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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 transformation 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.

Transformation 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 transformation

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.

Maturity

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.

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.

King Canute

There’s a whiff of King Canute and the tide in the Nick Grant and Chris Keall NBR report: “Sky, Spark, TVNZ, MediaWorks take action against CallPlus, other global mode ISPs“:

Spark (owner of Lightbox), MediaWorks, Sky TV and TVNZ say they are taking action against internet and technology companies selling and promoting services that enable access to international geo-blocked TV and movie services.

Canute was a wise king who made his flatterers look stupid when he proved he could not hold back the tide as they claimed.

The four companies who buy the New Zealand rights to distribute overseas TV shows and movies would be wise to heed Canute’s example.

A flatterer has convinced them they can hold back the internet tide. Unlike Canute, they’ve fallen for the bait. This story is going to end badly for them even if they win the action mentioned in the NBR story.

Geo-blocking

Restricting access to online content depending on the location of the device requesting the material is called Geo-blocking. It means New Zealanders can’t normally get easy, direct access to content intended to be viewed by, say, only a US audience.

Note the words easy and direct in that last sentence. There are less easy and direct ways of getting that material.

Generally it’s just a matter of paying a monthly fee for a VPN or virtual private network and tinkering with a few esoteric settings on devices and routers.

Legal, moral

There’s nothing illegal in this.

Nor is there anything immoral.

Rights holders often point out the morality of rewarding the artists and others who create works.

When people use VPNs to buy US-only services from companies like Netflix,  their money still ends up in the pockets of the people who make TV shows.

If anything a higher percentage of the money ends up in the show maker pockets because there’s less ticket clipping along the way.

Many Spark customers use VPNs this way. If the company objects to VPN and related technologies, it could stop them on its network. That would be commercial suicide, but it’s doable.

CallPlus – smart move

CallPlus’s so-called crime is offering an easy and direct way of getting around geo-blocking.

The company, which owns the Slingshot, Flip and Orcon broadband brands, has what it calls a ‘global mode’ service which allows customers to hide their whereabouts from content providers.

In effect global mode bundles VPN-like services into a customer’s monthly broadband subscription.

This takes us back to those words: easy and direct. 

Understandable defensive move

It’s understandable companies who pay large sums for New Zealand TV rights want to protect their investment.

If there’s anything immoral in this game, it’s that larger media aggregators trick companies like Lightbox, TVNZ, Sky and Mediaworks into paying through the nose for content knowing damn well New Zealanders can and will buy it for less from Netflix or another global brand.

There’s no such thing as exclusive NZ rights in 2015.

The four companies may have a legal case against the companies in the US who sell them exclusive NZ rights without properly making sure the likes of Netflix do not then sell here. No doubt taking that kind of legal action would be ruinous.

InternetNZ weighs in

internetNZ CEO Jordan Carter sees the irony in the legal threat facing CallPlus when existing law allows parallel imports of DVDs.

In a media statement he says: “Moves like this won’t decrease piracy. New Zealand Internet users are still paying for content accessed via these services, many of them go off-shore to get content that local providers either don’t have or don’t provide on-demand.”

He says the legal action only serves to reduce choice.

“Consumers still have the choice to go with Sky, Spark and others’ online services. Efforts to undermine competition like this aren’t innovation: they are just trying to reduce our choices,” Jordan Carter says.

Meanwhile in Europe…

While lawyered-up New Zealand media companies seek to strengthen geo-blocking, Europe is moving in the opposite direction. There, legislators are talking of banning geo-blocking.

The European Union objects to copyright owners charging different prices for the same content to consumers in different countries.

That’s what is happening here with Netflix charging New Zealanders using its local service higher prices for less content than Australian or US consumers.

Counterproductive danger

The danger in the reported action is that Spark, Sky, Mediaworks and TVNZ are looking to shut down one of the legal ways New Zealanders buy content. That’s as likely to drive consumers back into the arms of pirates as it is to win them over to services like Lightbox.

As I said earlier, it’s understandable New Zealand media companies want to protect their investments, but they need to realise they’ve been sold a pup by the content giants.

There is no such thing as NZ exclusive content anymore, they should go back to Hollywood and get a refund. That’s not going to happen because when it comes to lawyering-up, Hollywood trumps Auckland.