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cellular towerEarlier this year Communications Minister Simon Bridges wrote to the Commerce Commission asking it to investigate competition in the mobile market.

Last Friday the Commerce Commission confirmed the study will go ahead.

The Commerce Commission says study aims to “better understand how mobile markets are developing and performing, particularly around the competitive landscape and any emerging competition issues”.

In his letter, Bridges noted that, unlike many other countries, New Zealand does not have thriving mobile virtual network operators.

Mobile virtual network operators

MVNOs are a feature of many mobile markets around the world. They can account for a large slice of the market. In Australia MVNOs are about 10 percent of the mobile market.

Often run by well-known consumer brands, MVNOs buy wholesale services on existing mobile networks. They then sell them to customers without needing to invest in infrastructure.

MVNOs can increase competition and give consumers greater choice. They also tend to reduce prices and squeeze margins.

Carriers unimpressed

New Zealand’s mobile carriers are not impressed. Spark, in particular has spoken out. The company says there is no case for new mobile regulation.

The company’s general manager regulatory affairs John Wesley-Smith is quoted in a notice to the NZX on the study. He says: “We have three world-class networks delivering prices that are well below OECD averages and three mobile network operators that are ploughing significant investment into an intensely competitive market.”

This is largely true. Seven years ago before 2degrees entered the market, New Zealand mobile prices were high by international standards. Today prices are a touch below international averages.

Moreover, margins have dropped. While the mobile networks are solid businesses, they are not awash in profits. It took until this year for 2degrees to make its first profit.

That alone tells you the market is competitive.

It also speaks volumes that 2degrees, the relative newcomer and the smallest mobile carrier, is not calling for more regulation. In the past it has been the beneficiary of intervention.

Competitive enough?

You could argue, the carriers almost certainly will argue, that consumers are well served by the existing competition. From this point of view the market settings appear to be right.

And yet not everyone is happy. Last month the NBR carried a report saying Vocus general manager, consumer Taryn Hamilton believes his company cannot grow its mobile business without regulatory intervention.

Vocus has an MVNO agreement with Spark. The Vocus brands, Callplus, Slingshot and Orcon offer mobile services. There is also a 2degrees MVNO agreement with The Warehouse.

In market terms these deals are a freak show. The existing MNVOs don’t add up to more than about one percent of the total mobile market. And that estimate may be generous.

Elsewhere in the world MVNOs can be seen as a positive by carriers.

Often the customers who choose an MVNO are the ones who would already be looking to move away from their existing accounts. If they choose an MVNO on the carrier’s network, the bulk of the revenue they generate stays with the carrier. There’s churn, but not churn to a rival carrier.

A new kid on the block

The other carrier-point-of-view argument in favour of boosting MVNOs in New Zealand is that it would keep out a fourth network. None of the existing carriers would welcome a new competitor.

In the past that may have seemed unlikely in a small market like New Zealand. However the market dynamics have changed.

New Zealand has four sizeable telcos: Spark, Vodafone, 2degrees and Vocus.

Vocus’ parent company faces challenges at the moment and is focused elsewhere. However, Vocus has been an aggressive investor in the past. It could be again.

Unlike smaller telcos, Vocus can buy spectrum. It could bid for new spectrum licences. It could build a fourth mobile network.

If the company decides mobile is straegic and can’t get what it considers to be a reasonable MVNO agreement with existing carriers, this is a plausible strategy. Let’s face it, mobile is stratgic for every sizeable telco.

Given this, Spark, Vodafone and 2degrees might do well to see the Commerce Commission study in a more positive light. Being forced by the regulator to offer more generous MVNO agreements would be preferable to facing a new rival.

Who’d want that?

2degrees has signed a multi-year backhaul contract with Chorus. The deal replaces a mix of services from providers including Spark and Vocus.

The network will connect UFB points of presence and data centres to the international network. 2degrees says it now has a fully diverse and highly resilient network that transports voice and data worldwide.

It’s a strategic move for both companies. At 2degrees it marks the latest step as the seven-year-old mobile carrier emerges as a full-service telco. It is now New Zealand’s third largest retail telecommunications carrier.

Future proof

Mark Petrie, 2degrees chief fixed officer says: “By combining 100Gbps links into our network we’re future proofing our ability to support the ever-increasing data demands of the country’s largest enterprises, for whom having this capability is critical.”

The deal marks the first national customer to sign for Chorus’ 100Gbps nation-wide fibre backbone network. Chorus’ chief commercial officer, Tim Harris describes 2degrees as an important strategic partner for Chorus.

While it is an important business win for Chorus, there’s an even greater significance. It marks the national wholesale network provider’s move away from regulated monopoly services into a more competitive space. This gives Chorus a route away from settling down as a mere utility provider into more commercial areas.

Silverdale 4.5G cell siteCompetition and regulation economist Donal Curtin says in a blog post there may be unfinished business with the mobile termination rate.

The mobile termination rate is the sum one cellphone company pays another for calls going from network to network.

Curtin is responding to the Commerce Commission annual report on the telco market.

He writes:

I speculated last year that maybe it is time to revisit our regulated mobile termination rate: it’s still unrevisited, at a left-high-and-dry level by comparison to current overseas rates, for no obvious reason that I can see. And there’s an ongoing issue with the high cost of mobile data downloads to data-only devices.

It’s a good point. Some see the MTR as done and buried. Yet there were always plan to reset the rate. As Curtin points out, the charge in New Zealand is high by international standards.

Yet, I’d argue this is far from the most pressing piece of telephone industry regulation. I’ll write more about what should worry the Commerce Commission in another post.

Mobile termination rate

The mobile termination rate is a financial transfer between the three cellphone companies. Vodafone, Spark and 2degrees pay each other.

This was of vital importance when 2degrees was still a fledgling cellular company as it meant the company ended up paying a larger slice of its revenue to its rivals. This made it a barrier to market competition. In effect, the MTR rate penalised 2degrees for being smaller than its rivals.

What matters most about MTRs is not the total payment from one company to another but the net payment. As 2degrees’ market share increased, the net handover of MTR money decreases.

Competition barrier

If you had three players with identical market share, the net MTR transfers would be zero. We’re not at that point, but the market is moving towards it.

It speaks volumes that 2degrees hasn’t sought to raise the issue again in recent years. During the company’s early years it did a lot of lobbying about MTRs. That can be distracting to a business and imposes a different set of costs.

The lack of noise from 2degrees is not the only reason that MTRs are of less interest.

Curtin mentions mobile data. The cellular market is switching from voice calls to data use at a clip. Data is already more important than voice. In other words, the MTR has less impact. When the Commerce Commission last regulated the MTR, calls were close to 100 percent of the cellular business. Today they might account for 50 percent at most.

Underlining this switch, all three mobile carriers offer affordable unlimited voice plans. Skinny has unlimited calling plans starting at $30 a month. Spark’s and Vodafone’s start at $60. With 2degrees unlimited call plans covering New Zealand and Australia start at $50.

If carriers can deliver all-you-can-eat mobile plans at these prices, the MTR doesn’t seem to be a barrier to competition.

Sure, reducing the MTR would mean a flatter playing field, but in many respects the New Zealand cellular market works fine.

2degrees mobileIt’s taken seven years, but 2degrees is 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

Chief executive Steward Sherriff says the number of post-pay mobile customers is up 19 percent. 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. It built a 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. ↩︎

2degrees offers what it calls an unlimited mobile data plan. Unlimited in this context doesn’t mean no limits. The plan has restrictions.

Unlimited mobile data only applies to a single device. That usually means a phone. Users can’t tether their laptops or tablets to the device. Nor can they use their device as a Wi-Fi hotspot or use machine-to-machine communications.

Customers on the 2degrees network are told the plans are subject to a fair use policy. There isn’t a formal definition of fair use. It is best to read it as “don’t push your luck”.

In other words the plan may be generous, but it isn’t unlimited in the sense most English-speakers understand. 2degrees plan is $129. For that money you also get unlimited calls and texts1.

spark-vodafone-unlimited-mobile-data-plansSpark, Skinny Freedom plan

Spark is more precise about the terms and conditions of its Freedom plans. You still can’t tether, hotspot or handle machine-to-machine communications. There are unlimited calls.

Customers can use 22GB of data at normal speeds in any given month. After that they can carry on downloading, but everything happens at a slower pace. Skinny has the same conditions. Spark’s plan is $130. At Skinny you pay $120.

Spark’s marketing material doesn’t say how much slower. That’s not surprising. Mobile data speeds vary. It’s possible the official slower speed for enthusiastic downloaders is no worse than they’d see on a bad day.

2degrees Data Clock

There’s another data point: 2degrees’ Data Clock. A day of all-you-can-eat data costs $6. The conditions are similar, no hot-spots, tethering or machine-to-machine and fair use applies.

Let’s assume that customers who go over on the Spark and Skinny plans don’t go a long way over the 22GB point where slower speeds kick in. There will be customers on the plan who use less .

Likewise, we’ll assume that 2degrees’ fair use cut-off point is at more or less the same level, say, 30GB. That’s a gigabyte a day. Let’s also assume this is what Data Clock customers can buy.

Restrictions and limits

The restrictions tell you what you already know: mobile bandwidth is limited. The carriers have calibrated what they think they can get away with before the networks start to creak.

That’s why you can’t tether. It explains why you can’t, yet, choose a mobile data plan as a realistic alternative to fibre, copper or fixed wireless broadband.

It is why Spark’s marketing points out the Freedom plan includes 1GB a day of data on the company’s Wi-Fi hotspot network.

It’s also why both Spark and 2degrees say their plans are only a trial at this stage. And don’t overlook the point that Spark’s offer is only to certain customers. It’s not open to all comers.

Neither carrier wants to flood their networks. Nor do they want loud public whingeing from customers getting a lousy experience.

Cellular bandwidth

And that’s the danger. At least for now. There’s only so much cellular bandwidth and users share it. If lots of users hop on at the same time, the network is congested.

Spark has more suitable 4G spectrum than 2degrees. It arguably has more useful 4G spectrum than Vodafone, although that kind of debate can get technical fast. Let’s not go there right now.

The extra spectrum gives Spark more room to move on mobile data plans than its rivals. If the current wave of restricted, yet otherwise generous cellular data plans turns out to be a popular contested market, Spark will do best. That’s both in terms of revenue and network performance.

More bandwidth, bigger data plans coming soon

Cellular equipment makers promise 5G mobile will pump up the market by at least an order of magnitude. That means faster downloads, more users online at the same time, greater data throughput and less latency.

One day. Remember 5G mobile is still at least four years away in New Zealand.

Before then, we’ll see 4.5G. Spark already has 4.5G towers in Christchurch and Silverdale. The company says the towers can deliver faster speeds and offer more bandwidth for users to share.

There’s a catch here, to make the most of these towers users need devices tuned to 4.5G. So far there aren’t any on sale here.

There are two problems with plans to squeeze more data through the airwaves. First, you need more spectrum. Spark and Vodafone already have plenty. 2degrees not so much. But even more is needed in the right spectrum bands to deliver 5G’s promised benefits.

Challenges

At the same time, carriers need to build more towers to get the promised 5G performance. In busy areas they will need to build a lot more towers. Some of the extra 5G performance is down to dense, small cells as well as more spectrum.

That’s a technical challenge. In some areas it is a political one. Communities are torn between wanting connectivity and not wanting to be overshadowed by too many antennae. Most of all, it is a financial challenge.

The earlier investment in 4G technology is only now paying off. Sure, the economics are sound, but telcos pour hundreds of millions into wireless networks. Telecommunications companies have to recover that money.

On a positive telecommunications equipment tends to get cheaper in relative terms over time.

At the same time some installed 4G hardware is upgradable. Even so, the cost of putting in enough 5G cellular capacity so that everyone who wants can have unlimited mobile data with tethering, hotspots and the rest will be high. It runs to billions2. That means the cost of using it is unlikely to drop.

The cost of unlimited mobile data

2degrees entered the unlimited mobile data game with a carefully calibrated price. If the charge was much lower than $130 it would be in danger of cannibalising its existing high-end plans.

If the price was much higher it would be open to undercutting from rivals.

There’s still a healthy margin in $130. What’s more, it does something 2degrees has struggled with through its history: raise the average revenue per user.

It’s unlikely any carriers will go much below this level with all-you-can eat data plans. Skinny’s $120 plan could be the anchor price. If carriers want to compete they can add value. They could, say, offer 10GB a month of tethering on top of today’s package.

Unrestricted

Somewhere in the management spreadsheets at 2degrees, Spark and Vodafone is a calculation of a price for a full unrestricted unlimited mobile data plan. Whatever the number, it will be higher than $130.

No doubt there are people who would be happy to pay more, say, $200 for such a plan so long as the performance was acceptable. And there’s the problem. Today’s cellular data is fast, affordable or reliable, but not all three at once.


  1. Does anyone still care about how many texts come with a mobile plan? We seem to adapted to the idea they are, in effect, unlimited and part of the mobile deal. ↩︎
  2. Mobile carriers can cut costs if they opt for an open access model with shared towers. They may not all volunteer for such an approach, but it could happen. ↩︎