I’m Paul Spain’s guest on the New Zealand Tech Podcast this week. We talk about Spark selling its Morepork security business to ADT and how Netflix is struggling with content deals.
Elsewhere I describe Elon Musk as a Bond villain in the segment discussing Neuralink.
Also in the podcast: NZ drone rule update refresh, mobile-only streaming offering in India, FaceApp, Microsoft highlighting nation-state attacks, Huawei staying in headlines and why Apple may acquire Intel’s Modem business.
In the last two years, four potential buyers have looked, then decided not to buy the Vocus Group.
Last week Australian energy company AGL withdrew its A$3 billion takeover offer for Vocus. This came only two weeks after Swedish private equity firm EQT halted its $3.3 billion transaction.
In 2017 private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners both withdrew bids. In each case, the deal floundered at the due diligence stage.
It’s been a bruising experience for an already damaged Vocus. When AGL walked away from this week’s deal Vocus shares lost a third of their value.
On the surface, the bad news apparent during due diligence means there’s something bad in the financials that Vocus hasn’t disclosed to shareholders. It’s something that well-funded companies are not able to spot before bidding.
Reports in Australian media say that bidders walk away from Vocus because the plan to turn around the business is more complex than it appears from outside the company. There is something in this, but it is probably not the whole story.
Along the way, Vocus acquired other companies. At times it has struggled to integrate the parts. That’s not uncommon in the telco sector.
Vodafone New Zealand acquired a number of businesses. Years later it has still not completely integrated the various back-end systems. Customer enquiries can mean service agents need to reference several screens to answer simple questions.
This Balkanisation is how large companies made up of smaller concerns often operate.
So long as there is plenty of forward momentum those tricky integration issues can be kicked down the road. Over time they can either be fixed or, for one reason or another, they simply stop being a problem.
The big Vocus problem
That’s a problem for Vocus, but it isn’t the big one. Far more serious is that Vocus’ Australian consumer business is losing money.
In part that’s because Australia’s NBN model has flattened the market to the point where it’s hard to turn a buck selling broadband. There’s no clear path to profitability.
AGL looked like a good buyer because it’s a power company. Combining power and broadband sales is a tried and tested strategy. If the AGL bean counters looking at Vocus’ books realised that could turn things around, the problem is worse than most of us thought.
Even though Vocus is, to some degree, a special case, it isn’t that out of line with the rest of the telecommunications industry.
No quick path to profit
All of which says bad things about the state of retail telecommunications. The private equity investors have looked and seen there is no quick path to profit.
More patient, longer-term investors like AGL, who have access to the magic formula of adding power sales to a broadband subscription don’t think it looks viable either.
If you work in the sector you might want to worry about that.
A $2 price rise for overseas roaming doesn’t seem much until you realise it’s a 40 percent price increase at a time when inflation is close to zero. Few other service providers could get away with a 40 percent price hike.
That said, no-one can argue that New Zealand mobile phone margins are excessive.
Less than a beer
Nor could you argue that $7 a day for overseas roaming is not reasonable. If you can afford to travel overseas and you want to stay in touch, it costs less than a glass of beer. For many readers, it remains the best option and is far better than the bad old days of bill shock.
Vodafone’s first line of justification for the price rise borders on the ridiculous. Keall writes:
The spokeswoman said, “Vodafone launched Daily Roaming over five years ago and since then have made numerous improvements to the service, including expanding it from 23 destinations to now over 100. Included in the latest round of new destinations are Vietnam and Cambodia, which are hugely popular with Kiwis.
Chris Keall, NZ Herald, June 4, 2019
The fact that there are more destinations may benefit customers. It benefits Vodafone more.
By giving the company a lot more opportunities to bill that $7 a day charge, it means much more revenue. It also improves internal costs by spreading the costs of administering overseas roaming charges across many more sales.
Let’s put it another way: imagine if New World said it was charging more for milk because it was stocking it in more supermarkets.
Vodafone has a much better argument when it says mobile data use is now running at three times the rate when the roaming service was first introduced. However, the cost of delivering a gigabyte of mobile data has fallen over time.
There’s a bit of snark about Vodafone’s customers not having to buy bundles… that’s how roaming works with Spark. And talk about one fixed price across markets where the costs are different. Well yes, but again, keeping the price structure simple is also of benefit to Vodafone.
Overseas roaming is revenue
Whatever the public justification, the increase is also about increasing revenue at a time when there’s little obvious growth. It’s also about improving margins. Both of these are fair enough, Vodafone is not a charity, yet for some reason, the company doesn’t feel able to say so.
The bigger concern for Vodafone customers could be that this is not the only price increase. Six months ago Vodafone jacked up broadband prices. There could be more in the pipeline.
Vodafone can’t go too far. As the Commerce Commission points out, New Zealand’s telecommunications market is competitive. If you don’t like Vodafone’s roaming price increases you can go elsewhere. The international equivalent of buying a prepaid Sim card in the first dairy as you leave the airport is also still an option.
2degrees launched New Zealand’s third mobile network almost ten years ago in August 2009. Today it accounts for roughly one in five mobile connections.
Last week 2degrees reported a modest net profit of $19.6 million on revenue of $805 million.
The company says a highlight of the year was a nine percent increase in contract mobile customers. A six percent drop in prepay customers went some way to offsetting that. It says many of these closed accounts when 2degrees switched off its 2G mobile network.
Still a minnow
It remains a minnow compared to Spark and Vodafone. The two big mobile companies each have around 2.5 million connections, while 2degrees trails with 1.4 million. Spark has almost 700,000 fixed-line broadband connections compared with 87,000 for 2degrees.
Spark’s annual revenue is in the region of $3.5 billion, while Vodafone’s is $2 billion.
2degrees plays an important role in New Zealand’s mobile sector. It makes the market more competitive. Before the company started, New Zealanders paid well over international average prices for mobile phone services.
While 2degrees has been a success on some levels, it has yet to break through in the fixed-line and broadband markets.
It is the number five broadband service provider. 2degrees has about five percent of the market compared with Spark’s 43 percent and Vodafone’s 26 percent. Vocus, 13 percent, is also much bigger.
Another measure of the relative size of New Zealand telcos is the size of their contribution to the Telecommunications Development Levy. This is an annual tax on the industry. The government uses it pay for providing services to deaf and hearing-impaired people. Some of the money subsidises broadband for rural areas and upgrading the 111 emergency service.
2degrees pays the fourth highest contribution behind Spark, Vodafone and Chorus.
One of the biggest problems facing 2degrees is access to investment capital. It doesn’t have Spark’s deep pockets.
When the government auctioned 4G mobile spectrum in 2013, 2degrees didn’t buy its full allocation even though the price was deliberately kept low.
The challenge for 2degrees will be to find the money for further investment. To put this in perspective; Each of those first blocks of 4G spectrum went for $22 million apiece. That’s more than a year’s profit for 2degrees.