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Vocus is preparing its New Zealand assets, which include mobile, broadband, and energy offerings, for sale by June 2018, while also exploring the sale of its ‘non-core Australian assets’ including datacentres.

Source: Vocus to sell New Zealand assets | ZDNet

The Australian parent is in trouble. As is so often the case, the people at the top decides to get rid of the New Zealand operation. After years of telling us otherwise, Vocus New Zealand is suddenly “non-core”.

Vocus New Zealand has been performing well. If anything it has done better than the Australian business.

The company’s annual report to shareholders shows the facts:

  • New Zealand revenue up 123 percent.
  • The consumer business is up 186 percent.
  • EBITDA up 103 percent in NZ dollars.
  • Average broadband revenue per customer is $71.
  • In the most recent quarter Vocus NZ had an 18 percent share of new UFB connections. That’s punching way above its weight.

Where are the buyers?

The problem for the Australian parent is there is not a conga-line of potential buyers waiting to snap up New Zealand telecommunications assets. That is, as always, except at fire sale prices.

It’s possible parts of Vocus might find willing buyers. Taken as a whole it is most likely too big for a single NZ telecommunications industry player to swallow whole. We’ve seen  the problem Vodafone had absorbing Telstra-Clear. 2degrees did a fine job integrating Snap. But that deal was at least an order of magnitude smaller.

Vocus is New Zealand’s fourth largest retail telco. It comes in behind Spark, Vodafone and 2degrees.

If the stories about a pending IPO are correct, you can rule out Vodafone as a buyer. Spark and 2degrees are also unlikely buyers, for different reasons. Although all three might like to rip juicy morsels from the carcass.

There may be regulatory reasons why none of the three bigger retail telcos would want Vocus.

Vocus New Zealand options

Which leaves three plausible options. The first is that the parent company has a big overseas buyer in mind. At times like these China often gets mentioned. Maybe that’s a possibility. We know Chinese telecommunications executives have been window shopping in New Zealand in recent years.

A second option is for a private equity buyer to pick up the business. It can’t be ruled out, but Vocus New Zealand was already in the process of applying something similar to the kind of rationalisation private equity firms apply.

The other possibility is some form of management buyout. Of course, these three alternatives are not mutually exclusive. And there is some smart telco investment money in the country. At least some of that will be from those who cashed out during the last five years of industry consolidation.

One thing is likely, the parent company might struggle to get back all it has invested in Vocus New Zealand.

The New Zealand telco sector has barely stopped to catch its breath since the government stepped-in with its nationwide ultrafast fibre programme started. That triggered a wave of merger and acquisition activity which is not over yet. It’s likely to be a busy year for the industry.

HD Voice vodafone NZ

Spark, Vodafone and Chorus will pay almost NZ$44 million towards this year’s $50 million Telecommunications Development Levy.

The Telecommunications Development Levy is an extra tax paid by telecommunications companies. Each company pays a little over one percent of its revenue to subsidise rural broadband and finance other worthy but uncommercial services.

Spark is the biggest contributor. It pays almost $20 million. Vodafone pays almost $14 million and Chorus’ share is around $11 million.

The next two telecommunications companies, 2degrees and CallPlus pay around $3 million and $1.2 million. There are 13 other companies paying the tax. Between them, they pay about $2 million.

Companies have to earn at least $10 million from “telecommunications services” before paying anything.

Government set the Telecommunications Development Levy fund at NZ$50 million. Each of the contributing companies pays a proportion of the total depending on its share of all “qualifying revenue”.

Some of the money raised, NZ$2.6 million this year, pays for the Telecommunications Relay Service. This helps people with hearing problems use telephones.

The government sets a further sum aside for 111 emergency services. It spends the rest of the money on rural broadband.

A tax by any other name

Note how government charges the Telecommunications Development Levy on revenue, not profit.

That would be difficult because as a whole New Zealand’s telecommunications industry barely scrapes a profit.

Last year the five companies paying the lion’s share of the levy made a collective loss. This year the numbers are better, but not much.

Telecommunications is not a high-margin business and requires huge capital investment in infrastructure. Not least in paying the government to use the radio spectrum — which could be regarded as another form of taxation.

In practice companies pass the extra taxes on to telecommunications customers.

Free riders

There’s an irony here. While telecommunications companies pay extra tax, the companies, one might argue benefit the most from a nationwide broadband network, barely pay any tax.

Google and Facebook earn a king’s ransom selling ads to New Zealanders. Because they claim these sales happen elsewhere in the world the revenue they collect is effectively tax-free.

They wouldn’t be able to earn this tax-free income if it wasn’t for the likes of Spark, Vodafone, Chorus, 2degrees or CallPlus providing the networks. They get a free ride.

According to the IAB industry spent some NZ$200 million on interactive advertising in the third quarter of 2015. I

Even if the government can’t force these companies to pay their fair share of company tax, perhaps it could include their revenue in the Telecommunications Development Levy.

Vodafone NZ

New Zealand telecommunications went from state-owned to a competitive market in a generation.

Now the government is back in the telecoms business. Not as a direct player, but sponsoring and calling the shots for a national urban fibre roll out.

Government also imposed an extra tax on telcos to pay for rural service upgrades. It restructured the industry to get the ball rolling on its Ultra-fast broadband project. Telecom NZ had to spin-off Chorus, its network division, or miss out on fibre contracts.

From Telecom NZ to Spark

The restructure forced Telecom NZ to change its strategy and to find new markets. It also found a new name: Spark.

Vodafone went through its own changes adjusting to the new market conditions.

Now New Zealand’s two telecommunications giants are moving in different directions.

By changing it name from Telecom NZ to Spark, the company underlined its transformation. It is no longer the telephone company. Today Spark sells a broad variety of digital services.

Vodafone changes tack

Meanwhile, Vodafone acquired Telstra-Clear and pushed into business and rural markets.

Change was always going to happen with or without direct government intervention.

Competition between carriers means profit margins have fallen. Regulation and, in New Zealand, extra taxes like the Telecommunications Development Levy eat further into already slim margins.

Then there are new external competitors. Over-the-top services like Google, Skype and Apple offer free or low-cost products. They compete with toll calls and other once-lucrative sources of revenue.

It means an end to healthy profits from tolls, SMS and other value-added services.

Dumb pipes

Today the core business at Spark and Vodafone is selling dumb pipes. These can be through the air or through landlines. They sometimes speak of “selling bits”, which amounts to the same thing.

Whether you call it dumb pipes or bits, telecommunications is now a commodity business. Two Spark subsidiaries illustrate this. Big Pipe sells broadband, Skinny sells mobile phone services. They are bare-bones, low-cost alternatives. They offer a shorter menu of options and less customer hand-holding.

It is difficult to differentiate core telecommunications services. To the user voice calls look, or rather sound, much the same no matter how they arrive. Few consumers could tell the difference if a different broadband provider delivered their data.

700 MHz of difference

There are points of difference. Spark invested in an extra slice of 700 MHz spectrum. That will give it an edge with faster wireless broadband.

On the whole customers distinguish between telecommunications services on the basis of Hygiene Factors. They notice more when things they expect to see are missing or not working as they should.

So, say, poor service, counts against a carrier more than good service works in their favour.

It is hard to make money from undifferentiated, commodity services. To keep shareholders happy, Spark and Vodafone have strategies adding value to core services.

Spark now a digital services company

At Spark the answer is to find more digital services to sell. Among other options consumers can buy video-on-demand services and home security from Spark. There’s a new fixed-wireless rural broadband service.

Businesses can buy sophisticated IT services including cloud computing from Spark Digital. The company’s Qrious operation offers big data.

Spark is moving to sell a broad suite of digital services to consumers and business.

Vodafone tackles enterprise

Meanwhile, Vodafone has pushed into the enterprise market. It used its Telstra-Clear acquisition to move into areas like the internet-of-things offerings. Vodafone’s involvement in the rural broadband initiative has seen it turn up at Fielddays. It now offers products aimed at farmers.

Both look to expand beyond dumb pipes into growth sectors with non-commodity margins.

At a recent function, managing director Simon Moutter talked of Spark selling overseas assets. It used the money to focus more on New Zealand investments. Almost $100 million of that went towards buying Revera, the largest local cloud service provider.

Worlds apart

If Spark is looking more like a New Zealand business, Vodafone is moving in the opposite direction. Today is more into line with its UK parent. Part of that is so the local company can give Vodafone’s global customers the same services they use elsewhere.

Vodafone has moved from being mobile-centric to a full-service telco. It has formed partnerships to reach new rural and enterprise markets. The advertising has gone from cool urbanites to a daggy farmer and his pig. That’s a metaphor for something.

There’s another, less divergent part of the NZ telco transformation story. Spark and Vodafone are working together to build a new submarine cable across the Tasman.


Although the two companies are as competitive as ever, their ability to combine for a project like this signals a fresh attitude, a maturity.

In the last year new, or revamped, competitors have emerged for Spark and Vodafone. Australia’s Vocus has snapped up enough network assets to be a challenger.

Vocus is merging with another Australian company, M2, which earlier acquired the CallPlus group. The move brought fresh capital and momentum to the industry’s third largest player. 2degrees has broadened its scope picking up ISP Snap.

The market outside of Spark and Vodafone may be consolidating, but most of that action is in the traditional telecommunications sectors. While that may be the two big companies’ home turf, they are busy looking at new pastures.

VocusHere’s a story I wrote earlier today for The Register:

Oz telco consolidation continues:

Fibre and data centre owner Vocus and consumer/business carrier and service provider M2 are merging to create what they are calling a “full-service vertically integrated telco”.

Assuming shareholders agree and the plan gets nodded through by regulatory authorities — both seem likely — they will merge early next year to become Australia’s fourth largest telco.

The new entity will also be the third largest telco in New Zealand.

You can read the full story: M2, Vocus merge to form down under’s newest billion-dollar telco • The Register

From the moment Telecom NZ CEO Paul Reynolds announced the company would spin-off its Chorus division to win UFB contracts we knew New Zealand’s telecommunications sector was heading for massive change.

At the time, it seemed reasonable that an Australian player might enter or expand its NZ operations. Perhaps Telstra would double down on its TelstraClear investment. Or maybe Singapore-owned Optus would do something. There was always TPG in the background.

Vocus, M2 not expected

This Vocus plus M2 development has come from left field. It wasn’t an overnight move, the two companies have invested heavily in New Zealand since 2010.

Vocus had a footprint here at the time of the Chorus demerger, mainly reselling capacity on the Southern Cross Cable Network. If there was an M2 presence here in 2010, it was below the radar.

And yet here we are with a new player. Make that a big new third telco. Tuanz CEO Craig Young estimates the merged business will own about 17 percent of New Zealand’s broadband market when the deal goes through early next year.


That’s a big change in the landscape.

Writing at the NBR, Chris Keall quotes M2 Group NZ boss Mark Callander who says the business is shooting for a 25 percent market share.

New Zealand’s industry consolidation isn’t over yet. The M2, Vocus group doesn’t own a mobile carrier at the moment. For a long time industry insiders have wondered, sometimes aloud, who might be in the market to pick up 2degrees.

Until now the list of potential buyers with access to the necessary capital, interest in the NZ market and ability to win regulatory approval was close to zero. That’s changed.

King CanuteCallPlus backed down. From September it will stop providing Global Mode. The service allows customers to hide their whereabouts. That way they can buy low-cost streaming video services direct from the US, UK or elsewhere.

In return the big media companies halted legal action against CallPlus.

Among other things they claimed Global Mode breached the Copyright Act and the Fair Trading Act.

That won’t be tested in court. We’ll never know if Global Mode was legal or not. That’s a pity because it leaves important questions unanswered.

Plenty has been written elsewhere (and by me) on what is a rearguard action against new digital distribution models.

This was always going to end badly for the big media companies, even if they won the Global Mode action.

That’s in part because Global Mode was a local version of something consumers can buy elsewhere.

While the King Canute media companies have stopped a wave, they haven’t stopped the tide.

There’s something else.

Globle Mode looked legitimate

Regardless of the untested legal arguments, Global Mode looked like a legitimate way of bypassing content geo-blocking. Consumers who used it felt they were doing the right thing. They were buying media.

It has taken the media business decades to convince consumers they should pay for media and not use shady operations like Pirate Bay.

And for a while they were.

Overnight, the big media companies have closed that channel. Consumers addicted to the latest shows, to entertainment not available from officially sanctioned New Zealand distributors have nowhere else to turn.

Some will lose interest. Others will head back to illegal channels.

That is not a victory for media companies.