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Commerce Commission Monitoring ReportLast week Spark boss Simon Moutter told shareholders at the company’s AGM it is cheaper to win customers through merger and acquisition than through market efforts.

The NBR reports him saying: “We expect to see, and participate in, significant consolidation of the retail broadband industry over the next couple of years.

Give that Vocus NZ is on the market, it’s not hard to join the dots here. We can assume that Spark NZ is interested in buying some or all of Vocus.

If Spark buys Vocus NZ

There are other assets, including the fibre network built by FX Networks. But taking Moutter’s AGM comments at face value, Vocus’s broadband business is in his sights. That’s CallPlus, Slingshot, Orcon and a couple of minor brands.

Let’s assume the price is right and Spark is able to beat any rival bidders. What does this mean for market competition?

It all depends on which market you’re looking at. If we take the total New Zealand retail telecommunications sector as a whole, a Spark-Vocus acquisition would not change much.

A good starting for measuring market share among significant players is the 2016-17 TDL liability allocation determination drawn up by the Commerce Commission.

This is used to work out each telco’s share of the Telecommunications Development Levy. Only sizable telcos pay the levy, their share is proportional to the company’s share of the total qualifying revenue. In effect this number is the company’s share of the retail telecommunications market.

Spark dominates

Spark is by far the largest market player with a 35 percent share of the industry qualified revenue. Vocus is the fifth largest company on the list, but its share is a shade over three percent. Add the two together and the list looks much the same as before.

On this basis there is almost no obvious reason for the Commerce Commission to object to Spark NZ buying Vocus. The market dynamic would be almost the same as before.

The almost in that last paragraph is because the Commerce Commission’s Annual Telecommunications Monitoring report for 2016 shows Spark’s share of fixed line retail revenues as a line item. It has been falling for a decade.

By implication, Spark’s falling market share shows competition is working. If Spark acquired Vocus NZ, this figure would tick up. That may or may not be enough to ring alarm bells. Yet, while the Commerce Commission may not relish industry consolidation, it can’t necessarily stand in the way of bigger-picture market trends.

Broadband market

Retail broadband market share NZ 2016

Things get tricky if the Commerce Commission decides competition is important in the broadband market.

Spark is the largest broadband retailer with a 46 percent market share. Vodafone is number two with a 29 percent share. Vocus is the next largest player with 14 percent of the market.

The three top broadband retailers have 90 percent of the market.

Add Spark’s broadband market share to Vocus and you have a company with 60 percent of the market.

Spark is already the largest and in every respect it dominates. Yet to go from 46 percent to 60 percent would reset the market.

If Vodafone were to buy Vocus NZ, it would still have a smaller market share than Spark. The two would be, in effect, on equal footing.

Vocus NZ sale and broadband competition was first posted at billbennett.co.nz.

Rural VDSL2

Cynics were quick to label the government’s generous broadband funding announcement as pork barrel politics. There’s something in that. New Zealand is, after all, in the run up to what looks like a tightly fought election.

Yet anyone looking closely at the existing fibre network and the second phase of the Rural Broadband Initiative could have figured out that government needs to spend more to fill the remaining broadband gaps.

It was only a matter of time.

English, Bridges plug holes

In the event, Prime Minister Bill English and Communications Minister Simon Bridges managed to find the extra money needed to plug the holes. Sure, it is smart politics. It is also a smart communications strategy.

By the time the money is spent, New Zealand will have world-class broadband infrastructure. The cities were always going to get that. Now the regions will too. On paper New Zealand will have the world’s best rural broadband.

What’s more, we get that world-class network sooner. Five years from now the earth movers, fibre-laying gear, hard hats and high visibility jackets will be packed away. Just about everyone in New Zealand will be able to watch high-definition streaming video or quickly upload vast amounts of data to a cloud.

Fibre, copper, wireless

Before this week the government committed about $2 billion to building a fibre network that would reach around 80 to 85 percent of the population. Another 10 percent or thereabouts would have either VDSL from fibre-fed cabinets or a fixed wireless connection of some description1.

This week’s spending brings the total spend up to around $2.5 billion. Between them the network builders2 will invest about twice as much again. That’s all private money. No-one uses the term in telecommunications; New Zealand’s new broadband network is a classic public-private partnership.

The cost to taxpayers is minimal. The $1.5 billion or thereabouts put aside for the first wave of Ultrafast Broadband was a soft loan. By 2025 the treasury will get that all back.

Old money

Much of the remaining billion dollars from government is either the same money recycled, or funds raised from levies imposed on telecommunications companies.

While taxpayers will ultimately cough up for this through higher service prices, it’s still clever accounting. And the cost per user is minimal. My back of an envelope calculation3 puts it about 50 cents per month.

Compare this with the tens of billions Australia is spending on NBN. Many figures have been used over the years, around A$50 billion is the most common current estimate.

Australian’s will tell you it’s a bigger, more ambitious job reaching more people and spreading further. It’s true. Even so, it looks like the New Zealand people are getting a far better deal. Most of us also get better services than Australians too.

99 percent

At its peak, the old copper telephone network reached around 99 percent of the population give or take. You can assume the last one percent is beyond reach in practical terms.

Connecting the 75 percent of the population living in cities and towns isn’t that hard. Laying fibre to the door for these people isn’t prohibitive.

The next ten percent of the population is harder to reach, the cost per connection might be one and half to two times the cost of connecting the first 75 percent of the population. It’s harder, takes longer and is more expensive. But it’s still doable.

Problems start with the remaining 15 percent. In many cases it is cheaper to reach them with wireless services. Some of the last 15 percent will be in communities which already have fibre connected to a local school. In others, there may be enough people in one spot to make fibre-fed cabinets and VDSL over copper a viable proposition.

Where fibre gives way to wireless

In round numbers the cost per connection rises with each percentage point as you move from the 85 percent mark to 99 percent. At some point along this line the economics of fibre and copper give way, first to cellular fixed wireless and then to the more tailored, local approach used by wisps.

Fibre is the best way to get a broadband connection. Fibre-fed cabinets and VDSL over copper is second best so long as you are near enough to the cabinet. Today’s wireless technologies can often perform almost as well.

This plan leaves almost no-one behind and anyway, govenment will plug the few remaining gaps over time. New satellite technologies promise to perform almost as well as fixed wireless.

There’s a clear political slant to this week’s announcement. While the timing is deliberate, the decisions are money well spent. This is a sound infrastructure investment.


  1. Fixed wireless services from wireless internet service providers or wisps are not quite the same as the RBI fixed wireless broadband services delivered from cellphone towers. ↩︎
  2. Chorus, Northpower, Enable Networks, UFF, Spark, Vodafone, 2degrees and the wisps. ↩︎
  3. Total levy is $50 million a year. Divide that by the number of mobile, landline, fixed wireless and broadband accounts and then by 12. At a guess I’d say there are eight to ten million telecommunications accounts. ↩︎

Writing at Newsroom.co.nz, Mark Jennings covers a weak financial result from Sky TV. He quotes boss John Fellet:

“Piracy has become our biggest competitor.

“The big problem is the increasing ease by which pirated content is accessible.

“Devices preloaded with piracy software enable users to access pirated content stored on servers overseas, from the comfort of their living room.”

There’s little question piracy happens. Every so often an email arrives from a company that offers exactly the kind of device Fellet blames for a poor financial result. You can buy a VPN and watch shows or sports that cost money on Sky on other nations’ free to air TV channels. It’s not hard.

But it’s not the whole story.

Keen consumers of paid services

Analyst firm IDC says New Zealanders are now among the world’s keenest buyers of paid online services. Some 22 percent of consumers here say services like Netflix and Lightbox are their main way of viewing entertainment.

That’s on a par with the US and a long way ahead of the worldwide figure of 14 percent.

We’re still behind North America when it comes to buying a streaming service. On the other side of the Pacific 41 percent pay for streaming TV, here just over a quarter do.

New Zealand wasted little time moving from near the bottom of the online service league to the top of the table. It is three years since Spark launched Lightbox, the first widely available local service. There were also services like the Premier League Pass which allowed fans to watch English football on digital devices.

Netflix

While many New Zealanders paid for an international version of Netflix, that service didn’t arrive in a local form until early 2015. Network companies like Chorus and ISPs like Orcon show graphs of how data consumption rates leaped after Netflix opened in New Zealand. It helps that these services arrived as the nationwide UFB fibre build hit its stride.

These numbers give the lie to the idea that New Zealanders are software pirates or spend a lot of time downloading illegal content.

Some of the discussion of this survey on social media centred on the poor entertainment choices had before streaming video was a practical option.

Fellet’s Sky TV enjoyed an effective monopoly on paid video entertainment for a generation. By overseas standards it is, or was, expensive. Sky was never fast bringing shows to New Zealand, that wasn’t an issue back when it started, but online spoilers and the buzz around big, popular shows meant that annoyed consumers.

Sky missed a trick with the internet. It still doesn’t make all content easy to buy online. Instead it uses out-of-date set top boxes. Its technology is more than a decade behind the times.

Downloads

Customers found they could download shows ahead of Sky’s schedule. They can watch them when they like. They also realised they could get their material without paying. Many still do. But as the IDC evidence shows, New Zealanders are more willing to pay for TV than most people in the world.

While Sky could legitimately claim it was losing to pirates, there’s another side to the debate. Studios sold exclusive rights to Sky for vast fortunes, but did little to police how their products were distributed.

For a while New Zealand consumers could buy shows from international online services for a fraction the price charged by Sky. The pay TV company would have a legitimate claim against the studios, but chasing wealthy lawyered-up corporations is harder than busting kids who know how Bittorrent works.

Not just movies and sport

IDC says it isn’t just movies, sport and TV shows. New Zealanders are among the keenest users of all premium digital services. This includes online music streaming, cloud services, and console gaming. We are also among the highest users of Facebook with 81 percent of people who answered the survey using the service in the month before they were asked. The worldwide figure is 74 percent.

People here own an average of 6.5 digital devices and spend 56 hours, roughly half, of waking hours connected to online.
In general, we’re a practical breed. We tend to use digital services if there’s an obvious benefit. If the benefit is less clear, we’re more tentative. So just 18 percent of New Zealanders have used virtual reality in the past year. This compares with 38 percent worldwide.

To get these numbers IDC questions 30,000 adult consumers in 19 countries. 1400 of them were in New Zealand.

Why New Zealand outplayed Australia on the NBN 

New Zealand will reach its broadband roll out goal on time and on budget – with superior technology. What went wrong in Australia?

At the Australian Financial Review Jennifer Hewett goes back over the question asking Why New Zealand outplayed Australia on the NBNAlong the way she talks to MyRepublic‘s Vaughn Baker who has played a role in New Zealand’s fibre project and now has a regional role for the Singaporean service provider.

Hewett makes a number of points. There is an eye-opening quote from Baker about his observation of the Australian project:

He was amazed, he recalls, at the time and the effort taken by subcontractors without the discipline of the private sector questioning each dollar, meaning the cost base was skewed from the beginning.

I noticed this when I lived in Australia. On the other side of the Tasman companies often do better when they get their snouts in the government trough. New Zealand’s private sector approach to the fibre build helped guard against this, but many private projects in Australian go off the rails as well.

NBN built from outside-in

Another important point is that the NBN build started in rural Australia. New Zealand’s government was clever putting the rural broadband project into a separate basket. A smaller proportion of Australians live outside the main centres, but the distances and the challenges connecting them are mind-boggling.

,Hewett missed an important point. New Zealand’s fibre build was never subject to Australia’s poisonous and destructive partisan politics. For a while an Australian’s opinion on the NBN project was coloured as much by political allegiance as facts, science or technology.

This hasn’t stopped. Today, there is ridiculous squabbling in Australia over fibre speeds, among other things. And a declaration that no-one wants or needs more than 25mbps broadband. Try telling that to New Zealanders zipping along to gigabit services.

fibre to the new home essentialNew home buyers in the UK want running water, electricity and ultrafast broadband according to property developer The Berkeley Group.

Berkeley chief executive Rob Perrins says: “If we weren’t able to offer fibre, I think there would be the real prospect of some people walking away from property sales.”

There’s anecdotal evidence the same applies in New Zealand. It’s not just new homes. Which is why it’s important that our fibre build reaches as far as possible, there’s a danger that house off the network will be hard to sell. Neighbourhoods off the UFB network could become ghettos.

CommsDay reports on a survey commissioned by MyRepublic in Australia. In it around 1000 Australians were told New Zealanders could get residential gigabit internet. They were told this is around one hundred times faster than ADSL and forty times faster than the standard NBN plan.

When asked if they would like this, 76 percent said yes. They were then told New Zealanders paid $130 a month for the service and were asked what they thought was a fair price, 85 percent of the sample said they thought they should pay less.