Orcon’s merger with 2degrees became official on New Year’s Eve.
The move brings together New Zealand’s third largest retail telco with the fourth largest.
As a consolidation play, it will alter the market dynamics at the margin.
It is not a radical competitive reset.
Let’s put it in perspective
At the time of writing, Spark accounts for around 44 percent of the retail telecommunications market by revenue.
Vodafone is roughly 33 percent of the market.
Orcon plus 2degrees has around a 17 percent share of New Zealand retail telecommunications revenue.
There are more than 90 other retail companies. Of them, Sky and Trustpower each have about one percent market share. The remainder are tiny compared to what is now the big three.
These figures come from the latest Commerce Commission telecommunications development levy allocation determination published on December 14.
The TDL figures include wholesale fibre companies and Kordia.
To get the market shares quoted above the wholesale fibre companies were removed and the remainder divided up.
Not a huge change
Before the merger 2degrees had around a 13 percent market share.
The merged third player is bigger at 17 percent, but not bigger enough to reshape the wider telecommunications market in the immediate future.
That said, there are pockets of the market where the change could be more significant over time.
Spark and Vodafone are neck and neck in the mobile sector. With a 19 percent market share, 2degrees is half the size of each of its rivals.
Merging with Orcon is not going to change that in the short term. Orcon is one of the largest mobile virtual network operators (MVNOs) but the entire sector adds up to around one percent.
Adding Orcon’s mobile customers to 2degrees would be no more than a rounding error.
Over time the new business will have the opportunity to cross sell mobile services to its customers. And it can expand on the bundled deals 2degrees offers to existing broadband customers.
As a strategy it is going to be a long, hard slog. There is no guarantee it will go anywhere without aggressive pricing, but margins are tight enough now. The merged business does not have much room to manoeuvre on price.
The Orcon-2degrees merger is likely to have its biggest impact on the broadband sector. Together the two companies have roughly the same market share as Vodafone. Each of them would be 20 percent of the market, compared with Spark’s 40 percent.
2degrees gives Orcon a realistic entry into fixed wireless broadband. That covers off a missing part of its existing portfolio.
In the past Orcon has kept the brands of the various broadband businesses it has acquired. Orcon, Callplus, Slingshot, Stuff Fibre and Flip remain in the market even if they share infrastructure and services behind the scene.
Given that history, it looks likely that the new business will keep the 2degrees broadband brand. That’s by no means certain. One possibility is for Orcon to rationalise its brands after the merger.
Having multiple brands gives Orcon-2degrees the option of differentiating products.
Retail consumers may not see much change in the short term. It is not as if people have a close relationship with their service providers.
2degrees had the luxury of painting itself as a more customer facing rebel compared to the corporate monoliths of Vodafone and Spark, but that’s more a clever marketing stance than a practical reality.
Merging customer service operations has always been something of a disaster in New Zealand telecommunications.
It’s possible Orcon and 2degrees have a better formula for this than Vodafone. Anyone who has been close to the industry for a long time might not be optimistic about that.
The new business would like to tell you about the opportunity to sell power services to 2degrees customers. This deserves a story in its own right. Maybe another time.
It will be interesting to see if the 2degrees retail stores make many changes after the merger. Apart from offering a wider range of broadband brands, it’s not clear what else can happen here.
The business and enterprise sector is where then merger could make the most impact in its early stages.
Both Orcon and 2degrees have targeted the more lucrative business market and, because of their size, have been able to be more creative than their bigger rivals when it comes to cutting deals.
Yet until now, they’ve been kept out of many of the biggest deals because they lack scale and a wide enough portfolio.
The merger gives Orcon better mobile options for its business customers. That’s something that has been, not a weakness, but a less explored avenue in the past.
Likewise, Orcon has the infrastructure in place to give 2degrees a much better story when approaching potential enterprise customers.
Companies don’t merge on this scale unless there are opportunities to make substantial savings. In almost every case this means jobs.
It can also mean premises. Both Orcon and 2degrees have fancy, new head offices at the posh end of town. Some of that may go. Or it maybe these buildings are rationalised and other offices close.
Orcon owns fibre around New Zealand, which 2degrees can now use to backhaul broadband and mobile towers. This opens the door for services in areas such as IoT and edge computing.
There is no need to run duplicate office sites in other cities and towns around New Zealand. Likewise the buildings where servers and telecoms hardware are housed. That can all be tidied up.
A merged business may not need as many customer service or sales staff. There will be roles and teams across the businesses that can be consolidated.
At the time of the merger 2degrees has 1200 employees, Orcon has a shade under 600. Unless it plans massive investment and expansion, the number of consumer facing employees will fall by the end of 2022.
At the same time, there could be opportunities for others in the business and enterprise space.
None of this will be fast. It will take months for plans to be finished and decisions made.
This could be an exciting time for staff, but alway a worrying one as teams and individuals work out they may soon be out of a job.
A press release issued at the time the merger was finalised suggests the merged business will be a stronger challenger to the two leading brands.
That’s true, but as we’ve seen, the merged business remains dwarfed by Spark and Vodafone. Executives at those two telcos will have spent summer revisiting plans and projections, but may not see a pressing need to change any strategies.
What may have changed for the rest of the industry is a tweak to the regulatory landscape.
If Vodafone or Spark had sought to buy 2degrees, that would have set off alarm bells at the Commerce Commission.
Now there is a third substantial player in the market, there may be less objection if, say, the owner of a smaller telco wanted to cash out and Spark or Vodafone wanted to buy.
The test is about whether a move would lessen competition. It would now be harder to argue, say, a Spark takeover of a minnow would change market competition in any meaningful way.