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Orcon consumer general manager Taryn Hamilton says his company will be first off the block when gigabit fibre services go live around New Zealand on October 1.

Hamilton says his company will be aggressive going after the market. It is selling an unlimited, naked gigabit plan for $135.

To sweeten the deal, Orcon will give an Xbox One S to customers signing a 24-month contract. Those signing for 12 months will get one month free.

Hamilton says Orcon was the first ISP to offer Ultra-Fast Broadband and plans to stay ahead of the pack. “We’ve been providing gigabit plans in Dunedin since 2014 and we have the technology and systems to support high-end plans”, he says.

Orcon is only one of four broadband brands owned by Vocus, New Zealand’s third largest telecommunications company after Spark NZ and Vodafone.

The other Vocus broadband brands are Callplus, Slingshot and Flip. Although each sell similar products and in some cases share infrastructure and services, each addresses a different market sector. Orcon targets more technically advanced and more demanding customers.

Big cities first

Orcon says it has already begun taking orders for its gigabit plans in Auckland, Hamilton, Tauranga, Wellington and Christchurch. Dunedin already has gigabit fibre.

Hamilton says existing customers who order an upgrade this week can expect to download at gigabit speeds in about a week. It will take a little longer to put customers transferring from other ISPs online.

The first gigabit areas will soon be joined by New Plymouth, Whangarei, Cambridge and Te Awamutu.

To show the company’s preparation for faster fibre speeds Orcon showed journalists around its central Auckland facility, one of three sites in the city servicing fibre customers.

At the site, Orcon showed cabinets full of caching hardware including equipment for Google-You Tube, Facebook and Akamai. It has similar equipment in a handful of sites around the country. The ISP says it now caches more than half its network traffic locally and this helps gets data to customers faster.

Story amended to include updated price information. 

While CallPlus isn’t saying how much it paid to buy Orcon. If CallPlus paid the right price — a safe bet — the deal makes far more sense than others mentioned in recent weeks.

Selling internet services in New Zealand is brutal. Margins are wafer thin. Competition is tough. And the cost of customer acquisition is high.

The path to profit is to build scale so that unavoidable, fixed costs spread over the widest number of accounts. Then find ways of adding value.

It’s about to become more brutal.

In the copper era ISPs could differentiate by putting their own kit in exchanges. With fibre, they have to buy from the same menu of services from Chorus and the local fibre companies, all at the same price within any region. That leaves ISPs little room to play with.

So scale is essential. Orcon was never going to get there from here. CallPlus had a shout of building the necessary scale, but it would have been slow. Picking up a competitor short circuits that. It makes sense.

CallPlus’ press release says it has a 15 percent market share. I suspect there could be more consolidation to come.

Tom Pullar-Strecker reports on signs Sky Television is about to buy Orcon in Sky TV may enter internet market.

He joins these dots:

Orcon director Warren Hurst indicated late on Friday evening that a deal for the sale of the internet provider was being worked on over the weekend.

Minutes earlier Sky Television said it expected to make an announcement about a “new Sky development” by Wednesday morning.

If Pullar-Strecker is right, the story is great journalism.

Great journalism, but a poor business strategy by Sky TV.

Orcon’s tricky position

Orcon is the number four internet service provider in New Zealand behind Telecom NZ, Vodafone and CallPlus.

It is a relative minnow. The company has around 60,000 subscribers and makes up about five percent of the market.

Last year a group of private investors purchased Orcon from state-owned Kordia.

Loaded with debt

Although nothing official is on the record, industry gossip says the deal involved vendor finance from Kordia. This hasn’t been paid. The private investors have run out of money and need to sell.

Orcon’s problem is that providing internet services is a relatively low-margin business with high capital and customer acquisition costs. The two quickest routes to making money mean either finding ways to add value or from becoming larger and winning economies of scale.

Which means, at the right price, Orcon is a worthwhile purchase for another ISP wanting to build scale.

However, the asking price of $500 or thereabouts per subscriber is too high. That’s despite there being value in taking a competitor out of the market.

In other words, a rival ISP might snap Orcon up at a fire sale price, but it wouldn’t pay top dollar.

To make matters harder, Orcon ranked badly in the Consumer magazine comparison. Customer service is a particular problem. That suggests Orcon’s buyer will need to invest in technology and systems.

A good fit for Sky TV?

If Sky is looking to buy Orcon, it is because the pay television company thinks it can add value. It won’t be bulking up unless it buys other ISPs. While this is not out of the question, there’s no industry buzz about a deal being in the offing.

Sky doesn’t need Orcon to distribute its programming. It already has an exclusive partnership with Vodafone for that.

Buying puny Orcon would jeopardise a potentially strong Vodafone revenue stream with few overheads. Sky doesn’t have in-house ISP expertise, finding that would be another problem.

On the other hand, Sky has an efficient marketing and customer service machine. It has been hugely successful. Integrating an ISP into Sky’s customer service operation could make sense.

Problem child

There’s another reason Orcon is the worst possible ISP for Sky TV to acquire: Kim Dotcom.

Orcon used Dotcom to advertise its business earlier this year — whatever the rights and wrongs of the litigation and other actions around Dotcom, the man’s name is associated with file-sharing. That’s going to be a headache for Sky, which sits at the polar opposite extreme of that debate.

By all accounts the Dotcom advertising campaign was not a huge success. Yet I suspect it may have struck a chord with consumers who, let’s say ‘lean towards content piracy’. Dealing with that will be a challenge for Sky and may cause even friction in its relationship with Hollywood studios.

I don’t see how this issue can end well for Sky.

There’s yet another potential fish-hook. Until now Sky has managed to, largely, steer clear of the Commerce Commission and telecommunications regulation. The opposition parties have already made noises about this. If Sky becomes an ISP, it’s going to be harder for Sky to stay under the regulatory radar.

It’s unlikely whatever benefits Orcon brings to Sky will be adequate compensation for regulatory pain unless it is thinking of making further acquisitions in the ISP and telecommunications market.

Media reports suggest 2degrees is in the race to buy Orcon.

If 2degrees couldn’t find the $22 million to buy the third chunk of 700 MHz spectrum, it can’t afford Orcon.

In hindsight, the government’s 700 MHz spectrum auction was a great deal. The reserve price for each paired block of spectrum was set at $22 million. Thanks to the rules that meant each of the three carriers could each buy three blocks at the reserve price.

Vodafone and Telecom NZ picked up their full allocation, 2degrees purchased two blocks leaving one on the tablet. This was later sold to Telecom NZ for $83 million.

Which means 2degrees couldn’t find $22 million ito buy an asset the market prices at $83 million. That’s a return in less than six months of around 270 percent.

Compare this missed opportunity with buying Orcon. The formerly state-owned ISP and phone company is in trouble. It lacks scale in a market where scale matters.

Orcon is essentially bankrupt. Regardless of the price, Orcon needs a serious cash injection to get back in the game. I don’t have access to the numbers, but I suspect it needs considerably more than $22 million.

For what?

Certainly not a quick return of 270 percent.

ISP margins are not high, shareholders are happy if they can manage a 10 percent return on capital.

Fixed line or double down on mobile?

The conventional thinking says 2degrees needs a broadband and fixed-line business so it can offer complete telecommunications packages to, allegedly, lucrative business customers. It’s about 2degrees being competitive.

That’s not a stupid idea, but nor is it straightforward. Those bundles work for Vodafone and Telecom NZ partly because they give opportunities for cross-subsidy and partly because they allow a centralised, single bill. 2degrees would need to find those cross-subsidies and splash out on a new billion system. None of this is cheap.

We could wake tomorrow and find 2degrees has acquired Orcon. No doubt there will be calming words from the management about ‘synergies’, cost-savings and unlocking value.

But I’m not convinced. If 2degrees can’t find $22 million to buy $83 million of spectrum, an appreciating asset, it doesn’t make sense to buy into Orcon’s financial black hole.