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2degrees launched New Zealand’s third mobile network almost ten years ago in August 2009. Today it accounts for roughly one in five mobile connections.

Last week 2degrees reported a modest net profit of $19.6 million on revenue of $805 million.

The company says a highlight of the year was a nine percent increase in contract mobile customers. A six percent drop in prepay customers went some way to offsetting that. It says many of these closed accounts when 2degrees switched off its 2G mobile network.

Still a minnow

It remains a minnow compared to Spark and Vodafone. The two big mobile companies each have around 2.5 million connections, while 2degrees trails with 1.4 million. Spark has almost 700,000 fixed-line broadband connections compared with 87,000 for 2degrees.

Spark’s annual revenue is in the region of $3.5 billion, while Vodafone’s is $2 billion.

2degrees plays an important role in New Zealand’s mobile sector. It makes the market more competitive. Before the company started, New Zealanders paid well over international average prices for mobile phone services.

Today the Commerce Commission reports “New Zealand mobile plan prices are well below the OECD average”. It says:

The price of a New Zealand entry-level mobile plan giving 30 calls and 500MB of data at $16 per month was 36 percent below the OECD average and well below Australia.

Higher use plans showed big price decreases and are well below the OECD averages.

Commerce Commission Annual Telecommunications Monitoring Report 2018

The report goes on to say NZ higher use plans are still more expensive than in Australia.

The flip side of this good news for consumers is that 2degrees has eaten into Spark and Vodafone profit margins. A clear sign of competitive pressure.

Some success

While 2degrees has been a success on some levels, it has yet to break through in the fixed-line and broadband markets.

It is the number five broadband service provider. 2degrees has about five percent of the market compared with Spark’s 43 percent and Vodafone’s 26 percent. Vocus, 13 percent, is also much bigger.

New Zealand broadband market share by connections

Another measure of the relative size of New Zealand telcos is the size of their contribution to the Telecommunications Development Levy. This is an annual tax on the industry. The government uses it pay for providing services to deaf and hearing-impaired people. Some of the money subsidises broadband for rural areas and upgrading the 111 emergency service.

2degrees pays the fourth highest contribution behind Spark, Vodafone and Chorus.

Telecommunications Development Levy

One of the biggest problems facing 2degrees is access to investment capital. It doesn’t have Spark’s deep pockets.

When the government auctioned 4G mobile spectrum in 2013, 2degrees didn’t buy its full allocation even though the price was deliberately kept low.

The challenge for 2degrees will be to find the money for further investment. To put this in perspective; Each of those first blocks of 4G spectrum went for $22 million apiece. That’s more than a year’s profit for 2degrees.

In 2015 I travelled to Shenzhen in China to learn more about 5G mobile technology at Huawei’s headquarters. Huawei’s brand is best known in New Zealand for phone handsets. That is only part of the company’s story. Huawei is also the world’s largest telecoms-equipment-maker and a world-scale economic powerhouse. Spark New Zealand and 2degrees use Huawei kit to power their cellular networks. Moreover, Huawei is leading the charge towards next generation mobile networks.
Huawei headquarters – Shenzhen, China

5G was always going to happen

Everyone in the phone business always knew there would be a generation to follow 4G. Cellular technology is far from done. Yet at the time of my visit 5G was still a new idea only starting to take shape. In 2015 many telcos around the world were still finishing their 4G networks. The hype machine hadn’t kicked in and technologists were still batting ideas around. Some concepts were just that: concepts.

Huawei’s 5G perspective

During the visit I got my first comprehensive overview of the Huawei’s perspective on the technology from Alex Wang, the company’s VP of wireless marketing. This is from the NZ Herald story I wrote about the trip:
“Dealing with more connections is one reason telecommunications companies need 5G. Wang says the formal definition of 5G has yet to be agreed, but one of the items of the list is for it to support massive connectivity. The goal is for cell sites able to cope with one million connections in a square kilometre — effectively that means one mobile device per square metre. By comparison today’s 4G cell sites might handle 1000 to 3000 devices.”
Wang also said the goal was to get latency down to 1 ms and to support data speeds of up to 10 Gbps. This second goal has since been changed to 20 Gbps. Most of the other numbers remain as planned in 2015.

Phones at the speed of light

As any physics student will be able to tell you, light, or radio waves, travels through a vacuum at about 300 kilometres in a millisecond. The speed through air is not much different. The original 5G target speed of 10 Gbps is ten times the speed of today’s fastest home fibre connections. The newer 20 Gbps target is twenty times faster. Without getting deeper into electromagnetic physics or engineering, these goals are ambitious. You can’t push wireless data that fast with the existing mobile radio spectrum. There isn’t enough free bandwidth for three carriers to hit these targets in densely populated areas.

More spectrum needed

Which means carriers need to find new spectrum if they are to deliver 5G. Or, more to the point, government’s have to reorganise existing spectrum allocations. In most cases they then sell it to carriers in an auction. New Zealand’s Radio Spectrum Management, part of the Ministry of Business, Innovation and Employment, is already working on 5G plans. So is the Commerce Commission. Telecommunications Commissioner Dr Stephen Gale said: “We believe the power to regulate remains an important competition safeguard, especially with 5G networks and potential new entrants on the horizon”.

A costly exercise

Spectrum isn’t cheap. Governments usually auction it in blocks at a time. Each block sits in a separate band of spectrum. The last New Zealand government wisely decided not to cash in on the last big spectrum auction for blocks in the 700 Mhz band. That left carriers with the funds to exploit the new bandwidth almost straight away. Contrast this with the UK where bidder spent £1.4 billion buying 5G spectrum. This was more than twice the anticipated cost. The winning bidders spent money they could have used for the capital expense of building a network. It’s likely to mean a slower build and higher costs for users.

Aggregation

In the past different services have run in different frequency bands. One of the features of 5G is that carriers will be able to mash together greater amounts of bandwidth from different bands. Or to use their language: aggregate spectrum. This already happens a little with 4G. Spectrum aggregation is central to 5G. Aggregation opens the door to merging what now may seem like different technologies, in particular cellular and wi-fi. How that works in practice will be interesting. In the next post on 5G we’ll look more at the spectrum issue.

New Zealand’s mobile carriers are keen to talk about 5G mobile. Telecommunications equipment makers are even keener to talk about it. They have more to gain in the short term. It’s possible they have more to gain in the long term too.

The next generation of mobile technology promises a lot. The promises depend on who you listen to and who they talk to. Sometimes the promises overlap, sometimes they don’t.

There is a good reason why 5G promoters send mixed messages: the technology aims at distinct markets. Each market has different needs. Each wants to hear a different set of promises.

Silverdale 4.5G cell site

5G selling point

For users on the move, the most important selling point is blistering fast mobile broadband. The technology promises users abundant bandwidth to deliver streaming high resolution video and huge amounts of data.

This is perhaps the most oversold promise of all.

While there’s always a case for more bandwidth, you don’t need to move up a generation to get faster mobile broadband.

In 2016 Spark demonstrated 4.5G delivering 1.15 Gbps. Huawei told me 4.5G can go all the way to 6 Gbps. Some other reports mention higher 4.5G speeds.

Let’s put this in perspective. You need 15 to 20 Mbps to watch streaming 4K movies on Netflix. There are few applications that need more bandwidth.

Even the most demanding virtual reality apps might only use three or four times that. Wearing a headset and wandering through a virtual world might not a good idea if you are actually mobile.

Of course other apps may yet emerge to use faster phone data speeds. You have to ask yourself if it is wise investing in an expensive mobile phone network upgrade when no-one has a clue what it might be used for. For the foreseeable future 4.5G has all the bandwidth most mobile users can use.

Fixed wireless 5G

There is a better case for upgrade fixed wireless broadband networks. Fifth generation cellular promises those customers fibre-like speeds. It is possible if carriers have more bandwidth to play with they could offer higher data caps than today.

In New Zealand, fixed wireless broadband is often sold as an alternative to fibre for people with less demanding internet needs. Building a 5G network needs a huge investment. Carriers will struggle to get a return on investment by increasing fixed wireless broadband charges. If anything competition from fibre networks means they are under pressure to lower prices.

Internet of things customers are another target market. They expect to see a trickle of data beamed to and from thousands, even millions of devices. For these customers, speed is rarely the main consideration. On the other hand, some will want the density of coverage promised by 5G. Some IoT apps need 5G’s promised low latency.

At the time of writing there are four main IoT networks in New Zealand. 5G will give carriers and customers many more options. This is the most likely application to pay for the new network build, but squeezing out a return on investment when the nation is already awash in IoT networks won’t be easy.

5G’s low latency is vital for two specific user groups: driverless vehicles and robotics. Or as they say in the industry: these are the key “use cases” for 5G. Most likely these technologies will fuel demand for new networks. Although it is possible both may be further away from everyday use than the industry tells us.

Put that down to hype.

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. ↩︎

Mobile carrier 2degrees now 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

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. ↩︎