Mobile phone handsetA 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.

A lack of retailer diversity is the issue that triggered the mobile market review. Last year the then Communications Minister Simon Bridges wrote a letter about it to the Telecommunications Commissioner Stephen Gale.

Bridges writes:

“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.”

Where are the MVNOs?

The lack of MVNOs in New Zealand is beyond debate. In many markets, these alternative carriers account for a large slice of the total market. Here MVNOs barely register.

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.

The Warehouse

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.

Skimpy data plans

The second sign that competition doesn’t work well in New Zealand’s mobile market is the skimpy mobile data plans on offer. In recent months carriers have begun selling what they call unlimited data, but the small print makes it clear they are anything but unlimited.

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.

5G networks

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.

Sensible

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.

Mobile market competition issues ComCom should watch was first posted at billbennett.co.nz.

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.

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.

Also on:

Vodafone TVYou need a fast fibre connection to use the new-look Vodafone TV. Less than 100Mbps won’t cut it. That means a UFB connection or Vodafone’s own FibreX alternative.

You also need a Vodafone broadband account. The service is company exclusive. CEO Russell Stanners says he hopes customers who like the look of Vodafone TV will reward his company with their business.

Vodafone has offered a TV service for some time. Its 2013 earlier incarnation was, in effect, a version of Sky TV’s My Box reworked for the internet.

The new version is something else. The hardware is a puck-sized box packaged with a remote control. In some ways it is like Apple TV.

It’s not about the hardware

There’s not much to the hardware because there doesn’t need to be much. The cloud does all the heavy lifting. An Amazon server stores all TV shows, movies and other video. It could be in Australia, but it could be anywhere in the world.

Cloud storage has the vast catalogue of material and the user’s own saved program choices.

There are also mobile clients for phones and tablets. Stanners says, you might be sitting at home watching the All Blacks test on a large screen before going on a trip.

When your taxi arrives, you can press pause on the big display. Load yourself in the car and resume watching the game from the point where you stopped en route to the airport. Pause again, dump your bags and find a seat in the lounge before getting back to watching the game on your tablet.

Stanners says the experience is seamless and brings all the screens together. Vodafone wasn’t able to show the hand-off at the Auckland event to show off the product. Yet staff were able to show how well Vodafone TV works on big screens and on mobiles. It is impressive and like all impressive technology has a faint whiff of magic about it.

Reverse electronic programme guide

Using the cloud has other advantages. There’s no likelihood of running out of local storage. And there’s a powerful reverse electronic programme guide.

This makes it easy to find the shows you want. One neat twist is you can use your mobile phone to cue big screen content. It’s a form of on-demand programming. Armed with the reverse programme guide, you can search back through the last week or so to find shows that you may have missed. The actual timespan wasn’t discussed.

Vodafone TV uses the company’s proprietary intellectual property. The company has a similar product in parts of Europe. Stanners says there has been a huge amount of local input into the service on sale here. Not least, is the work clearing the rights with content owners to build the reverse electronic programme guide.

Vodafone TV: made for Sky merger

The TV-as-a-service product was already in the pipeline when Vodafone planned to merge with Sky. It shows what Vodafone was able to bring to the party. Sky, meanwhile, owns the bulk of content. It will all be there on Vodafone TV, but it’s isn’t an exclusive relationship. The device is able to run apps and from day one there will be Netflix, YouTube and content from Mediaworks. TVNZ will join them soon after.

Vodafone was coy about the precise launch date and the cost. Stanners says it will be soon. There was a whisper at the event that soon means the next week or two. We could have the new Vodafone TV before we have a government.

He wouldn’t talk prices, but Stanners says they will be competitive. Again, the word around the event is that it won’t be expensive. There will be add-ons, some premium content and extras like Netflix subscriptions. At this stage customers will have to buy Netflix themselves, but Vodafone may yet offer it.

Party-on dudes

It doesn’t stop there. Stanners says one advantage of Vodafone’s approach is it makes distribution easy for smaller content providers. He says that means we could see the emergence of Wayne’s World-like niche channels.

The event made it clear there is still a strong relationship between Vodafone and Sky. Vodafone TV delivers most of what a merged operation could have achieved. It does so without causing regulatory ripples. There is no legal compulsion for Sky to offer the same content to other broadband suppliers.

Vodafone TV puts the company in a strong competitive position. It should be able to grow its share of the broadband market. Yet even with stellar growth it will struggle to match Sky’s satellite reach. It goes places fibre doesn’t.

Fibre is important to Vodafone TV. You need a solid, fast, reliable connection for it to work.

Chorus and the other fibre companies have graphs that show how fibre uptake took-off. It happened first when Spark introduced Lightbox. Then, again, when Netflix opened in New Zealand. There were two clear inflection points.

Inflection point

It wasn’t only uptake. The graphs also showing how much data users download. These also turned corners at the inflection moments. Expect a similar effect as Vodafone TV kicks in.

Close Vodafone watchers may have spotted a theme with the company in recent months. Vodafone group product director Sally Fuller was in town earlier this year. The main thrust of her presentation was that we’re moving to: “Everything-as-a-service”. She says the ownership of things is on the way out, instead we buy outcomes.

This is something you could miss in Vodafone’s TV announcement. Yes, it is a flash new product. It has the capacity to delight customers and win business from rivals.

At the same time it is another step closer to “everything-as-a-service”. This is the future world Vodafone refers to in its advertising. Vodafone TV is more than a product, it is a strategy.

Also on:

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?