Selling broadband and energy as a bundle

When the New Zealand government first planned its fibre network three groups bid for contracts.

Chorus wanted the entire project. At the time it was part of Telecom. Axia Netmedia, a Canadian business, was the second bidder.

The third bidder was a consortium of power distribution companies. Each bid to build fibre in one or more of the 30-odd regions.

Northpower, Enable Networks and a group of power companies in the central North Island all won contracts.

These businesses are wholesale fibre companies and electricity distributors.

Power retailers selling broadband

In recent years power retailers have entered the broadband market. Both Trustpower and Contact Energy have sizable retail telecommunications businesses.

They come from power and now play in telecommunications.

Orcon comes from telecommunications and now plays in power.

In 2016, Vocus acquired Switch, an energy utility. It used this to offer power to customers at CallPlus, Slingshot and other brands.

It became Vocus Energy. You can find that brand today, but it is more common to see it as Orcon Power.

Orcon’s power potential

Power didn’t rate a mention in the 350 word press release announcing 2degrees merger with Orcon.

You have to read the attached Notes to editors, which is, in effect, a footnote to learn:”

“…Orcon Group, a fully-owned subsidiary of Vocus, is an integrated New Zealand telecommunications and energy business…”

Later, the press release expands on this in a ’key numbers section. Orcon has 40,000 energy customers.

This could prove to be far more important than that modest mention suggests.

Orcon has convinced almost one in five of its 200,000 plus customers to add power to their monthly broadband bill.

2degrees has around 1.5 million customers. If the merged company can convince these to move, it could mean 300,000 more power customers. That would make Orcon Power, or a rebranded version of the same, a giant in New Zealand electricity retail.

At the same time, it will make shareholders a lot of money.

Power and broadband networks

Up to a point, wholesale power and broadband are natural partners. They both operate physical distribution networks. You could string fibre from power networks. Before UFB, power companies built their own fibre networks to control their systems.

Places, like, say, cellphone towers, tend to need both a fibre connection and a power link. Combining the two makes sense.

The relationship between retail power companies and broadband is virtual more than physical.

Both businesses rely on sophisticated billing systems. It’s not that hard for savvy operators to combine power and broadband billing systems.

Years ago, service providers sent bills by physical mail. It was a significant cost each month. Printing both bills on one sheet of paper then stuffing and delivering a single envelope represented a major cost saving.

The savings are not on the same scale with electronic billing, but there are some benefits.

Would you like fries with that?

For power companies that sell broadband and telecoms companies who sell power, the main attraction is upsizing.

It costs a fast food outlet money to get a customer to walk in the door. There is marketing, a lot of marketing. And there is the cost of researching, buying and fitting out suitable real estate in places where there is a demand.

Once that customer arrives at the counter, there’s a small margin on the first thing they buy. If they can be upsold, the profit margin on the total transaction is higher.

Margins

A similar logic can apply to selling power and broadband together. It could increase the profit margin. Yet it doesn’t have to. Increasing the size of the sale means more profit even if both purchases carry the same margin.

After all, it’s not as if anyone has to do much more work to transact a power sale alongside a broadband sale. The extra revenue comes at almost no extra cost.

It would be worth doing if this were the only reason to sell power and broadband together.

There are two other points to consider. Both are important.

Harder to grasp

First, combined bills are more confusing to understand.

It’s easy to comparison shop for broadband. There are few variables. Line speed and download data are the main ones. Broadband providers offer a limited range of speeds and data options. Many customers pick a speed and choose unlimited data.

Comparing say, 2degrees broadband with Orcon broadband is simple.

You can’t say the same for electricity. Take a look at Consumer’s Powerswitch website. The combinations and options are confusing.

In some cases the power companies that bundle broadband are among the most expensive. You may get cheap broadband, but the combination can end up costing more than buying separate services.

It’s hard to tell. Sure you can spend an evening with a spreadsheet working things out. But there are many variables. It is difficult for an outsider to get a simple, clear picture.

Asymmetric information

None of this is to say the companies selling power and broadband combined are in any way unethical. The issue is asymmetric information, they know more about this than you do.

What is clear, is that selling power and broadband bundles is lucrative.

There is another huge advantage for companies that sell power and broadband together. It is much harder for customers to walk away when they have both.

The companies who sell bundles like to talk about ‘customer retention’.

It is simple for a broadband customer to switch from one provider to another if a better deal comes along. This happens all the time. In the business this is churn.

Reducing churn

The other business term you need to know at this point is the cost of customer acquisition.

Remember the fast food example? It costs McDonalds or KFC money to get a customer to walk in the door.

Likewise, broadband service providers spend money on advertising and other lures to win new business. This cost means the company may not break even with a new customer until they have been on the books for a few months. The longer they stay, the better the long term margin for that customer.

Getting customers to buy power with their broadband means they stay longer. That makes them more lucrative customers.

For consumers the benefit of having to pay a single monthly bill for two services is a small convenience. One less invoice to forget. It is a handful fewer mouse clicks or phone screen taps each month.

Buying separate services is often a better deal

It may look like a cost saving, but you can often do better by buying separate services.

Before choosing a power and broadband bundle you need to check two things. First, get a better understanding of what you pay for electricity. The Powerswitch website can help.

Second, recognise that unravelling a bundle could be more difficult than it looks. Give thought to how you might do this if it is necessary.