reaction to Fairfax announcement

Struggling Fairfax enters low-margin broadband market was first posted at billbennett.co.nz

3 thoughts on “Struggling Fairfax enters low-margin broadband market

  1. When you read the article it does say they are getting from Stuff “some capital” and office space – the latter being pretty meaningless to FFX who have big offices anyway they are paying for with probably lots of spare space from previous years layoffs – the amount of capital is unknown and its clearly a “partnership” so whatever it is – this is not owned by FFX

    Saying that a couple of other considerations that occur to me here, 1) Fibre might be low margin (and it is) but its reoccurring revenue – whereas normally at Fairfax apart from some large contracts, a lot of their revenue each year has to be sold with sales people over and over. So in the dream perfect world where they somehow magically pick up say 100k (less than 10%) customers who end up paying say $100 a month (just for easy calcs) then thats 100mill a year in revenue that is relatively reliable. Sure its low margin, but its also doesn’t need to be sold over and over so provides at least some stability.
    2) Fairfax (let alone with NZME) still have a couple of hundred salespeople going out and visiting often face to face business customers – often small regional customers – every day. There is no reason these people couldnt sell Fibre (and anything else they might add in the future) you could see some sort of buy our fibre for the same price as the others and we will give you x free digital ads a month (which are effectively free to FFX) – thats a big asset in terms of a sales force that noone else has or in the broadband market could hope to afford.

    Now neither of these things may work and it might just fizzle – but to me if i had hundreds of salespeople and a declining revenue base due to external market changing forces i would certainly look for other things for them to sell – and ironically a product exactly the same as everyone else sells – is not a bad place to start as at least the playing field in terms of product is reasonably level.

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    • Put that way it isn’t silly.

      But… getting 100,000 broadband customers in what is already a saturated market will not be easy. Even with Fairfax’s marketing clout, to win that much business in, say, two years would require a better performance than has ever been managed by any New Zealand ISP.

      It’s worth considering what would be a break even point for Stuff Fibre. There are small ISPs with only a few hundred customers, but once you have management structures and support operations in place the costs rise. As has been widely discussed elsewhere, the economics of being a fibre service provider don’t scale well.

      I did a back-of-an-envelope calculation which says Stuff Fibre needs about 40,000 to 50,000 subscribers to break even.

      Now, if as your second point suggests, Fairfax was to focus on selling fibre broadband to small business customers… that would be another story.

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      • Didnt see anything to suggest it was consumer only – the article mentioned albeit briefly businesses and true, no other ISP has ever achieved that – but like I suggest – no other ISP especially the tiddlers didnt/dont have 200+ face 2 face salespeople across the country, + outbound call centres – a very big existing customer list (for business customers) and a very high traffic website to start with (for consumers). Leveraging that Salesforce for a variety of things other than flogging ads makes sense to me and effectively no cost cause your paying them anyway and despite its woes – FFX is still a large backing business (who surprisingly still makes 40m a year) who could afford to absorb a slow start when your classic startup ISP would not. Better to reinvent yourself when you are 40m positive a year than start when its 40m negative,.

        Dont dispute it will be hard. But if the end game is everyone only fibre seems like there is over 1million people left to make that chance in the coming years and usually when you make that change at least some will look at the option – who knows.

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