CallPlus Orcon acquisition makes strategic sense

ISP margins are wafer thin

CallPlus hasn’t disclosed the purchase price—but if it paid a fair amount, this deal makes far more sense than the idea of a pay TV company buying Orcon.

Selling internet services in New Zealand is brutal. Margins are wafer thin. Competition is tough. And the cost of customer acquisition is high. There is next to zero customer loyalty when all products look much the same to a buyer.

Scale is everything in a tough broadband market

The route to profitability is scale—so fixed costs can spread across more accounts—along with smart ways to add value. This can include wrapping broadband services into other services such as a streaming TV service or partnering with an electricity supplier.

New Zealand's broadband market is about to become more brutal.

In the copper era, ISPs stood out by installing their own gear in exchanges. The local loop, that is the connections between exchanges and premises, was 'unbundled'. Unbundling remained in place when roadside cabinets were added to the network.

With fibre, everyone buys the same services from Chorus or local fibre companies—at the same price in every region—leaving little room to differentiate. In theory fibre wholesalers will be expected to offer an unbundled option. In practice that will be much harder than with copper.

Orcon could never get there on its own

Which means scale matters. Orcon couldn’t get there alone. CallPlus could—but slowly. Acquiring a rival accelerates the process—that's why it is a smart move.

CallPlus now controls about 15 percent of the broadband market. And this may not be the last consolidation we see.