Silverdale 4.5G cell siteFor over a year Spark has pushed fixed wireless broadband as an alternative to fixed-line internet.

Spark sells fixed wireless products using its own label and its cut-price Skinny brand.

From a customer point of view the two services are identical.

Skinny is cheaper. The cheapest plan is NZ$40 a month. At NZ$85 Spark’s own-brand fixed wireless product is more expensive. It even costs more than low-end unlimited fibre plans. In contrast, Spark’s Skinny brand has a $68 unlimited fibre plan.

Customers choosing Spark fixed wireless broadband over a fibre plan get inducements including a free streaming TV service but they won’t save money.

You can be forgiven for thinking wireless broadband is a new idea. It isn’t. The technology is over a decade old. However, things have changed since it first appeared.

Today’s 4G mobile technology has matured to the point where a carrier can offer an attractive enough product to compete with fixed-line broadband in some circumstances.

Extra spectrum makes fixed wireless broadband work

Spark picked up extra spectrum in the 2016 700 MHz auction. This gives the company enough capacity to make its fixed wireless practical and attractive to customers.

When Spark first started selling fixed wireless services to rural customers, they could see speeds in the region of 80 Mbps. That is comparable with fibre. Indeed, it is faster than the basic UFB fibre products on offer.

Few of today’s customers will see speeds like those enjoyed by the first to climb on board Spark’s RBI service. While wireless has many admirable qualities — more about them later — it has a big weakness. Wireless spectrum is shared by all the users.

In practice this means wireless networks can get congested. As more customers in an area served by an antennae sign for fixed wireless services, the average speed per user drops. This can happen at any moment, but is more noticeable at busy times.

This speed drop can, and often is, managed by network operators like Spark.

Dealing with congestion

One way they can get around congestion is to limit the number of customers connected to any particular cell site.

Spark and Skinny are already not accepting new fixed wireless connections in some busy areas. Even so, congestion woes always lurk in the background.

Another way carriers manage congestion is by limiting the amount of data each user can download. Fixed wireless broadband plans usually come with data caps. That is, the amount of data you can use is rationed. At the time of writing Skinny offers 40Gb and 100GB plans.

Data caps are not a problem for many users. 40GB is a lot of data if you just do mail, surf the web and watch a few cat videos.

It is not enough data to watch a lot of high quality streaming television.

Depending on picture quality you might go through a gigabyte in an hour watching Netflix. If you have a handful of family members each watching their own streaming TV and using other online services you will bust your cap.

With fibre you can use all the services you like without keeping one eye on the meter. Many regard removing that worry as well worth paying for.

Next wireless broadband generation

Over time wireless speeds and capacity will improve as carriers like Spark invest in new wireless network technologies. Spark already has many sites described as 4.5G. It adds more every month.

This mobile technology generation can be improved a few more times. We can, in theory, go all the way to 4.9G, although carriers don’t use that term when talking to the public.

In two to three years from now the next generation of mobile technology, 5G, will arrive in New Zealand in earnest. You can expect speeds to be faster again and individual cell sites should be able to handle more data.

The move from 4G to 5G is neither cheap or straightforward. Expect disruption.

Spark pushes fixed wireless broadband harder than the other two mobile network companies. In part that’s because it wants to get the most from its investment in spectrum.

There’s another reason. Every service provider, including Spark, has to pay a fibre company around $40 each month for a wholesale fibre connection. Most fibre subscriptions sell for between around $70 and $100 a month. The wholesale cost doesn’t leave much room for margin.

When Spark sells a fixed wireless subscription, it gets to keep the entire $85. There are costs, but the gross margin is far better.

Spark told shareholders its margins have improved since it moved around 100,000 customers onto fixed wireless.

At the same time, Spark gets to retain control. It manages fixed wireless connections all the way from a customer’s desk to the big internet hubs. Having this control, known in the industry as vertical integration, means it stays in control. Phone companies like vertical integration as it helps them maintain margins.

More customers, more towers

There’s a limit on the number of fixed wireless broadband customers Spark can support with today’s technology and the existing tower network. That will change over time, but it’s unlikely Spark could add a further 100,000 wireless customers in the next 12 months without building new towers. Estimates vary on where it can go at this stage.

If Spark pushes too hard its mobile phone customers will notice a degraded service. Still there is some room for growth on the network.

Meanwhile Spark has accelerated its network upgrade plans. It is confident the investment in 4.5G and later upgrades will pay dividends. One challenge will be meeting customer demands for higher data caps as they consumer ever more services.

Spark sees wireless technology, both fixed and mobile, as the way of the future. It’s arguably the right strategy for a large telco with a mobile network, deep pockets and substantial spectrum holdings. But wireless isn’t the only path to the future.

For now, the wireless first strategy is working for Spark. Its shareholders like the higher margins. They may be less delighted with the strategy when they see the cost of rolling out a 5G network and buying more spectrum.

Chorus’ network hit its 2017 peak at 9.25pm on December 10. The broadband network was delivering 1.328 Terabits per second.

We once measured large amounts of data in terms of books or towers of compact discs between here and the moon. This time Chorus says the peak was the same as 260,000 HD video streams being watched at the same time.

Four days into 2018 high demand during a storm broke the record. On January 4, at the same hour, the network hit 1.33 Terabits per second. No doubt the record will soon broken again as numbers continue to climb.

The people of Porirua are the most voracious data consumers. In December the average household chewed through 202GB, that’s 34 percent up on a year earlier.

Nationwide average data consumption on the Chorus network is now 174GB a month. That’s up from 123GB a year ago.

Fibre broadband accounts use more data

Users with fibre accounts use more data than those with a copper connection. While the average monthly data base across the entire Chorus network is 174GB, customers with fibre use around 250GB.

In September a Chorus forecast said this will climb to an average of around 680GB a month by 2020. In part the rise will come as more accounts move from copper to fibre.

The growth is largely about television moving from broadcast distribution to online, on-demand delivery.

Chorus network strategy manager Kurt Rodgers says it is not just the big international providers like Netflix driving this change. He says TVNZ and Three launched live streaming in 2017 and that has helped online television become mainstream.

Rodgers says people are watching on smart TVs, but they also watch on phones and tablets connected to home wi-fi networks. He says phone handsets are used more often with wi-fi than as traditional phones.

Broadband speeds on the Chorus network are also higher. Dunedin, which was the original Gigatown now has an average connection speed of 265Mbps. Rotorua is next on 72Mbps and Wellington is in third sport with 70Mbps. The national average across the Chorus network is 64Mbps.

A note on broadband averages

Chorus measures average use because that makes number sense for a network operator. It divides the total amount of data across the network by the number of user accounts.

The figure is, simple, easy to understand and demonstrates how demand for data is growing. It helps Chorus plan for growth. It makes discussion straightforward.

Not everyone likes this measure. Some point out that the data use pattern is not a Bell curve. They says that a small number of high-end users skew the average number higher. They argue that the median amount of data used is lower than the average.

There’s something in this. Yet the median and the average numbers are moving closer as more and more New Zealanders switch to streaming video. Or in other words, high data use is becoming mainstream.

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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.

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Stuff Pix new directionStuff Fibre says it is to offer Stuff Pix, a movie streaming service, from early next year. It takes the company in a new direction, one that hasn’t been tried before in New Zealand.

While getting into content is a natural move for an ISP part-owned by Fairfax, the largest regional media company, Stuff Pix has little to do with its parent’s traditional news business.

Instead, Stuff Pix opens with a catalogue of around 600 movies. Customers can watch them online for between $1 and $7 each.

Paddy Buckley who previously headed Quickflix in New Zealand will run Stuff Pix as general manager.

Stuff Pix not taking on Netflix

Buckley says the operation is a replacement for closed video stores, not a Netflix competitor. It will be open to all internet users and its main attraction will be the price. There is no subscription fee. Customers pay a one-off fee to view each movie.

He says the prices will be the lowest on the market. While it is technically possible to buy movies for less by parallel importing, customers need to set up a VPN (virtual private network).

Different, not differentiator

Although part-owned by a large corporation, Stuff Fibre is a broadband minnow and has yet to make an impact on the market. Until now it has offered rock-bottom prices and little else.

Adding Stuff Pix to the business is a bold attempt to build something other than a low-margin, race-to-the-bottom owner of a dumb pipe.

As you might expect from a minnow, Stuff Pix is a modest entry into the streaming market which is dominated around the world by Netflix.

The list of 600 movies is not large. Most old-school video stores had far more extensive catalogues. The movies on offer are not-exclusive. Stuff Pix will sell to people who are not Stuff Fibre customers.

In other words, with the way the businesses and offers are structured at present, no-one is going to buy Stuff Fibre to get at Stuff Pix. On that basis, it isn’t a differentiator. But it is an extra line of revenue and that’s important.

Buckley says Stuff Pix prices will be the lowest on the market. This means it will run on slender margins. The broadband service business is all about relatively small margins: the steady drip of subscription fees rolling in month after month that can still be a money-making recipe.

Revenue per user

Normally when ISPs add media, the idea is to bolster the margins and to raise the average revenue earned per user. That could work at Stuff Fibre, there will be opportunities to cross-sell moves to existing customers.

New Zealand’s two largest ISPs, Vodafone and Spark, have their own media offering. Vodafone resells Sky TV content through its Vodafone TV service. It isn’t cheap. Yet has an extensive catalogue of material and exclusive rights to popular sporting codes so there is a lot of value in the bundle.

Vodafone TV has the potential to more than double the revenue the company gets from each customer. It should do even better when it comes to lifting the per customer profit.

Meanwhile, Spark’s Lightbox streaming service seems a defensive play although it is a clear differentiator. Spark customers get Lightbox as part of broadband or mobile accounts. It’s a way of adding value and justifying higher prices. Spark’s basic unlimited fibre plan costs $95 a month compared to Stuff Fibre’s basic $90 a month.

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Sky TV launched legal action in a bid to force ISPs to block access to streaming and video download websites.

As you’d expect, the move didn’t go down well with the industry. At least two ISPs say they will fight Sky in court.

Sky sent notice that it will seek court orders for Spark, Vodafone, 2degrees and Vocus — which trades as Orcon, Slingshot and Flip – to block a list of unspecified sites. The date blocking should start is not specified in the letters.

Spark and Vocus seem ready to resist.

The four ISPs account for more than 90 percent of all online accounts in New Zealand. If Sky gets them to block, picking off the smaller players will be trivial.

Pirate Bay

Sky TV’s letter specifically names the Pirate Bay as a site it wants to be blocked.

The pay TV company says it is targeting illegal pirate sites as they are a threat to local entertainment industries and sporting codes.

The timing is curious. Most of the threat from piracy has subsided. The battle is won.

Once were pirates

It would have made sense for Sky to have moved against these websites in the past. But today piracy is only a shadow of its former self.

Vocus consumer general manager Taryn Hamilton says his company’s stats show visits to The Pirate Bay – a popular file-sharing site – is now at 23 percent of its 2013 peak.

Most of the damage to Sky TV’s business was done a long time ago. Today pirates are no threat. Legitimate online streaming services like Netflix, Hulu and Amazon are what is really killing Sky’s business. They have already killed the pirates.

They offer a similar mix of entertainment programming at a fraction of Sky’s price. Netflix is $15 a month, Sky TV is around $80.

Sport is different

Things are different with sports programming. Sky has the rights to the most popular sporting codes in New Zealand, there are no legitimate alternatives.

While determined customers with VPNs can often shop around overseas for a better deal, it’s often too much trouble for most people. And overseas coverage can be inferior,

Hamilton says the idea of Sky blacklisting sites is dinosaur behaviour and something you might expect to see in North Korea.

It is certainly dinosaur behaviour. The fact that Sky names the faded and diminished Pirate Bay as a public enemy is a sign of how out-of-touch it is with the current scene.

Yet blocking websites isn’t restricted to totalitarian North Korea. A number of countries have laws blocking pirate websites. Often after the kind of litigation Sky plans. Web-blocking regimes don’t always work. There are plenty of workarounds for determined pirates.

Fighting Sky

Hamilton says Vocus will fight Sky in court. His company is not alone. Spark says it also aims to fight the injunction. Last time there was a copyright battle, Spark sided with Sky TV.  InternetNZ says it is seeking legal advice. Vodafone, which has a close relationship with Sky, says it will comply with any court order. At the time of writing, 2degrees has yet to commit.

Should the four ISPs co-ordinate their defence, maybe with help from InternetNZ and other interested parties, life could be difficult for Sky, which is already in long-term decline as it continues to fail to adjust to new technology.

Lawyers are obvious winners here. Litigation is likely to be expensive. One problem is there is no precedent in New Zealand for this kind of complaint, the Copyright Act stems from a time before video streaming was practical. Until now most service providers have walked away from pitched battles.

Kodi victory

Around the time Sky sent letters to the ISPs, the company won an interim injunction against Fibre TV which sells the Kodi set-top box. Fibre TV sells the set-top box along with software designed to make piracy easy. The decision was made in the Christchurch District Court and Sky was awarded costs.

It is possible that the Kodi victory spurred Sky TV’s renewed interest in attacking the ISPs. Possible, but unlikely. Fibre TV was small and unable to put up much of a fight. The case against Fibre TV was a slam dunk and there’s not much public sympathy for the company.

On the other hand, the attack on ISPs looks set to be a public relations disaster for Sky. The move is unpopular with consumers.

Criticism of Sky TV

As you’d expect Sky TV has come in for a lot of criticism over its move – not just from the ISPs who are in the firing line.

It is fair to say Sky is struggling to defend an outmoded business model. Yet it is equally understandable that the company wants to protect the value of the rights it has purchased in good faith from movie or TV studios and sporting codes.

It is possible that Sky is acting against ISPs on behalf of rights holders. In the past, the big US-based media companies have attempted similar actions. They or the sporting codes could be bankrolling Sky’s litigation or even pressuring Sky to act as their proxy.

All these protagonists seem out of touch with what’s happening on the ground. Netflix has shown how to make software piracy redundant. It charges what consumers consider a fair price for a decent selection of programming. That becomes a compelling alternative to navigating the dark side of the internet.

Sky needs to find a way to cut its prices to Netflix-like levels. From outside, that looks hard because it appears bundling channels lets Sky subsidise some content by overcharging for other content. If so, it is an unsustainable business model. Moreover, the problem has nothing to do with Orcon customers being able to see the Pirate Bay.

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