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Chris Keall has the Vodafone overseas roaming story at the New Zealand Herald: Vodafone NZ increases global roaming cost from $5 to $7 a day. (The story is behind the pay wall).

A $2 price rise for overseas roaming doesn’t seem much until you realise it’s a 40 percent price increase at a time when inflation is close to zero. Few other service providers could get away with a 40 percent price hike.

That said, no-one can argue that New Zealand mobile phone margins are excessive.

Less than a beer

Nor could you argue that $7 a day for overseas roaming is not reasonable. If you can afford to travel overseas and you want to stay in touch, it costs less than a glass of beer. For many readers, it remains the best option and is far better than the bad old days of bill shock.

Vodafone’s first line of justification for the price rise borders on the ridiculous. Keall writes:

The spokeswoman said, “Vodafone launched Daily Roaming over five years ago and since then have made numerous improvements to the service, including expanding it from 23 destinations to now over 100. Included in the latest round of new destinations are Vietnam and Cambodia, which are hugely popular with Kiwis.

Chris Keall, NZ Herald, June 4, 2019

Vodafone benefits

The fact that there are more destinations may benefit customers. It benefits Vodafone more.

By giving the company a lot more opportunities to bill that $7 a day charge, it means much more revenue. It also improves internal costs by spreading the costs of administering overseas roaming charges across many more sales.

Let’s put it another way: imagine if New World said it was charging more for milk because it was stocking it in more supermarkets.

Vodafone has a much better argument when it says mobile data use is now running at three times the rate when the roaming service was first introduced. However, the cost of delivering a gigabyte of mobile data has fallen over time.

There’s a bit of snark about Vodafone’s customers not having to buy bundles… that’s how roaming works with Spark. And talk about one fixed price across markets where the costs are different. Well yes, but again, keeping the price structure simple is also of benefit to Vodafone.

Overseas roaming is revenue

Whatever the public justification, the increase is also about increasing revenue at a time when there’s little obvious growth. It’s also about improving margins. Both of these are fair enough, Vodafone is not a charity, yet for some reason, the company doesn’t feel able to say so.

The bigger concern for Vodafone customers could be that this is not the only price increase. Six months ago Vodafone jacked up broadband prices. There could be more in the pipeline.

Vodafone can’t go too far. As the Commerce Commission points out, New Zealand’s telecommunications market is competitive. If you don’t like Vodafone’s roaming price increases you can go elsewhere. The international equivalent of buying a prepaid Sim card in the first dairy as you leave the airport is also still an option.

Infratil is among the few companies able to unlock Vodafone New Zealand’s value. There is untapped potential. It may not be immediately obvious to other potential buyers.

That potential didn’t excite enough interest when the company was taken on the road after the Sky TV merger failed. Presumably, buyers looked in the wrong direction.

Most people see Infratil as an infrastructure company. It is that.

Infratil hold TrustPower key

Infratil also owns a little over half of electricity retailer TrustPower. This is the key to unlocking Vodafone’s value.

TrustPower isn’t any electricity retailer. It is also New Zealand’s fourth largest internet service provider.

Number four doesn’t mean big. Last year’s Commerce Commission monitoring report said TrustPower has a five percent market share of broadband connections.

That’s small. Even when added to Vodafone’s 26 percent, the two don’t get close to Spark. That company still has more than 40 percent of all connections.

Small but potent

If Vodafone plus TrustPower doesn’t alter the broadband balance of power, what is disruptive here?

The answer is Trustpower has found how to make more profit from connections. It sells bundles combining broadband and power in a single bill.

Buying Vodafone opens the door to a million Vodafone customers. Many of these will also buy electricity.

It turns out broadband and electricity are a potent mix. They may go together better than, say, broadband and pay TV.

Would you like fries with that?

TrustPower isn’t the only company to find value in the “would you like fries with that?” broadband and power proposition. Vocus acquired a small electricity retail business. It has been selling power to its customers.

Electricity and broadband have worked for TrustPower.

Both services need investment in billing systems. Billing is a large cost for both electricity and broadband retailers. Putting two services on a single bill trims costs. It increases margins by more than you might imagine. A few dollars per month times thousands of customers soon adds up.

Remember Vodafone has struggled in the past with billing.

There are other efficiencies. You don’t, for example, need to run separate call centres for power and broadband customers.

Golden handcuffs

These cost savings are nothing compared with the value Trustpower gets from having customers buy both services at once.

Customers who buy more complex bundles of services are less likely to go elsewhere. TrustPower cuts churn every time a power customer signs up for broadband. This also works the other way around.

A million Vodafone customers have already proved they are creditworthy. There is probably enough data to know which customers are difficult to deal with. It may even be easy to identify homeowners or lead tenants, the people most likely to buy electricity.

Asymmetric information

There’s another aspect to TrustPower’s offer.

You’ll notice TrustPower’s advertising splashes the headline price of broadband. Usually this is so much a month less than other high profile broadband retailers. In some cases, the first months are discounted. A normal rate kicks in a few months into a 24-month contract.

TrustPower sweetens deals by offering Samsung flat screen TVs or other inducements.

It’s easy for consumers to comparison shop for broadband. There aren’t many speed and data options.

Selling photons and electrons

It’s harder to comparison shop for power Both are low margin products. Both are competitive markets. It is often easier to make more profit selling electrons than photons.

Vodafone and TrustPower under a single umbrella means more market power. That’s not helpful when it comes to inputs, companies buy broadband at regulated prices from wholesalers like Chorus and Enable. It is helpful when muscling to the front of a queue with partners.

We haven’t even mentioned TrustPower’s earlier bid to establish a mobile virtual network operator business. If nothing else, the company’s executives would have looked closer at the economics of selling mobile. This is Vodafone’s core business.

Infratil invests in infrastructure

Vodafone was due to float next year. The parent company, the UK-based Vodafone Group, wants to get as much of its New Zealand investment out of the country. It plans to invest in places like India where there is more long-term potential.

One challenge Vodafone faces and would otherwise continue to face is finding funds to invest in 5G. Doing the job properly would cost the thick end of a billion dollars over the next decade. Infratil can cover the spend.

Sure, Vodafone has other attractions. It won’t all be about cross-pollination with TrustPower. Yet the million-plus creditworthy mobile customers who might be persuaded to switch electricity retailer, are an important part of the company’s value.

fibre-optics

On Thursday Chorus released its proposed unbundled fibre pricing for industry feedback. Would-be unbundlers responded with a noise resembling what you might hear when placing an electric guitar in front of an amplifier: a loud howl.

This was always going to happen.

New Zealand’s telecommunications regulations mean that the fibre networks must, by law, be open for unbundling from the start of 2020.

Unregulated, for now

For now, the unbundling process and the prices wholesale fibre companies can charge is not regulated. The idea is that the industry can hold commercial negotiations. If that doesn’t work, then the regulator will step in.

Unbundling worked well for some ISPs when Telecom was forced to unbundle the copper network over a decade ago. ISPs installed their own hardware at an exchange and paid Telecom a monthly access fee.

This worked well for a number of reasons. First, the service providers could cherry pick the most lucrative neighbourhoods. Second, there weren’t many exchanges and each exchange served a large number of customers. Third, the monthly access fee was regulated.

Bitstream then and now

It turned out that the price was considerably lower than the fee Telecom charged for bitstream access. Bitstream access was, to a degree, similar to the service ISPs now buy from New Zealand fibre companies.

The gap between these prices left ISPs with enough room to offer competitive prices to their customers or take the difference as increased margin.

Unbundling fibre is different. Instead of hundreds of exchanges each serving thousands of customers, there are thousands of fibre nodes each serving a handful of customers.

The other big difference is the way we price fibre services. Today’s layer 2 prices are regulated. Prices depend on the level of service, but typically they run from around $40 to around $65 for a gigabit service. The Commerce Commission based its pricing structure on a fibre company’s costs.

Difficulties

Now, this is where things get difficult for would-be unbundlers. The input cost difference for a wholesaler between operating a layer 2 service and an unbundled layer 1 service is pennies, not dollars. That $40 monthly access fee might drop to $38 or thereabouts if it was regulated along the same lines as a bundled line.

This doesn’t leave an unbundler with enough margin to play with.

Despite the unattractive underlying economics two telcos, Vocus and Vodafone, joined forces to push an unbundling programme.

Since late last year they’ve been showing a demonstration of what the technology might look like. They’ve also been dropping unsubtle hints suggesting that: ‘unbundled fibre had better be cheap’.

Like copper only different

Scratch the surface and its clear their thinking is the difference between bundled and unbundled fibre should be in line with things in the copper world.

Chorus’s proposal is that unbundling service providers pay a monthly access charge of $28.70 per line. This covers the fibre line from the customer to the nearest node, Chorus calls these nodes ‘splitters’. Usually 16 customers connect to each splitter.

On top of that, Chorus wants to charge $200 a month for the connection from the splitter to a central point where the service providers can connect the unbundled service to their own networks.

Unbundling at scale

You don’t need to be good with arithmetic to realise that this only works for a service provider if a lot of customers at any splitter want to buy their connection. A would-be unbundler would need to have more than a dozen connections at each node for prices to drop below the basic regulated bitstream monthly fee.

Although keep in mind here that an unbundled fibre line might operate at a blistering 10Gbps. That’s a service that could command a premium retail price.

To no-one’s surprise Vodafone and Vocus made it clear they don’t like the proposed price. A press release from the pair has the headline: “Chorus machinations could put competitive UFB on ice”.

Maths

In it, a clearly angry Vocus CEO Mark Callendar says the maths just doesn’t stack up. He is right. But the legislation was designed that way. There isn’t enough margin between layer 1 and layer 2 to make an ISP happy.

An access price that would please Callendar, at a previous media function he told me it should be under $20, would leave the fibre wholesale companies under water. They’d be bankrupt in no time and that would put critical national infrastructure at risk.

Back to the release where Callendar says: “…the Commerce Commission will now need to intervene, it’s as simple as that. The UFB network was designed to be unbundled and ultimately is an asset that the government has helped fund.”

The Commerce Commission was destined to be dragged into this row from the moment Vocus and Vodafone first announced an intention to unbundle.

Intervention

If it does intervene and assuming it follows a similar cost-based model, the would-be unbundlers are going to be as disappointed then as they are now. The economics of fibre unbundling mean it is a path that’s not worth the trouble, at least as far as residential customers are concerned.

Now, it’s quite possible that the spat you see on the surface is all there is. Yet there’s something else at play. Since the fibre network started, most of New Zealand’s service providers have raced to the bottom on price. It’s about the only point of difference they feel able to compete on.

As Vodafone CEO Jason Paris has said to me in a previous interview, they have competed away all the profits in the broadband business.

Thin margins

Margins are razor thin. Unbundling had potential to fix that. It’s also an opportunity for two high profile telcos to position themselves publicly as against New Zealand’s telecommunications regime without actually saying they are against the regime. Make no mistake, that’s the real object of their ire. 

In the public statements so far, they’ve poked the finger at Chorus.

There’s something in that. But Chorus is a creation of a telecommunications regime that the previous National government set up. The Labour government continued the same regime. There’s a broad political consensus that our telecommunications market is working as designed.

You could see Chorus as the government’s proxy in these matters. A useful punching bag if you don’t like the rules. 

Equivalence

One part of the disliked regime is something called equivalence. The idea is that Spark, Vodafone and Vocus get exactly the same prices, products and services from fibre companies as a five-person regional ISP working in rural Taranaki.

The big firms hate that. They like to use their clout and economies of scale to negotiate better terms from suppliers. Regulation stops them.

Consciously or unconsciously, Vodafone and Vocus hope the government is listening. That’s why so much of their rhetoric about unbundling uses politician-pleasing words like ‘innovation’ and ‘competition’.

Competition

Unbundling is clearly a competitive1 move, but it’s not really innovation in the sense we normally use the word. Assuming it is doing everything right at the back-end, the only practical option an ISP has to innovate with unbundled fibre services is to remove some of its capability from certain customers.

Remember this as the war of words heats up in coming months and the various parties troop into the Commerce Commission. They’d like to get a lower price for unbundled fibre.2 Who wouldn’t? But what they really want is to take back a little control and restore profit margins.

Disclaimer: Chorus pays me to edit the Download magazine and a weekly newsletter. It didn’t pay me to write about unbundling. Indeed, this post doesn’t reflect anyone’s opinion other than my own, certainly not Chorus’. No one vetted or otherwise approved this. Any mistakes are down to me. Your corrections or alternative opinions are welcome.


  1. Spark has options with its fixed wireless broadband. These should ramp up when 5G arrives. Vodafone ought to be able to do the same, but the local firm isn’t getting the investment it needs from Vodafone Group. Unbundling is a cheaper option. ↩︎
  2.  

  3. I’d expect the Commerce Commission to insist wholesale fibre companies propose a single per-line price in place of the more complex line and splitter tariff. ↩︎

In ‘Climate of fear and anxiety’: Some 200 Vodafone staff offered voluntary redundancy, says union Chris Keall, New Zealand Herald writes:

Insiders have told the Herald there is a broad expectation that around 400 of 2800 roles could go.

Paris stressed in an earlier interview that there was no set number. Different departments would gain or lose staff depending on the outcome of the ongoing review.

And he while he has acknowledged the possibility that call centre jobs could be offshored, Paris also said no decision would be made that would hurt customer service.

As part of an international company, Vodafone NZ was able to tap into its parent’s “Centres of Excellence” in other territories.

Paris says Vodafone NZ fell short of targets last year. His brief is to get the subsidiary into shape this year for an IPO in early 2020.

As the story says Jason Paris’ job is to tidy up Vodafone New Zealand’s business so it is an attractive IPO. That way the parent company gets the maximum return on its investment.

Looking at cutting employee numbers is part of that. Compared with other similar sized technology companies1, Vodafone’s revenue per employee is low.

Taking costs out of a business can make it more attractive in the short term.

If Vodafone gets rid of 400 people out of a total of 2800, that’s almost 15 percent of the total. Potential investors will like that.

We shouldn’t forget job cuts are often devastating to the people involved. They are often also uncomfortable, even stressful for many of the staff who remain. It can hurt morale. If there are long term effects, they will probably show up after the IPO.

Outsourced call centres

One risk here is that Vodafone New Zealand has suffered from poor customer service in the past. It has used overseas outsourced call centres that customers hated. A return to those days would damage the company.

Last year Consumer criticised the company after a satisfaction survey.

Vodafone was the only provider that rated below-average on all our performance measures – from customer support to value for money,” Consumer NZ chief executive Sue Chetwin said.

About three-quarters of Vodafone’s broadband customers reported spending a long time on the phone waiting to speak to a rep. Nearly half said the service was poor once they finally got through.

The company that performed best in Consumer’s survey was Spark’s Skinny subsidiary. Ironically Skinny doesn’t promise much in the way of customer service. Maybe that’s the secret success formula. Either way, if I was Jason Paris, I’d be taking a closer look at what makes Skinny tick.


  1. Vodafone has often talked of itself as a technology company. ↩︎

It’s remarkable that Vodafone ever thought it could get away with calling its HFC cable network FibreX. It always look like the exercise would end in tears.

This was a law suit waiting to happen. And boy did it happen.

At the New Zealand Herald Chris Keall writes Vodafone pleads guilty to some FibreX charges, will contest others

Vodafone has pleaded guilty to nine charges brought by the Commerce Commission over its “FibreX” service, but will contest a further 18 related to allegedly misleading marketing.

That’s total of 27 charges. In other words this is a big deal.

A rose by any other name

Most, but not all, the problems stem from the name.

I questioned the name when FibreX launched. A Vodafone executive explained with a smile that the name comes from the full version of HFC: hybrid FIBRE coaXial. He knew it was pushing things a bit.

HFC uses both fibre and copper cables. The network was first built almost twenty years ago. There are networks in Kapiti as well as parts of Wellington and Christchurch.

Vodafone inherited the network when it acquired TelstraClear in 2012.

Performance woes

Readers with long memories may remember that the cable network had appalling performance at that time. Yet it was capable of delivering television signals along with broadband data connections at a time the copper network would often struggle with video.

From outside it looked as if TelstraClear had under invested in the technology and even neglected the network.

The TelstraClear acquisition was a mixed bag for Vodafone. It accelerated the company away from being a mobile phone carrier into enterprise and fixed line markets.

It didn’t do much to grow Vodafone’s market share. The company’s overall market share in 2018 is the same as it was in 2009, despite swallowing a sizeable rival.

Potential millstone

In some respects the HFC network became a millstone around Vodafone’s neck. It was a support nightmare and hurt the company’s reputation.

In order to recover some of its value, Vodafone beefed up the technology moving to a new, far faster version of Docsis. While this could put it on a performance par with UFB fibre in theory, the practice proved somewhat different. HFC networks can suffer from congestion in ways the UFB network does not.

Nevertheless, it looked like a plausible alternation to UFB fibre.

FibreX vertically integrated

There is something else. Vodafone’s FibreX network is vertically integrated. The company doesn’t need to pay anything to a wholesale network provider. Vodafone gets to keep all the monthly subscription.

Vodafone launched FibreX launched a the peak of the nationwide UFB fibre build. It priced it at much the same level and its marketing went out of its way to present FibreX as a like-for-like replacement. It’s not.

The fibre networks being built by Chorus, Northpower, UFF and Enable send photons along a length of glass fibre. There are fast, reliable and modern. Some FibreX users report UFB-like performance. Others don’t. What’s clear is that it is not as consistent as fibre.

Dodgy tactics

There are stories of customers calling Vodafone asking for fibre connections being told FibreX is the same thing. There are stories of customers asking for fibre being told the only upgrade available to them is FibreX.

A lot of the Commerce Commission charges are to do with the way Vodafone sold FibreX.

Vodafone is no stranger to the Commerce Commission. Over the years the company has consistently pushed at the boundaries of ethical, legal marketing of its services.

The senior executives responsible for many of those incidents have now left the company. A new team has been left the task of cleaning things up. That’s going to take time. A good place to start would be coming clean about FibreX.