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Bill Bennett

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Fly Air Orcon for business class broadband

Orcon is trying something different. It plans to ask customers to pay $15 more each month to get business class service.

This is a smart idea.

For years, New Zealand broadband competition was all about price. In recent years there have been content bundles. Buy a service and get free Netflix or half price Amazon Prime.

Sky turns this recipe on its head. The company sells lower cost broadband to customers buying its content.

Until now, that’s been about it for broadband competition: a relentless focus on having the lowest price. It’s competitive to the point of companies competing away most of their profits

Competitive but one dimensional

It wasn’t meant to be this way.

When New Zealand’s fibre network was starting-up, one of the big questions was “how will the players compete”.

The Ultrafast Broadband network is open access. That means there’s a wholesale level and a retail level. Wholesalers cannot compete with retailers.

Chorus, Northpower, Enable and UFF are the four wholesalers. They each have a monopoly in set areas.

There’s another important rule behind UFB: the wholesalers can’t play favourites. They must offer the same terms to every fibre retailer.

Undifferentiated

This means, in effect, fibre internet service providers all sell the same thing. There are nuances about how they set up backhaul and buy international links.

Yet on the whole a Fibre Max plan from one ISP is much the same as a Fibre Max plan from another ISP. In marketing-speak, the options are undifferentiated.

One of the obvious ways to differentiate this fibre ISP from that ISP is to offer better customer service.

This should be easy enough. We all know what good customer service is. And companies know how to provide it. The problem is that it comes at a cost and that’s an issue when margins are pared to the bone.

Orcon has pulled this part of its product offering out, shined it up, and sells it as an option add-on.

Orcon Priority Support

For an extra $15 a month Orcon’s Priority Support customers get pushed to the front of the queue. If there’s a problem, Orcon will send an on-site technician within a day.

On paper this resembles the service offered to motorists by the AA.

For this to work, Orcon has to keep its word. The idea will collapse in days if a forum like Geekzone is full of angry customers who paid the premium and had poor support.

At the same time, Orcon needs to make sure the customers who don’t pay for Priority Support continue to get decent treatment, although not as good as those who pay the premium. If everyday support degrades as a result of this initiative, the company’s reputation will take a hit.

While this idea is original for consumers, it’s in line with what business customers who pay premium prices can expect.

Orcon puts residential on equal footing with business

And that’s the other part of Orcon’s pitch. Orcon chief executive Taryn Hamilton says the company has scrapped the distinction between business and residential customers.

You could look at it as unbundling the distinction.

Orcon has other ideas that differentiate the company from many rivals.

It is one of a handful of ISPs to offer customers Hyperfibre. This is the Chorus product that lifts fibre speeds. There’s a new 2Gbps Hyperfibre option. Orcon will continue to sell 4Gbps Hyperfibre and from early next month will offer an 8Gbps service.

The Wi-fi Pro option promises to give customers a strong wireless network signal throughout their home. Hamilton says the company checks out the size of a customers property and sends enough Google mesh Wi-fi units to provide blanket coverage.

Orcon also has a 4G failover option. Should a broadband connection go down, this will automatically switch to a 4G mobile network. Vodafone offers a similar 4G failover product called the Ultra Hub Plus.

Like Hyperfibre and Priority Support, the 4G network backup is a product that would, in the past, be offered to business customers.

Flip reborn as affordable broadband brand

Last week Vocus moved customers off its Flip brand. It grandfathered the existing plans and prices.

This week it rebooted Flip as the Vocus Group’s low-cost broadband option for less well-heeled New Zealanders.

Flip has a single plan. The brand’s chief executive Taryn Hamilton says that’s to keep things simple and minimise operational costs.

One plan to rule them all

For $15 a week, a customer will get a fibre line running at 50mbps in Chorus areas or 30mbps in other fibre areas. This comes with unlimited data. There are no contracts but there is a $30 set-up fee. Customers can opt to pay weekly or fortnightly.

The price and the pay weekly or fortnightly approach goes a long way to reach across the digital divide. At the same time it makes a great option for students living away from the family home or for families wanting a connection at the bach.

Low cost Flip

Flip’s $15 a week price makes it one of the cheapest fibre broadband deals on the market. Contact Energy offers a $60 a month plan, slightly cheaper than Flip which works out at about $67 a month. But to get the Contact price, you must buy electricity from that company.

One way Flip keeps down costs is that it assumes customers have their own wireless router. The company does not send out new ones when a customer signs up.

Vocus Taryn Hamilton recycled wireless router
Flip chief executive Taryn Hamilton at last month’s event to promote recycled wireless routers

If a customer doesn’t have their own wireless router, Flip has a stock of suitable refurbished and will courier one out for a flat $25.

Given that the regulated wholesale price of a 100 mbps fibre line is $47.15, Flip is, to put it mildly, a low margin operation. And given that the low cost service is likely to attract business from less well-off consumers, there is a high risk of default. The shorter billing cycle should help there, if a Flip customer misses a payment, there won’t be much of a debt to worry about.

Hamilton says customers who drop out will be welcomed back, but they will have to pay the $30 set-up fee again.

Vocus buys Stuff Fibre in consolidation play

Buying Stuff Fibre is a medium-sized consolidation play for the Australian-owned telco.

Vocus’s customer numbers will climb 10 percent when the company absorbs Stuff Fibre. The Australian telco picked up the media company owned ISP for an undisclosed sum.

The deal will add roughly 20,000 broadband customers to Vocus’s existing 200,000 customers.

Vocus remains New Zealand’s third largest internet service provider behind Spark and Vodafone. After the deal it will have around 13 percent of the market.

Stuff Fibre is part of the Stuff media group, which is also up for sale.

Unusual ISP

It is unusual in the telecommunictions sector because it is a media company with a broadband business. More commonly broadband companies have forayed into media with projects like Spark Sport and Vodafone TV.

The other unusual aspect of Stuff Fibre is that it is, in effect, a virtual ISP. Stuff Fibre doesn’t own and operate its own infrastructure. Instead it buys these as a service from Devoli.

This was a smart strategy for a business with a recognisable brand, but without in-house broadband expertise.

Stuff Fibre’s virtual nature will make it easy to integrate into the Vocus business. That’s often a sticking point with broadband company acquisitions. Some well known broadband brands remain famously unintegrated years after acquisition.

Vocus New Zealand chief executive Mark Callander
Vocus New Zealand chief executive Mark Callander

The ISP was, in its own small way, innovative in other ways. Mark Callander, who heads Vocus New Zealand made a point of mentioning the in-home Wi-Fi troubleshooting services. He says he plans to make this available for Vocus’ existing customers. Stuff also tried a content play with Stuff Pix.

He went on to suggest other acquisitions could be in the pipeline. For years industry observers have expected to see consolidation among ISPs. New Zealand is significantly oversupplied with service providers, many other markets only have a handful of players, there are 90-odd here.

It’s possible the Covid–19 disruption could trigger a wave of more acquisitions, but don’t hold your breath. The shape of the market has been consistent for years now with more new entrants joining than mergers taking brands out of contention.

Callander also says Stuff Fibre staff to will transfer to Vocus.

AGL walking from Vocus speaks volumes about telco sector

Last week Australian energy company AGL withdrew its A$3 billion takeover offer for Vocus. This came only two weeks after Swedish private equity firm EQT halted its $3.3 billion transaction.

In the last two years, four potential buyers have looked, then decided not to buy the Vocus Group.

In 2017 private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners both withdrew bids. In each case, the deal floundered at the due diligence stage.

Bruised Vocus

It’s been a bruising experience for an already damaged Vocus. When AGL walked away from this week’s deal Vocus shares lost a third of their value.

On the surface, the bad news apparent during due diligence means there’s something bad in the financials that Vocus hasn’t disclosed to shareholders. It’s something that well-funded companies are not able to spot before bidding.

Reports in Australian media say that bidders walk away from Vocus because the plan to turn around the business is more complex than it appears from outside the company. There is something in this, but it is probably not the whole story.

Consolidation

Vocus is the result of a number of telecommunications industry mergers. It is a rare example of classic industry consolidation.

Along the way, Vocus acquired other companies. At times it has struggled to integrate the parts. That’s not uncommon in the telco sector.

Vodafone New Zealand acquired a number of businesses. Years later it has still not completely integrated the various back-end systems. Customer enquiries can mean service agents need to reference several screens to answer simple questions.

This Balkanisation is how large companies made up of smaller concerns often operate.

So long as there is plenty of forward momentum those tricky integration issues can be kicked down the road. Over time they can either be fixed or, for one reason or another, they simply stop being a problem.

The big Vocus problem

That’s a problem for Vocus, but it isn’t the big one. Far more serious is that Vocus’ Australian consumer business is losing money.

In part that’s because Australia’s NBN model has flattened the market to the point where it’s hard to turn a buck selling broadband. There’s no clear path to profitability.

AGL looked like a good buyer because it’s a power company. Combining power and broadband sales is a tried and tested strategy. If the AGL bean counters looking at Vocus’ books realised that could turn things around, the problem is worse than most of us thought.

Even though Vocus is, to some degree, a special case, it isn’t that out of line with the rest of the telecommunications industry.

No quick path to profit

All of which says bad things about the state of retail telecommunications. The private equity investors have looked and seen there is no quick path to profit.

More patient, longer-term investors like AGL, who have access to the magic formula of adding power sales to a broadband subscription don’t think it looks viable either.

If you work in the sector you might want to worry about that.

Vocus Group back in play with private equity bid

EQT Infrastructure’s A$3.3 billion takeover bid for Vocus Communications could see a new owner for the New Zealand business.

Vocus Group New Zealand includes the Orcon, Slingshot and CallPlus brands along with other assets. It is the third largest telco behind Spark and Vodafone.

The potential buyer, EQT Infrastructure, is a Swedish private equity investor.

Vocus commands good price

EQT’s bid, which became public on Monday, put a 35 percent premium on Vocus Communications’ trading price at the time.

Insiders say the bid is likely to succeed. Although there are other potential bidders waiting in the wings should EQT’s offer fall through. Either way, Vocus is likely to find a new owner soon.

The EQT bid comes only days after Infratil and Brookfield’s successful bid for Vodafone New Zealand. It suggests other telco sector mergers and acquisitions could be on the way.

This is not the first time investors have attempted to buy Vocus Communications. In 2017, private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners, made a bid for the company. That was later withdrawn.

According to the Australian Financial Review, the key to renewed interest in the business is Vocus’s fibre assets.

Fibre infrastructure

Infrastructure is an increasingly popular investment class. The returns are relatively high and, in many cases, it faces little direct competition. Fibre assets of particular interest to infrastructure investors at present, they feel that its owners don’t always maximise its value.

The Australian Financial Review goes on to report it’s likely the buy will sell Vocus Communications’s retail business.

Presumably, this would also include Vocus’s New Zealand retail brands.

Vocus has New Zealand local fibre assets. It picked them up from the former FX Networks business now wrapped into the Vocus Group.

One interesting angle is that after 2022 regulated UFB wholesale prices will be based on network asset values. If fibre becomes a sought after asset for investors, that could put pressure on the regulated price.