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 VocusCommunications’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.
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.
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.
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.
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.
Vocus says its fibre broadband customers with unlimited data plans now download an average1 of 430GB a month. The average for all Vocus fibre customers is 425GB.
With data use doubling every 12 to 18 months, a terabyte monthly average is in sight.
Taryn Hamilton, Vocus Group’s general manager of consumer for Orcon and Slingshot says: “While the average might seem high, Vocus customers have always used more than the national average.
“We expect usage to double again in the next 12 to 18 months. Given that, it’s pretty insane to think that the average data use for fibre customers will soon be more than a terabyte.”
Streaming video the driver
Vocus users are in front of the pack, but the rapid growth the company is seeing is common to most New Zealand Internet Service Providers.
The swtich from copper to fibre is significant, but the underlying reason for rapid growth is streaming video.
As a rule of thumb an hour of standard definition streaming video uses about a gigabyte. Move to higher definition video and an hour uses three GB. Most streaming video services automatically adjust to deliver the highest possible quality picture the connection can manage.
The network company says traffic is now growing at 100 percent a year. That’s twice the rate data traffic grew in the pre-UFB era. The average amount of traffic per broadband connection across all New Zealand is now close to 150GB.
Fibre, copper traffic on the rise
Vocus says its customers with unlimited VDSL plans download an average of 288GB. Those on ADSL download an average of 225GB.
The average monthly download for all Vocus broadband customers is 288GB for those on unlimited plans and 230GB for all customers. That’s higher than the national average, but then Vocus’ customer base skews towards geeks, digital enthusiast and other heavy users.
Vocus unlimited plans dominate
Hamilton says the overwhelming majority of Vocus customers across all the company’s brands and speed options are on unlimited data plans. Almost every customer on the company’s 1000/500Mbps and 200/200Mbps products has an unlimited plan.
Around 85 percent of those on the 100/50Mbps service have an unlimited plan. The number drops to 77 percent for Vocus customers on VDSL services.
There’s a clear move to faster plans. Hamilton says most Orcon customers are already on fibre. Half of all new sign-ups choose the 1000Mbps plan. In part this reflects Orcon’s market positioning as the high-end brand for the most demanding internet enthusiasts.
We’re going to use the term average a lot in this story so let’s make sure we’re all on the same page. Here we’re talking about the mean. That’s the number you get if you add up all the data used then divide it by the number of users. There are people who don’t like looking at these numbers this way, but the mean is easier to understand and more useful when making direct comparisons.↩︎
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. The company also plans to give customers. an Xbox.
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.
Xbox is a different lure
Offering an Xbox is an interesting idea. Trustpower has found customers buy offering TVs and fridges.
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.
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.