Stewart Sherriff 2degrees tips into profit

Chief executive Stewart Sherriff says it’s taken seven years, but 2degrees is now making money for its shareholders.

The company says it made a profit of $13.4 million in 2016. That compares with a loss of $33.1 million a year earlier. Revenue was a shade over $700 million.

Fuelling that growth is a fast rise in post-paid mobile customers. That means more lucrative business. For years 2degrees struggled to get the average revenue per user off the floor¹.

Hey big spender

Sherriff says the number of post-pay mobile customers is up 19 per cent. These tend to be higher spending than the pre-pay customers; the company’s focus in its early history.

Broadband performed even better. Sherriff says customer numbers doubled in 2016.

2degrees bought the Snap ISP business is 2015. So 2016 was the larger company’s first full year. The acquisition turned 2degrees into a full-service telco. This meant it could bid for larger commercial and government contracts. Bigger customers prefer to buy all their telecommunications services from a single provider.

Tex Edwards’ accurate forecast

Soon after 2degrees launched in 2009 I interviewed founder Tex Edwards. The business got off to a flying start, but a quick look at the numbers made it clear there was a torturous path to profit.

At the time, I asked Edwards if the business would ever be profitable. He said it would take seven years to get there. In hindsight, that’s an accurate prediction given the twists and turns en route to the black ink.

Then, 2degrees goal was winning low-spending pre-paid customers from Vodafone and Telecom NZ, now Spark NZ. It did this by cutting prices; the most obvious strategy, but also the one most likely to work.

This had the affect of increasing the profitability of rivals. When less lucrative customers switched to 2degrees, their ARPU (see the footnote) climbed.

Victim of success

Much of 2degrees early strategy involved lobbying for industry regulation and reform. The incumbent mobile operators were never going to make it easy for a newcomer to eat their lunch.

In 2012 the company held a press conference announcing that it had a million customers. That was a huge achievement, but became a problem.

Until 2012, 2degrees could always play the underdog card in any regulatory debate. By winning so many customers so fast, the incumbents could point at the million customers to show competition is working.

2degrees’ strategy

In round numbers, 2degrees’ customers were the million least profitable phone customers. While there was the appearance of healthy growth, in fact the business was on a trajectory that, at the time, looked as if it could never be profitable.

This was clear after the 2013 700 MHz spectrum auction. Government offered spectrum at a low price, in part to level the playing field. Vodafone and Telecom picked up three blocks each at $22 million. 2degrees could only afford two. The final block then sold to Telecom for $83 million.

Since then the company’s strategy has been to move away from a narrow mobile focus. Sherriff turned it into New Zealand’s third major full-service telco.

1. Carriers fret about something they call ARPU or average revenue per customer. It’s one thing to have lots of customers, but what matters more is that they each spend enough. The spend has to cover the carrier’s costs. In effect, this is what has changed for 2degrees. Pre-paid customers tend to spend far less than post-pay customers. ↩︎