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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. ↩︎

The 2degrees data clock means the mobile company sells data in time blocks as well as by the gigabyte. Data Clock is an app for pre-pay customers to manage time-based data purchases.

Data Clock allows prepay customers to buy five minutes of data for 50 cents. Ten minutes cost 60 cents. An hour is $1.50. Customers can buy 12 hours for $4 and 24 hours for $61.

These prices are not set in stone. 2degrees is using a form of dynamic pricing. This means data can cost less when demand is low — say, during the wee small hours. On the flip side it means data can cost more during busy periods, that’s most likely the evening peak.

2degrees mobile

2degrees Data Clock restrictions

Data Clock does not allow tethering or a phone used as a Wi-Fi hotspot. 2degrees says it is for personal use only.

As with the recent 2degrees unlimited data plan, there is an excessive use clause, so it may not be a fill-your-boots option for users wanting a lot of data.

2degrees says selling time blocks makes sense for customers who don’t know how much data it takes to do things online like read mail, browse the web or watch video.

While that may be true, data has been around long enough for most people to grasp the general idea. If anything time blocks can make life more complicated, especially for people who have always-on apps using a trickle of background data.

At times you’ll want this

It is a great offer for people who may need to use a lot of extra data over a short period. Say when you’re working away from base. Most plans are for people who use the same amount of data each month. If your use is lumpy, this fills the gaps.

One negative aspect of time pricing is that it can reward a carrier for running an inefficient network. It takes longer to download files at slow network speeds. It can mean 2degrees earns more for slow downloads than for quick ones.

Despite potential flaws, hats off to 2degrees for innovating. The company seems determined to ramp up competition, especially for low-end customers.

It’s also away to improve the amount of revenue per user it earns, which is lower than Spark or Vodafone. This is 2degrees’ second move on the mobile data market in a week.


  1. Which means, in theory, a customer could buy unlimited monthly data for around $180 give-or-take the dynamic pricing. This compares with the $129 unlimited plan that includes unmetered voice calls and text but doesn’t allow tethering or running a hot-spot. The $4 for 12 hours option might be the best choice for someone wanting to get the maximum data during work hours. ↩︎

Mobile phone handset

It took Spark two days to respond to 2degrees’ all-you-can-eat mobile plan. That’s agile for a large company. There was a time when it would take months to get a counter offer like Freedom Mobile out the door.

From Easter Spark and Skinny customers can buy plans with unlimited voice and texting as well as uncapped data. Spark’s Freedom Mobile plan costs $130 a month. The Skinny Direct Freedom Mobile is $120.1

As with 2degrees, Spark only allows a single phone to use the data. Users are told they can’t tether or operate a Wi-Fi hotspot. And like 2degrees, Spark says the plan is offered on a test basis and only to a limited number of customers.

Questions and answers

Spark Home Mobile and Business CEO Jason Paris says; “We’ve seen 2degrees’ new ‘unlimited’ plan – and while we like the intent, we believe it leaves customers with as many questions as answers.”

The big question for most users considering a plan is what does 2degrees mean when it says there is a fair use limit.

Spark attempts to answer this for its customers by bringing back traffic shaping, also known as throttling. That is, it delivers the first 22GB of data in a month as normal. Once a customer goes over that amount, the download speed drops.

This used to be a common practice with broadband accounts. It provides users with enough incentive to self-monitor their use, without imposing horrific consequences should they over-indulge.

The Freedom Mobile New Zealand model

Paris says he thinks this is the right model for New Zealand.

Well, up to a point. Unlimited mobile data plans are common overseas. They often have restrictions. The restrictions in New Zealand are tougher than elsewhere. In other markets carriers allow customers more. In the US 10GB of tethering is normal.

It makes sense to impose some limits on an ‘unlimited’ plan. Wireless bandwidth is a finite resource. If carriers allow unrestricted use, wireless networks would quickly become congested and performance would drop.

There are still questions. Most of all, how far will Spark go with the throttling? Will download speeds drop to half their normal level or right back to a crawl?

The other question is where is Vodafone in this game?


  1. The $10 price gap between the two brands’ plans is interesting. In effect Spark users get Spotify, Lightbox and a daily 1GB of Wi-Fi hotspot downloads for $10. This tells you the real premium Spark puts on those services. ↩︎