The Commerce Commission wants to continue regulating mobile roaming. At present it can make Spark, Vodafone or 2degrees give a new network owner wholesale access. This is part of the Telecommunications Act.
The Act also says the Commission faces a review of its responsibilities every five years.
Wholesale access to existing networks helps a new network get a foothold in the market. Something similar happened when 2degrees started and customers could roam on Vodafone’s network. At the time 2degrees only had coverage in four centres.
Telecommunications Commissioner Stephen Gale said in a press release:
National mobile roaming helped 2degrees deliver a nationwide service for its customers from day one, in advance of rolling out its own national network infrastructure. We believe the power to regulate remains an important competition safeguard, especially with 5G networks and potential new entrants on the horizon.
The key phrase in that quote is “potential new entrants“.
After all there is little prospect of a new mobile carrier entering a saturated market. Yet that doesn’t mean there isn’t a potential new entrant looking to enter the cellular market.
That would be Malcolm Dick’s Blue Reach. The Commerce Commission mentions this company in its review of the market.
The allocation of 5G spectrum may influence mobile competition:
The allocation provides a potential opportunity for a new entrant to purchase spectrum. A new mobile provider will almost certainly require a NR arrangement while it rolls out. We note that Blue Reach Services has entered as a fourth provider and has publically stated intentions to roll-out 5G.
Dick is a wealthy man who has succeeded in telecommunications before. He is a co-founder of CallPlus and an investor in the Hawaiki Cable network. The latter is set to start operating next month.
His Blue Reach project has been public for a couple of years. Early on Dick described Blue Reach as a 5G wholesaler. The idea is that it will offer fixed wireless broadband to retail service providers. In some ways it is like the failed Woosh Wireless operation. That company was ahead of its time.
At the time of writing carriers around the world are building the first 5G networks. Both Spark and Vodafone have trials here in New Zealand. The technology still hasn’t settled. More to the point, the extra spectrum needed to make it work is not ready in New Zealand. We can expect that to happen over the next 12 months.
Blue Reach plans a service resembling Spark’s fixed wireless broadband. Both Spark and Vodafone sell a similar RBI wireless product to rural customers. So do wisps (wireless service providers). Presumably the wisps are among the retailer Dick hopes will buy his services.
The Commerce Commission’s review hints that we are about to see more competition. Bring it on.
The Commerce Commission has called for submissions on the issue to before July 30. It expects to release a final decision on September 4.
A Commerce Commission investigation into mobile market competition is underway. The carriers think they’ve seen enough regulation, with some justification. And yet there are areas where New Zealand’s mobile market does not work as well as it might.
Spark managing director Simon Moutter has a point when he says New Zealand’s mobile market is competitive.
On the most obvious level, the mobile market works well. Prices for monthly accounts, calls and texts have fallen. Consumers pay less and get more.
New Zealand is no longer an expensive place to own a mobile phone. Cellular voice and text prices are in line with those in comparative overseas markets.
2degrees not lobbying for regulation
It speaks volumes that 2degrees is not asking for further market structure changes. The third carrier is profitable and continues to put price pressure on Spark and Vodafone.
2degrees CEO Stewart Sherriff says his company invented competition in New Zealand. His company has certainly made the mobile phone sector price competitive in a way that it wasn’t before.
Prices from the larger carriers didn’t start to fall in earnest until 2degrees got market traction. Sherriff’s company is often the first to move on price. 2degrees is innovative and aggressive when it comes to pricing bundles of mobile services.
In Moutter’s eyes, the tough price competition at this level is enough to prove the market works. Yet we could do better.
Where the market doesn’t work
There is one clear way New Zealand’s mobile market competition isn’t functioning as well as it might. Customer service is, at best, indifferent. Often it is appalling.
If the market was truly competitive, carriers would not be able to get away with leaving customers on hold for hours or failing to solve trivial technical problems.
That’s not something the Commerce Commission can address in a direct way. Complacency about customer service is a clear sign a market could be more competitive. We replaced a monopoly with a duopoly and then an oligopoly. From a consumer point of view: worst, worse and not good.
Areas the Commerce Commission should address
There are three areas the Commerce Commission needs to address in its mobile market review. All three have the potential to improve competition.
First, New Zealanders still pay too much for mobile data.
Second, there are warning signs of collusion between carriers that should worry the regulator.
Third and top of the list is the lack of diversity in mobile phone service retailers.
“I note that submitters raised concerns about the effectiveness of regulation at the wholesale level, particularly with regard to the provision of Mobile Virtual Network Operator (MVNO) services. In other countries, these services are an important part of the mobile ecosystem, and the widespread availability of such services has led to better outcomes for consumers.”
It is theoretically possible there are no MVNOs in New Zealand because the market competition is already so perfect and the incumbents look after customer needs so well that there is no room for them.
That argument doesn’t stand up for a moment.
When is an MVNO not an MVNO?
New Zealand’s biggest MVNO isn’t really an MVNO at all. Spark’s Skinny business exists to give the nation’s largest telco a budget brand without cannibalising its core market. Skinny is not a true MVNO because its parent company owns the network.
Skinny is Spark lite. Today Skinny customers get almost the same product as Spark customers but without the value-adds like Wi-Fi hotspots and Spotify. Otherwise, the plans are a few dollars less each month than equivalent Spark plans.
In effect, Skinny is another Spark mobile product line.
New Zealand’s next biggest MVNO is the 2degrees-Warehouse tie-up. It is price competitive but hasn’t caused any waves in the market. The number of customers would be a rounding error on the numbers for the three big players.
The Warehouse isn’t pushing hard with its mobile option. If you walk into a store you’ll have to hunt to see where you can buy it and sales staff don’t seem motivated to emphasise it.
Vocus is New Zealand’s fourth largest telco. Unlike the three bigger telecom companies it doesn’t own a mobile network.
There are some Vocus MVNO customers, but not many. You could probably fit them all in a room. Vocus doesn’t make much money, if any from them and, like The Warehouse, it isn’t marketed.
Full telco service
In most other western countries a business like Vocus would be able to partner with a carrier and offer its customers a full telecommunications service including mobile. It would be able to bundle services and offer keen prices.
That’s not the case in New Zealand. Likewise, you can imagine other smaller telcos and even companies that dabble in telco like, say, TrustPower, would love to offer mobile as an add-on to power and broadband.
MVNOs perform two vital market functions. First, they often serve more specialist customer needs not catered for by the bigger players.
MVNOs are about choice
Second, they act as a pressure valve for the market. Many disgruntled customers leave one carrier only to find their new choice is just as annoying. The MVNOs give consumers a new set of choices.
Until MVNOs make up about ten percent of the market, preferably more, New Zealand does not have true mobile competition.
The Commerce Commission needs to look at the barriers to entry for MVNOs. If these are structural, then there is a need for new rules.
We pay a lot for mobile data. This is especially true when you look at data-only plans. We pay a lot more than, say, Australia.
On the other side of the Tasman, you can pay A$65 a month for 50GB of mobile data. In the UK £25 buys 100GB of mobile data. That’s around NZ$50.
At the time of writing the best deal in New Zealand is 2degree’s 25GB for NZ$70. That’s roughly twice the price Australians pay and, depending on exchange rates and taxes, around five times the UK price.
Economy of scale
While you can argue that Australia and the UK have economies of scale, it’s hard to imagine scale means the cost of supply in New Zealand is twice that in Australia or five times that in the UK.
It is significant that the Australia data deal quoted above is from Amaysim, a MVNO. These smaller MVNO players have put huge pressure on the prices charged by the network owners for data.
There’s another way you can look at New Zealand’s mean mobile data caps. The competitive pressure in other countries means carriers dedicate their spectrum to satisfying the needs of mobile customers. If they don’t, someone else will.
Fixed wireless broadband
Spark mobile customers share the company’s cellular bandwidth with 100,000 fixed wireless broadband customers. If the mobile market was competitive, Spark could not afford to risk degrading the mobile data experience.
How Spark manages its resources is the company’s own affair. It is certainly possible to run fixed and mobile broadband on the same networks without disappointing either group of users — that happens in lots of countries. It’s possible there is enough spectrum to satisfy both groups.
Spark may have a good explanation why 100,000 fixed wireless customers downloading gigabytes each month have nothing to do with mobile market competition. But it’s something the Commerce Commission investigation needs to take into account.
Is there a cartel?
A third area the Commerce Commission needs to consider is something from left field. The three carriers have banded together to build a rural mobile network with shared infrastructure.
The Rural Connectivity Group is an intelligent and innovative solution to what looks like a tricky problem: delivering broadband to small remote communities and filling in the mobile blackspot on country roads.
While it makes sense for rivals to co-operate on a project of this nature, it isn’t without risk. In his book The Wealth of Nations Adam Smith wrote:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Smith was no tin-foil hat conspiracy theorist, he is recognised as the father of modern capitalism. His name is forever tied to the ideas of free markets.
Rural Connectivity model
The danger with the RCG is that it could become the model for the next generation of mobile networks throughout New Zealand. There have already been whispers of the carriers considering acting together to build a 5G network.
When Chorus recently floated the idea of creating a UFB-style open access 5G mobile network the carriers were quick to shoot it down. A line hidden in a media statement from Vodafone could be interpreted as suggesting the carriers are thinking of building a shared 5G network:
There is no question that industry-wide collaboration makes sense in some instances, and the industry has already demonstrated working models for this.
You could see this as getting the regulator and others used to the idea of industry collaboration when it comes to 5G.
Moutter takes the argument further. He starts by saying Spark can build a 5G network on its own:
No industry amalgamation was required for the transition from 3G to 4G, and none is required from 4G to 5G. Based on our current analysis, we think the investment for 5G will be manageable, as we will be able to leverage our existing 4G and 4.5G physical infrastructure.
Which sounds reasonable. He then goes on to say:
That’s not to rule out sensible infrastructure sharing where that can speed up deployment or address visual pollution issues that might come from the deployment of more network sites – we are supportive of those models. But to jump straight to a conclusion that we need a monopoly network would be crazy.
Which could be another subtle softening up of the idea of a shared infrastructure. When you run a large partly vertically integrated business “sensible” can take on a lot of meanings.
As 5G networks are understood at the moment, they will need many more towers than today’s networks so the deployment issues and visual pollution he mentions are a given.
None of this is to say the carriers are planning to build a shared 5G network, nor is it to say the network structure will be inherently anticompetitive. It is something for a market regulator to consider and watch.
Competition or cartel?
It’s not the Commerce Commission’s job to second guess an as-yet-unsettled technology. Nor can it speculate about plans that may only be written on the back of paper napkins.
Yet it strains credulity to think the three carriers put their heads together to plan the RCG without at least mentioning how such a collaboration might work in the future.
At this point the Wikipedia definition of a cartel is useful:
A cartel is a group of apparently independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels typically control selling prices, but some are organised to control the prices of purchased inputs.
No-one would suggest any of this is happening at present, but allowing the three carriers to build a shared network would be a step on the path to a potential cartel-like arrangement.
Last 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 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.
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.
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.
The levy is, in effect, an extra and, somewhat discriminatory, tax on telecommunications companies imposed by the outgoing National government. It adds up to a roughly one percent increase in telecommunications prices.
As in previous years Spark and Vodafone are the biggest contributors paying 35 and 26 percent. Chorus and 2degrees are three and four.
The big four players will pay more than 90 percent of the total levy. Another eleven companies will pay about eight percent of the TDL between them.
There’s a double whammy for Chorus investors. Not only does the company not get any of the TDL money back in the form of contracts, but unlike the telcos, Chorus can’t raise prices to fund the tax because most of its rates are regulated.
What the TDL says about the industry
Only companies with telecommunications revenue of more than $10 million pay the TDL. When deciding how much each should pay, the Commerce Commission extracts a number it calls qualifying revenue. This figure can often be well below $10 million.
The commission adds all the qualifying revenue. Then companies pay a share of the $50 million TDL based on their share of qualifying revenue.
You could look at the way the share changes as a crude, yet effective, measure of relative performance.
The total pool of qualifying revenue changed little between this year’s determination and last year’s. In both cases it comes to a little over $4.2 billion.
In other words, taken as a whole, New Zealand telecommunications industry growth is flat. Taking inflation into account, that means it is actually in gentle decline.
Spark still dominates, but falling
Spark remains the largest contributor to the TDL. In the 2016-2017 year its share was a fraction over 35 percent of the total. That’s down from almost 38 percent a year ago, a fall of around 2.5 percent.
Vodafone barely shifted position in the year at a little over 26 percent. Its share of the TDL total climbed by 0.1 percent. You could see this as closing the gap on Spark. In very round numbers Spark is around a third of the total market and Vodafone is a quarter.
Chorus saw its share of the total grow by half a percent. It remains the third largest telco with getting on for 23 percent of the total.
2degrees is a climber. Its share of the total grew from 7.25 percent to 8.38 percent. This reflects the company’s strong performance in the market. While it is still a long way behind Vodafone and Spark, to be almost a third the size of Vodafone after seven years in the market is a major achievement.
The five largest telcos collectively account for almost 96 percent of the total TDL in this year’s determination. That’s down one percent from last year.
This is because of fibre and the rise of the regional fibre companies. Ultrafast Fibre, Enable and Northpower saw their total share climb from less than one percent of the total to about 1.6 percent.
This happens because as customers move from the copper network to UFB fibre some of the money those customer pays switches from Chorus to the regional fibre company. As more sign up for fibre these companies will continue to grow their share of the TDL, but at some point they will stabilise.
Most of the other changes are down to what scientists might call noise in the numbers. Although there is a newcomer in the TDL list this year, Now only accounts for 0.13 percent of the total.
Here in New Zealand, television stories dominate the week’s telecommunications news.
Sky and Vodafone bow to the inevitable and call off their merger. Meanwhile TVNZ goes all in on streaming video.
For more than 40 years journalists have written about convergence. The telecommunication triple play idea: combining voice, data and television, is well over 20 years-old. I first heard about it in around 1990. That’s right, it pre-dates the commercial internet1.
Almost overnight, we’re on the other side of the revolution. Some bewildered people are looking back and wondering what happening. The rest of us wonder why it took so long to get here.
You say you want a revolution
The revolution is not that hard to understand, television uses electrical signals. They used to be analogue. Digital is better. Once TV was digital, it was only a matter of time before it became another stream of bits travelling through networks.
It took longer for the industry to grasp what that means in practice. Today we have Netflix and a cluster of junior would-be netflixen. We have binge viewing. We have on-demand viewing. Yacht races from across the world beam on to our mobile phones as we commute to work.
What we still don’t have is the choice and flexibility we get from other online media. That’s coming.
If you look at the sweep of online history, a merger between Vodafone and Sky TV makes perfect sense. It made sense to the management and board of both companies. If you look at the deal with the eyes of a competition regulator, nixing the deal makes sense. It could have established a monster.
There is something odd about the Commerce Commission’s decision on the Vodafone-Sky merger. Yes, a merger would give one telco access to the crown jewels of sports programming. Yes, it could be exclusive access.
But Sky still has a monopoly on that material. A stand-alone Sky can cut an exclusive deal with a broadband company. Indeed, it’s quite possible that it will strike an exclusive deal with Vodafone. Today’s agreements and contracts between the two companies point in that direction.
So the Commerce Commission vetoed a merger because of something that will happen anyway. Am I alone thinking that is odd?
Whatever the logic, Sky and Vodafone have come to terms with the decision. The two issued a terse statement to the New Zealand Stock Exchange on Monday. It gave no reasons. But said they withdrew their High Court appeal protesting the Commerce Commission’s decision.
The marriage may be off, but the two companies remain good friends. The relationship is still on.
Free Sky Sport for Vodafone customers
In June Vodafone said it would give 12 months’ free Sky Sport to customers buying broadband and a basic Sky TV service. This is, more or less, the kind of arrangement the Commerce Commission worried about.
Elsewhere, Vodafone mobile customers can get a deal which includes free Sky Neon. And Sky is providing Vodafone with exclusive live coverage of All Blacks matches.
There’s a secondary commercial logic here, the phone company is now the team’s sponsor. Yet both deals have a whiff of the exclusivity that the Commerce Commission feared. Remember, in February the Commerce Commission said a proposed $3.5 billion merger would reduce competition.
Separate, but vertically-integrated
It said Sky and Vodafone had an opportunity to create a vertically-integrated business. That would give a single telco access to all popular sports broadcasting rights. There was a fear the market power wielded by the new business would lock out other potential bidders.
Now rivals fear the two non-merged companies are doing the same thing anyway. They are building a form of vertical integration without all the parts being in a single company.
The tragedy here is that, unlike Australia’s ACCC, our regulator can’t impose rules. That way it could OK the merger and insist the new company licence Sky content to all-comers.
There’s a ridiculous lack of broadcasting oversight in New Zealand. The Commerce Commission’s job is to ensure competition. We have intense telecommunication competition, but one company holds a TV sport monopoly.
TVNZ goes all-in on digital
From Monday, Television New Zealand will livestream channels One and Two. Viewers will be able to see all broadcast material over the internet on PCs, tablets and phones. Everything will be available online in HD 720p format. There will also be a new catch-up on-demand service.
Some material will be in box-set format for binge viewers. Programmes will be on Chromecast from next month and Apple TV later this year.
TVNZ plans to optimise its streaming service for mobile devices. It will also keep programmes available online for longer.
For now, there are no plans to do anything about television transmission. Although TVNZ says that could change depending on demand.
The ghost of Netflix
All these moves acknowledge the changing way people use television. The spectre of Netflix is somewhere there in the background.
The key problem for TVNZ is that it earns its revenue from advertising. This is more annoying and intrusive online than on broadcast TV.
If TVNZ wants to address Netflix head on, it might think about offering an ad-free paid option. Of course, it would need to have enough high quality material to make that viable. It could start by investing more in its news and current affairs programming.
People started talking about the idea in the 1990s. I first heard the term around the time Kiwi Cable was building an HFC network on the Kapti Coast. The first serious attempts at triple play didn’t come until later. ↩︎