Telecom NZ’s market share was already falling before 2009. Then, the communications minister Steven Joyce announced plans for an ultrafast broadband network.
According to IDC Research, Telecom NZ, now Spark, held a 59.1 percent market share in the fourth quarter of 2007. By the same quarter in 2009 it was down to 54.3 percent.
Today, Spark is still the nation’s largest telco. Its market share is down to just 38 percent.
The two measures are not the same thing. Spark’s 38 percent share comes from the Commerce Commission draft liability allocation process. IDC measured total revenue market share.
Although the Commerce Commission used a different market share calculation, the result is so different to the earlier IDC estimate, that it’s clear there has been a major shift in market structure. Ultrafast broadband has changed the industry dynamic.
It’s not obvious this means greater competition. Between 2009 and 2016 Telecom NZ demerged its Chorus business unit. This is now a separate company.
According to the Commerce Commission figures, Chorus has a 22 percent market share. Add this to the Spark share and you are, in effect, back in 2007 only this time Telecom NZ is two separate companies.
There is no doubt Spark and Chorus compete. Spark’s recent fixed wireless launch was a competitive shot across Chorus’ bows.
Is telecommunications competitive?
But can we be confident the market is more competitive than before?
Vodafone was number two in 2007 and 2009. It is still number two today with almost the same market share.
It is as if TelstraClear’s entire New Zealand business evaporated.
2degrees didn’t exist in 2007 and was only weeks old by the fourth quarter of 2009. It has come from almost nowhere to take the number four market position. That’s a competitive win of sorts, but not much.
Nothing 2degrees does challenges or threatens the two larger players. It is about one quarter the size of Vodafone and less than 20 percent the size of Spark. More to the point, 2degrees has yet to make a profit.
Vocus is an interesting newcomer. According to the Commerce Commission calculation it only represents three percent of the market. That’s not much more than the 2.4 or 2.3 percent its parts CallPlus and Orcon accounted for in 2007 and 2009.
Not much change there either.
After Vocus the remaining players are tiny. Their market shares amount to little more than rounding errors.
After Telecom NZ split
The main change between 2007 and 2016 is that Telecom NZ is now two separate companies. Consolidation means there are two less major players elsewhere. The net effect is one less major telecommunications company.
Chorus is wholesale only. Which means customers have two less retail telecommunications companies to choose from. There is a long tail of small entreprenurial service providers who may or may not be thriving. Yet it us hard to argue the market is more competitive than it was a decade ago.
Another way to gauge competition is to look at how much money the main telcos make today compared with in 2007.
In 2007 and 2009 Telecom NZ had revenues of about NZ$5.6 billion in both years. Net earnings in 2007 were about $850 million and $400 million in 2009.
In 2015 Spark had revenues of around $3.5 billion and Chorus took about $1 billion. Together that’s $4.5 billion. The total is more than a billion less than Telecom NZ made when its was still a single business.
Spark’s 2015 net profit was $375 million while Chorus net earnings were $91 million. A total of $466 million. That’s a better collective performance than 2009, but well below the 2007 figure.
In 2009 Vodafone NZ reported revenues of $1.6 billion and $260 million profit. By 2015 total revenue, including TelstraClear, was $2 billion with a $120 million loss. In part Vodafone is still absorbing the TelstraClear business it acquired in 2012.
You could argue the billion dollars revenue Spark and Chorus did not make is money business and consumers might otherwise still be paying. If that’s the case, then the reforms have delivered a cost benefit to customers.
Otherwise, it’s not yet clear the market is more competitive than it was a decade ago.
Vodafone says it will start a nationwide fixed wireless broadband service in December. In its announcement the company took the opportunity to echo Spark’s criticism Chorus’ copper telephone network.
Vodafone Home Wireless Broadband is, in effect, a version of the fixed wireless service Vodafone already offers to rural users. It will call on unused capacity on Vodafone’s celluar network to give home users an alternative broadband service.
Vodafone will sell customers a modem for $199 if they don’t sign a contract. Those signing a 12 month contract get a free modem, but early termination fees apply.
There are 40GB and 80GB options with a home phone connection and an 80GB naked plan. An extra 15GB of data cost $20 and users can buy an extra 1GB for $4.
In a press release announcing the service Vodafone Consumer Director Matt Williams says; “Home Wireless Broadband has been designed especially for Kiwis who are frustrated by slow and unreliable internet access via Chorus’ ageing copper network”.
Williams’ comments about copper are similar to recent announcements by Jason Paris. Paris is CEO home, mobile and business at Vodafone’s main rival, Spark New Zealand.
According to Williams: “…Watching videos on multiple devices and old-style ADSL plans delivered over the copper phone network simply don’t cut it anymore. Even if you’re a relatively light internet user, issues like buffering are still really frustrating”.
Well yes, but many copper users could upgrade to VDSL plans. In most cases they are the same price as ADSL and VDSL performance is likely to be comparable with 4G fixed wireless.
You can buy unlimited data plans on VDSL which means no worrying about buying extra data. Buffering is frustrating, but so are low data caps.
That’s not to say fixed wireless is not the right technology for many users. It’s the cheapest way to get basic broadband and needs nothing more than a special 4G modem.
Where possible, New Zealand’s two biggest retail telecommunications companies bypass copper and fibre. Most of the time that means not buying services from Chorus.
It also means not buying regulated services. On copper and fibre networks they have to buy broadband from wholesalers at prices determined the Commerce Commission.
There’s anecdotal evidences Spark and Vodafone use aggressive sales and marketing to move customers off regulated services.
While the local fibre companies; NorthPower, UFF and Enable are also in the telcos’ sights, when it comes to Chorus, the moves are a deliberate shot across the bows.
Spark and Vodafone seem determined to chip away at Chorus and regulated broadband.
On one level this is all good. Telecommunications is a competitive industry. That’s how it should be.
Increased competition was the intention from the moment, the then communications minister, Steven Joyce first revelaed plans for the UFB fibre network.
That plan was to set in stone a layer of separation. It meant no telecommunications company could own a vertically-integrated monopoly. Any fixed lines between homes or offices and local exchanges or roadside cabinets had to be owned by a different company to the ones selling phone services.
When Spark and Chorus were family
Telecom NZ and Chorus demerged. This meant the latter could bid for fibre contracts.
Separation means Chorus is unable to sell services direct to customers. It can only act as a wholesaler.
The changes have been a resounding success. Parts of the market are crowded and, at times, margins are wafer thin. That’s market forces in action. You can see it as proof the market is competitive. More to the point customers are well served by companies keen to win their business.
When the UFB was still just a idea in the minister’s in-tray, broadband speeds in New Zealand were under 10 Mbps. In its latest quarterly review, Chorus says customers on its networks now connect at an average of 33 Mbps. That average speed is only going to get faster as more fibre is built and more customers move to the new networks.
From last month, anyone living in a fibre area can buy a 1 Gbps connection at a relatively modest price. Over time this will see average speeds sky-rocket.
It’s not just about speed. In 2009 unlimited data plans were, in effect, unknown in New Zealand. Almost everyone had data caps — most were in the region of few dozen megabytes per month. Today more than half of all residential broadband users have unlimited data.
Spark Upgrade New Zealand
Last week Spark opened a new front in its marketing campaign. In the Upgrade New Zealand press release Spark Home, Mobile and Business CEO Jason Paris says: “During winter, we apologized to customers for the poor experience they had on the Chorus copper network.”
Elsewhere the release says: “Chorus copper lines are a legacy technology; they are getting older and are increasingly prone to faults.”
There’s something in this. After all, an ageing copper network is one reason why the government tipped $1.5 billion of tax-payer money into replacing it with fibre.
Yet for Spark to highlight this is curious. It isn’t that long since Spark predecessor Telecom NZ sung the praises of the same legacy technology.
You can view Upgrade New Zealand as a move to push customers off Chorus copper lines. If there are fewer active lines, the copper network is worth less.
This matters because the post-2020 regulatory regime now under discussion is likely to use the so-called building block model. This model will see Chorus earn a regulated return through connections charges that, in effect, are based on the value of network assets. If the assets have a lower book value, then Spark and all the other telcos get to pay less for access.
In other words Spark shareholders do better, Chorus shareholders will be worse off.
Of course this will benefit all retail telcos. But as the largest retail telco with about half the broadband market Spark stands to gain the most. It has every incentive to push down the value of the copper network.
Wireless marches on
Technology never stands still. At the time the UFB contracts were awarded, mobile data was yet to blossom. We all knew wireless speeds and capacity would increase over time, that’s one reason fixed wireless was chosen to connect remote users in the Rural Broadband Initiative.
Yet, if anything, the progress has been faster than was expected at that time.
Today’s fixed wireless networks can trump the best copper speeds for many users. More spectrum and new technologies hold the promise of ever greater performance to come.
Fixed wireless will never be the best connection option for all users. Apart from anything else wireless bandwidth is shared. This means speeds can drop at times of high demand. There’s also a limit to the number of fixed wireless customers a carrier can support on the existing network.
Yet with investments and improvements, it can be a viable alternative to fibre for some customer types. This is the promise of 5G and 4.5G cellular. Although, you might want to take some of the 5G hype with a pinch of salt. Technology companies have been known to oversell the future.
There’s another aspect of wireless broadband that makes it interesting to carriers. It is not regulated. If Spark, Vodafone or 2degrees sell fixed wireless broadband to their customers, they don’t have to pay a charge to the wholesale network company. They get to keep all the money.
A lot of money is involved. The wholesale price of a copper or fibre line is around $41 a month. So when Spark sells a fixed wireless broadband connection, it has $41 more to play with. Of course that money has to pay for towers, spectrum licenses, back-haul, support and so on. But $41 per customer per month, every month soon adds up.
Likewise when Vodafone sells a connection to a customer on its FibreX network there is no ticket clipping.
Spark fixed wireless and Vodafone FibreX are vertically integrated. That is, whether you buy a Spark fixed wireless or Vodafone FibreX service, the connection goes through one company’s network all the way to the internet node.
Chorus has a total of about 1.2 million fixed line broadband connections.
Vodafone is coy about the numbers on its FibreX network. At one point during the press conference called to announce the service, Vodafone CTO Tony Baird said the network passes 200,000 homes. Vodafone later said this number was wrong. Yet whether right or wrong it seems in the right ball park.
Many of the Vodafone connections will be in Christchurch where Enable provides the fixed-line connections. If anything, the threat to Enable is greater than the threat to Chorus.
For the sake of argument let’s say Vodafone could service as many as 100,000 FiberX accounts that might otherwise be on the Chorus network. In round numbers, that means close to 10 percent of Chorus’ business has a direct competitive threat. Should that number rise much higher, we can stop talking in terms of Chorus having a monopoly.
Spark has previously said it aims to get around 50,000 to 60,000 users onto its fixed wireless network. Most informed observers suggest 60,000 is about the practical capacity of the existing technology and tower density. Of course the number could go higher if Spark built more towers or if it found more spectrum to devote to fixed wireless.
Last year’s numbers suggest Spark has around 500,000 broadband customers across New Zealand. It will be interesting to see if fixed wireless means Spark will expand its share of the total market or if it will mainly convert copper broadband customers to fixed wireless. Taking into account the other fibre wholesale companies, Spark fixed wireless could, at most, take two or three percent of those 1.2 million broadband lines from Chorus.
Vodafone has yet to officially announce its own fixed wireless in urban areas although anecdotally the company does have some connections.
If 2degrees is doing similar, it is keeping very quiet and there is no noise from its customers. There are other fixed wireless operators, but they mainly play in rural areas beyond the reach of the UFB fibre network.
Spark has more of the 700 MHz spectrum that Vodafone and twice as much as 2degrees. Neither of the other two mobile companies have made a concerted push to sell fixed wireless in urban areas so far. Even if they did, their joint potential market would only be much the same as Spark’s. So at most, today’s fixed wireless technology could pull five percent of connections away from Chorus.
All this means 15 percent of the Chorus copper and fibre footprint is vulnerable to Vodafone FibreX and Spark fixed wireless.
Disclosure: Both Chorus and Spark have paid for my writing services in the past year.
Let’s be clear here, Vodafone’s FibreX isn’t actually a fibre network. ↩
Communications Minister Amy Adams says the government will spend $150 million extending rural broadband.
The Rural Broadband Initiative second stage has a $100 million budget. The money is to boost speeds for people not covered by the urban Ultrafast Fibre network. She has earmarked a further $50 million for extending mobile coverage. This will cover state highway black spots and in tourist areas.
For now, the plan is for the RBI extension to target areas where connection speeds are less than 20 Mbps. Adams’ long term goal is for 99 percent of the population to get peak broadband speeds of at least 50 Mbps. The rest will get at least 10 Mbps.
Rural Broadband Initiative’s slow start
After a slow start, New Zealand’s RBI has performed better than anticipated. Chorus and Vodafone shared the original budget of $300 million. At the time of the contract Chorus was still part of Telecom NZ. Chorus’s job was to build fibre links to open access rural wireless towers and to 1200 rural roadside cabinets. Vodafone built the towers and used them for mobile and fixed wireless broadband services.
Until 2015 Vodafone’s RBI fixed wireless service used 3G mobile. The contract was for broadband connections of at least 5 Mbps. Although at times it didn’t deliver. At the time customer numbers were only a tiny fraction of the potential connections.
Two things changed this. Spark entered the market with a competitive offer. Then both carriers began using 4G mobile, which mean faster speeds and higher data caps. Today many rural customers get fixed line speeds well over 20 Mbps.
Adams says almost 300,000 rural New Zealanders now access better broadband thanks to RBI.
Bang for buck model
RBI’s first phase in effect asked companies to bid outlining what they could do in return for the funds. The money subsidised private businesses willing to risk their own funds serving rural markets.
A similar bidding model applies to RBI 2. But it is not just open to large telecommunications companies. Adams invited other groups to bid. The government isn’t fussy about the technology used. Its focus is on getting the most coverage.
Spark New Zealand has been quick to put up its hand for the new project.
The company’s general manager of regulation John Wesley-Smith says: “We’re looking forward to working our way through the details and working with government, community stakeholders and other telecommunications network operators to identify how the government’s RBI and Mobile Black Spot Fund can be best directed to improve ultra-fast broadband availability in rural New Zealand”.
The $50 million Mobile Black Spot Fund is for services in areas without any mobile coverage. While there is good coverage in almost every settlement, there are still gaps, especially along highways and in out-of-the-way tourist locations. Bidder must provide at least 3G voice services. The government says it prefers 4G coverage in the tourist areas.
Adams says: “This is a unique opportunity for national and regional providers to partner with the government to deliver increased connectivity and improved services to rural communities. I encourage network operators regardless of size to put their hand up and be part of this proposal.”
Vodafone says it will give customers mobile data at no extra charge if their fixed-line broadband connection fails.
The deal only applies to customers who have a Vodafone home broadband plan and use the company’s mobile services.
In a press release Vodafone consumer director Matt Williams says the always connected promise recognises an internet connection is an essential service like electricity, gas and water.
He says: “Our powerful promise is that if a fixed broadband fault can’t be immediately resolved via our call centre, we’ll give you as much mobile data as your household needs — for free — until the fixed broadband connection is up and running again”.
The data can apply to as many as four Vodafone mobiles in a single house. They can use it by setting up Wi-Fi hotspots.
Once Vodafone applies the free data to a customer’s account, it’s theirs to keep even after Vodafone fixes the fault.
Williams says: “The other group who will benefit from our always connected promise are mobile customers who are moving house. We acknowledge it can be a painful process getting your essential services up and running, but problems with internet access will now be a thing of the past.”
This is clever marketing on Vodafone’s part.
Broadband connections rarely fail, fibre connections fail even less often. Presumably Vodafone doesn’t anticipate it’s rebranded FibreX HFC network failing often either.
Vodafone will almost never need to dole out large amounts of its valuable mobile data to inconvenienced broadband customers.
Although most customers will never need to take up the offer, it’s a useful form of insurance. That has real value, in effect customers get guaranteed continuity of service.
However, the premium for Vodafone’s insurance policy is that a customer has to buy both a fixed-line and a mobile service from Vodafone.
This is why it is so smart. Billing systems are a significant cost for telecommunications companies. So is something known as ARPU — the average revenue per user. Putting more services on a single monthly bill is a way of bundling more services on one account, baking in customer stickiness and pushing up the ARPU.