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2degrees founder’s rumblings over ComCom mobile market monitoring

By Donovan Jackson
Mon 20 Oct 2014
FYI, this story is more than a year old

In the wake of a request for comment on how the Commerce Commission monitors the mobile market, 2degrees founder and industry agitator Tex Edwards has come out swinging, saying ComCom is asleep at the wheel and has produced faulty information.

He says there is a vicious handset subsidy war underway, with Apple’s iPhone and Samsung’s Galaxy models at its centre, which threatens the long term sustainability of competition in New Zealand. “This should be monitored by the Commission as part of its duties under the Telecommunications Act,” Edwards charges.

His company KLR International owns approximately 2% of 2degrees.

Edwards says ComCom’s erroneous market monitoring is at the centre of this ‘competition problem’. “The subscriber acquisition cost [SAC] war hasn’t been studied,” he continues. “The only reason you get a free [particularly high end] phone with a contract is thanks to the three-operator competition in the market.”

SAC is, as the name implies, the cost of getting contract subscribers signed up. These customers are a rich seam for network operators, delivering a higher Average Revenue Per User (ARPU) than pay-as-you-go subscribers. Perennial favourites like Apple’s iPhone and the new Galaxy models are powerful draw cards for new subscribers, with network operators covering the substantial cost of a new handset by building it into contracts, which typically run for 24 months.

2degrees has some one million customers, but is struggling to achieve profitability as most of its subscribers fall into the low ARPU pay-as-you-go bracket. Edwards believes the two dominant network operators, Vodafone and Spark enjoy an unfair advantage owing to their 18-year legacy market dominance, which enables them to preserve their dominance  by using large handset subsidies and other incentives to block competition.

He says the 2014 public accounts of the three mobile operators show two with positive cash flows in excess of $500m; the third, 2degrees, languishes with a negative cash flow in excess of $80m.

On this basis, Edwards calls into question ComCom’s assertion that there are three established mobile providers, singling out Vodafone in particular for using its market dominance to freeze out competition.

Not one to shy away from controversy, he calls into question Vodafone’s ostensible $28-million loss, laughing it off as “intercompany window dressing of the accounts; if the huge intercompany loan was reversed, Vodafone NZ would be back in profit. Most international regulators have the ability to monitor the proper accounts of the companies with dominance. It is unusual that the commission doesn’t use Section 69 Z of the Act [which deals with information disclosures to enable monitoring] to review the true position of Vodafone NZ, rather than suffering from these lobbyists spin accounts.”

The SAC war effectively means 2degrees is in a position where the contract customers it so desperately needs to achieve profitability come at a cost, which pushes profitability from those customers to a dangerously far future point. Meanwhile, with their positive revenue and cashflows, Vodafone and Spark can acquire these customers at low cost while maintaining profitability through cross-subsidisation from other lines of business. This forces 2degrees into a continued spiral of negative cash flows.

Spark doesn’t escape an Edwards tongue lashing, either. The firebrand ridicules the Commission for not forcing Spark to produce independent Skinny accounts, which he says will illustrate the real motivation for ‘that flanker brand’.

Describing the commission as ‘indolent’, Edwards slated it for not travelling more. “It’s time for the Commission to get on a plane and visit three or five of New Zealand’s peer group wireless markets and regulators [Sweden , Denmark, Ireland, Finland and Norway] and adjust its New Zealand activities after this trip.”

The Commerce Commission was contacted twice for comment on this story, but did not respond.

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