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Vodafone says it will start moving all its copper landline customers to a voice over IP service later this month.

The Dominion Post reports Vodafone will move customers with VDSL connections first. Those on the Vodafone FibreX cable network and customers with older copper connections will move next year.

Vodafone consumer director Matt Williams says the move is a response to Spark’s planned PSTN shut down. In April Spark said it will close the old telephone network by 2022. Vodafone buys PSTN services from Spark.

No more languishing

Williams says the early change over is: “so our customers can take advantage of the benefits of this technology as it evolves versus languishing on an outdated network.

Vodafone customers with UFB fibre connections already have VoIP calling. Until now FibreX customers have used copper lines for traditional phone calls.

The company says it will send customers detailed information and provide support before the upgrades start. For most the change will mean no more than unplugging existing phones from the wall and plugging them into a broadband modem or router.

There may be issues for people with alarm systems that use copper phone connections.

Vodafone’s move to VoIP is a long way ahead of necessity. While Spark said it would close its PSTN service, that’s a five year process. It means replacing hundreds of telephone exchanges and network nodes with three new nodes.

New Vodafone VoIP business plans

Vodafone will offer business users new all-in-one packages that includes voice calling and internet. The Office Net Unlimited plan is for VDSL users, Office Net Unlimited is the fibre version. Both plans cost $100 a month but require customers to sign for a 24-month term. As the name suggests, the plans include unlimited voice calls.

Office Net and Office Net cost $110. They include 200GB of data and 500 minutes for calls to anywhere in the world.

Vodafone VoIP transition to start this month was first posted at billbennett.co.nz.

Commerce Commission Monitoring ReportLast 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 dominates

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.

The almost in that last paragraph is because the Commerce Commission’s Annual Telecommunications Monitoring report for 2016 shows Spark’s share of fixed line retail revenues as a line item. It has been falling for a decade.

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.

Broadband market

Retail broadband market share NZ 2016

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 NZ sale and broadband competition was first posted at billbennett.co.nz.

Chorus active wholesaleComputerworld New Zealand reports that Chorus says it has moved to ‘active wholesale’ to stem the loss of customers to rival networks.

The story covers comments made by Chorus CEO Kate McKenzie at the company’s annual general meeting. She says the number of connections on the Chorus network has fallen following Spark’s move to push customers to its fixed wireless broadband services.

She says: “Total connections reduced by about 125,000 last year and by a further 20,000 in the first quarter to the end of September”.

From passive to active wholesale

To deal with this Chorus has moved from being a passive wholesaler to taking a more active role.

In response, McKenzie said Chorus had “gone from being a passive wholesaler to being more active in the marketplace. We can’t rely on all retailers to promote our products for us when they have their own competitive motivations.”

Among other things this has led to a Chorus information campaign highlighting the performance benefits of fibre broadband over a wireless service.

There has also been advertising promoting fibre. McKenzie told the AGM this is already showing results with defections to wireless slowing in recent months.

Follow the money

It’s not hard to understand why Spark wants to move customers on to fixed wireless connections. It makes a lot more money that way.

When a customer buys a fibre broadband connection from Spark, the company pays around $40 wholesale fee to the fibre company. In much of the country that’s Chorus, but the same applies in areas serviced by Northpower, UFF and Enable.

The wholesale cost of a line is around 40 to 50 percent of the price Spark charges its customers. So cutting out the wholesale level means better margins and greater profit. There’s enough room to pass some of the saving back to the customer.

Control

Aside from the money, a fixed wireless connection keeps everything under Spark’s control. It means it becomes less reliant on others. At the same time, it regains some of the benefits of vertical integration.

In a normal market this would give Spark leverage to negotiate better rates from the fibre companies. Spark is by far the largest buyer of broadband connections, so it could expect something for economy of scale and something else to counter the wireless broadband threat.

That’s not how New Zealand’s open access fibre broadband market works. Prices are regulated by the Commerce Commission, fibre companies are not allowed to play favourites. They can’t offer one rate to Spark and a different rate to other players.

The wireless threat

When this model was first drawn up, wireless wasn’t a serious threat to fibre. At the time I asked then Communications Minster Steven Joyce if the rapid development of wireless broadband had been considered, he said it had not and dismissed the idea the technology could one day compete with fibre.

In a sense wireless broadband doesn’t compete with fibre. It can’t deliver high speeds and the big wireless operators have kept tight caps on data downloads to stop networks from overloading.

And yet not everyone needs gigabit speeds and vast quantities of data. Fixed wireless broadband is ideal for low-use customers. It also makes sense in areas where fibre is not available.

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This week the Commerce Commission published its draft numbers for the $50 million Telecommunications Development Levy. In a way the TDL acts as a report card on the shifting fortunes of the main telecommunications companies.

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.

Investing in rural networks

The TDL helps subsidise investment in rural networks. Most of the money will go back to three of the biggest payers. Spark, Vodafone and 2degrees, as the Rural Connectivity Group, won the contract for bid the second phase of the Rural Broadband Initiative.

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.

Vocus is down a smidge at 3.25 percent of the total. It is less than half the size of 2degrees and less than a tenth the size of Spark. The company’s relative size could mean few regulatory hurdles if other New Zealand telcos attempt to buy it.

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.

Fibre effect

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.

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cellular towerEarlier this year Communications Minister Simon Bridges wrote to the Commerce Commission asking it to investigate competition in the mobile market.

Last Friday the Commerce Commission confirmed the study will go ahead.

The Commerce Commission says study aims to “better understand how mobile markets are developing and performing, particularly around the competitive landscape and any emerging competition issues”.

In his letter, Bridges noted that, unlike many other countries, New Zealand does not have thriving mobile virtual network operators.

Mobile virtual network operators

MVNOs are a feature of many mobile markets around the world. They can account for a large slice of the market. In Australia MVNOs are about 10 percent of the mobile market.

Often run by well-known consumer brands, MVNOs buy wholesale services on existing mobile networks. They then sell them to customers without needing to invest in infrastructure.

MNVOs can increase competition and give consumers greater choice. They also tend to reduce prices and squeeze margins.

Carriers unimpressed

New Zealand’s mobile carriers are not impressed. Spark, in particular has spoken out. The company says there is no case for new mobile regulation.

The company’s general manager regulatory affairs John Wesley-Smith is quoted in a notice to the NZX on the study. He says: “We have three world-class networks delivering prices that are well below OECD averages and three mobile network operators that are ploughing significant investment into an intensely competitive market.”

This is largely true. Seven years ago before 2degrees entered the market, New Zealand mobile prices were high by international standards. Today prices are a touch below international averages.

Moreover, margins have dropped. While the mobile networks are solid businesses, they are not awash in profits. It took until this year for 2degrees to make its first profit.

That alone tells you the market is competitive.

It also speaks volumes that 2degrees, the relative newcomer and the smallest mobile carrier, is not calling for more regulation. In the past it has been the beneficiary of intervention.

Competitive enough?

You could argue, the carriers almost certainly will argue, that consumers are well served by the existing competition. From this point of view the market settings appear to be right.

And yet not everyone is happy. Last month the NBR carried a report saying Vocus general manager, consumer Taryn Hamilton believes his company cannot grow its mobile business without regulatory intervention.

Vocus has an MVNO agreement with Spark. The Vocus brands, Callplus, Slingshot and Orcon offer mobile services. There is also a 2degrees MVNO agreement with The Warehouse.

In market terms these deals are a freak show. The existing MNVOs don’t add up to more than about one percent of the total mobile market. And that estimate may be generous.

Elsewhere in the world MVNOs can be seen as a positive by carriers.

Often the customers who choose an MVNO are the ones who would already be looking to move away from their existing accounts. If they choose an MVNO on the carrier’s network, the bulk of the revenue they generate stays with the carrier. There’s churn, but not churn to a rival carrier.

A new kid on the block

The other carrier-point-of-view argument in favour of boosting MVNOs in New Zealand is that it would keep out a fourth network. None of the existing carriers would welcome a new competitor.

In the past that may have seemed unlikely in a small market like New Zealand. However the market dynamics have changed.

New Zealand has four sizeable telcos: Spark, Vodafone, 2degrees and Vocus.

Vocus’ parent company faces challenges at the moment and is focused elsewhere. However, Vocus has been an aggressive investor in the past. It could be again.

Unlike smaller telcos, Vocus can buy spectrum. It could bid for new spectrum licences. It could build a fourth mobile network.

If the company decides mobile is straegic and can’t get what it considers to be a reasonable MVNO agreement with existing carriers, this is a plausible strategy. Let’s face it, mobile is stratgic for every sizeable telco.

Given this, Spark, Vodafone and 2degrees might do well to see the Commerce Commission study in a more positive light. Being forced by the regulator to offer more generous MVNO agreements would be preferable to facing a new rival.

Who’d want that?

Spark press release:

Spark announced today that Cambridge and Turangi have become the latest towns capable of getting the fastest mobile data speeds in the country, as 4.5G is switched on in the two Waikato locations.

The launch of 4.5G in Cambridge and Turangi follows other single-tower deployments covering limited areas in the Christchurch CBD, along with the activation of a cluster of five towers in Queenstown, making a total of 10 sites, with more on the horizon.

Source: Spark lights up 4.5G in Cambridge and Turangi

The most remarkable aspect of this story is how quickly Spark is moving to 4.5G.

New Zealand is already up to ten towers. The press release says another ten will be active over the next year.

It’s noticeable that, to data, neither Vodafone or 2degrees have made any public moves or announcements in this direction.

4.5G is preparing for 5G

Of course, the real story here is that Spark is paving the way for a transition to 5G. Industry insiders expect the new standard to appear in its finished form some time early next decade. Spark marked out its turf. It wants to lead on 5G.

One aspect not widely discussed is that many telcos, presumably Spark is one, will make adjustments and upgrades to 4G before moving to 5G. Industry insiders talk of 4.9G.

Further down the press release Spark mentions the new towers will also be used for fixed wireless broadband. It will be interesting to see how it performs in these places given the reports of problems in some other spots.

Spark admits today’s handsets and wireless modems don’t allow users to get all the benefits of 4.5G. Yet, owners of modern phones will get most of the performance boost. You can expect to download data three to five times faster than on today’s cellular networks.