Closed borders heats up broadband competition

The lack of new migrants in need of fast internet services has ramped up broadband competition and left Spark lagging behind its lofty goals for growth in wireless customers.

The country’s biggest telco added just 9,000 customers to its hybrid wireless broadband service in the last six months of 2020,  which account for 165,000 of its 703,000 broadband customers. While the number of hybrid wireless customers was up 17% from a year earlier, it makes the targeted annual growth of 40,000 new connections by the end of June a tall order.

Chief executive Jolie Hodson is well aware of the issue and told analysts yesterday the telco has plans in place to do better. That includes more targeted marketing and putting a premium on retention to protect long-term value. 

“We need to improve our execution — we’re focused on that,” she said.

Removing the natural driver of demand that new migration brings has meant broadband providers are fighting more aggressively for a smaller pool of customers. Government data show consumer prices for telecommunications services fell 2.1% over the 2020 calendar year.

Skinnier margins

The company’s gross broadband margin shrank to 49.3% in the six-month period from 50.7% a year earlier, with 12.1% growth in fibre connections to 381,000. Telco providers are trying to shuffle customers from copper services, and Spark’s copper connections shrank 25.6% to 157,000.

Australian-owned Vocus NZ — whose suite of brands includes Orcon and Slingshot — lifted fibre connections 26% to 155,000 in the December half from a year earlier, more than offsetting the 28% slide in copper customers to 59,000. This was bolstered by its acquisition of Stuff Fibre last year.

Spark is pursuing the wireless offering to sidestep wholesale access fees to network operators such as Chorus, making it a higher margin service. However, wireless takes up capacity on mobile networks and while it will be a major benefactor in the national rollout of 5G mobile infrastructure, those networks still need to be built.

Spark is live testing 5G in Christchurch, having launched in Auckland, Dunedin, Palmerston North, New Plymouth and Te Awamutu.

Rival Vodafone, which is pursuing a similar strategy, this week started selling 5G broadband in parts of Auckland, Wellington, Christchurch and Queenstown.

I don’t think so

Both are at odds with Chorus, which has accused retailers of inflating the service level of wireless relative to VDSL copper.

In saying that, Chorus provides fibre for mobile backhaul networks, so isn’t left entirely out in the cold by the wireless switch.

Chorus reported an increase in the ultrafast broadband fibre uptake earlier this week, with the first tranche of the government-sponsored build completed. Of the 1.25 million customers able to connect, 66% have. That’s even higher in Invercargill, Waiuku and Auckland, where uptake has topped 70%.

Spark expects wireless broadband to account for 30% to 40% of the market, putting it on a collision course with the network operator’s aspirations.

However, Jarden analysts Arie Dekker and Grant Lowe question whether that’s necessary.

Can’t we be friends?

In a note on the Chorus result, they wondered whether Chorus should dial back its focus on stemming the tide of lost customers to wireless, and instead push a mutually beneficial solution on the digital divide.

“We do wonder whether Chorus should be driving discussions with government (and retail service providers who will need to pass on savings) for a suitably specified (cannot introduce cannibalisation risk) product targeted to beneficiaries that helps close the digital divide and increases the penetration of fibre broadband,” they said.

The country’s telcos already look to pool their resources when it makes sense to do so. The three mobile network operators — Spark, Vodafone and 2degrees — set up the Rural Connectivity Group to share the load of serving uneconomic regions, and Chorus is also involved in providing backhaul fibre to mobile towers.

That could be in for a further shakeup later this year once Spark reviews its infrastructure assets to see whether it can grow its value. That infrastructure includes 1,500 mobile sites, 35 major network sites, 18 data centres, 1,200 kilometres of fibre backhaul network and ownership stakes in three sub-sea cables.

Hodson told analysts that Spark is not simply looking to sell the assets, but will consider ways to speed investment through partnerships and joint ventures to drive capital efficiency, improve network resilience, and give customers a better experience.