Brought to you by Wireless Intelligence

2degrees – New Zealand’s newly-launched third mobile network – has made an impressive start in its bid to break the country’s mobile duopoly, according to new Wireless Intelligence data. Figures show that the new network took over 50 percent of net additions – some 70,000 connections – in the last quarter of the year and is forecast to surpass a quarter of a million connections by the end of the current quarter (1Q10).

Formerly known as NZ Communications, 2degrees launched GSM services in August 2009, almost a year later than originally planned. However, it quickly made an impact with a low-cost prepaid strategy that significantly undercut its larger rivals, market-leader Vodafone and second-placed Telecom New Zealand (Telecom). The operator claims to have halved the country’s standard prepaid rates, cutting voice calls from NZD0.89 (US$0.63) to NZD0.44 (US$0.31) per minute, and standard text messaging from NZD0.20 to NZD0.09. 2degrees said last month that around 53,000 customers had ported their numbers from rivals over to the new network to take advantage of the low rates in the first six months since launch.
 
The operator is investing an initial NZD250 million (US$176 million) to build out its new network using Huawei kit. Services are currently limited to the 900MHz GSM band but it is also planning to launch 2.1GHz WCDMA (3G) services soon, eventually migrating to HSPA+. It has a national roaming agreement in place with Vodafone for areas where it does not have coverage, and claims its network covers around 97 percent of the country’s population as a result (the same figure cited by Vodafone).

As well as providing new competition, the launch of the new network has also served to step up pressure on regulators to force Vodafone and Telecom to make significant cuts in their mobile termination rates (MTRs). A high-profile campaign in the country – dubbed ‘Drop the rate mate’ (and backed by 2degrees) – claims the duopoly situation has led to unjustifiably high MTRs and higher retail prices for consumers. The two larger operators have already begun moves to cut standard termination rates (NZD0.15 per minute for calls and NZD0.10 for texts) ahead of regulatory intervention. Last month, regulators agreed to a proposal by the two operators to drop the rate to NZD0.06 by 2014, effectively saving them from making the more severe cuts proposed by the country’s Commerce Commission (which had asked for an immediate cut to NZD0.072, and down to NZD0.038 by 2015). 

Vodafone remains New Zealand’s market leader on just under 2.5 million connections by year-end, and is the most advanced player in the market with over 50 percent of its customers migrated to its high-speed WCDMA and HSPA networks. However, overall connections growth is slowing, rising by just 1.2 percent in the year to 4Q09 (compared to 2 percent at Telecom). Vodafone is also more dependent on prepaid customers than Telecom, making it more vulnerable to customers churning to 2degrees. According to our figures, Vodafone took less than a 7 percent share of net additions in 4Q09 following 2degree’s launch in August. 

Meanwhile, second-placed Telecom – a subsidiary of the country’s fixed-line incumbent operator – is in the process of replacing its CDMA2000 network with a new high-spec WCDMA/HSPA network running at 850MHz called XT. The new network was switched on in May 2009 and, according to our figures, Telecom had successfully migrated almost 20 percent of its customer base to XT by year-end.

However, the new network has run into numerous high-profile problems and controversies. Seen as a competitor to Vodafone’s WCDMA/HSPA network, the launch of XT last year immediately sparked a row between the two operators, with Vodafone claiming that it interfered with its own 3G services, which run in the nearby 900MHz band. This dispute was settled in time for XT’s launch in May (delaying it by just a few weeks) but greater problems were to follow. Technical problems with the new network reached a head this year following reports of a number of outages, culminating with the resignations of Telecom’s CTO Frank Mount and the head of operations at Alcatel-Lucent New Zealand, Telecom’s equipment vendor in the project. Telecom was forced to pay out NZD10 million in compensation to customers for the network downtime and publicly blamed Alcatel-Lucent for the problems.

Matt Ablott, Analyst, Wireless Intelligence

2degrees deployed a well-established tactic for a new player entering a market controlled by embedded incumbents by quickly building a connections base around a low-cost, no-frills prepaid proposition. This was easily achieved in an expensive duopoly market and has had the added advantage of forcing the two incumbents to lower their wholesale access pricing, which has served to lower the entry barrier for further market entrants. For example, lower wholesale prices should make the market more attractive to MVNOs. New Zealand currently has seven MVNOs, the majority of which have launched in the last year. Most prominent among these is TelstraClear – a unit of Australian operator giant Telstra – which has been in the market since 2007 and has recently announced it is to ramp up its presence with a new offering based on Vodafone’s HSPA network (by contrast, Telecom has said it will not allow MVNOs on its new XT network until 2011). Meanwhile, 2degrees’ network roadmap suggests the operator is looking beyond 2G services – but it is likely to find competing with its larger rivals in high-speed services more of a challenge. Vodafone is the clear market leader in this space and has had success in bundling up its 3G services with its fixed-line offerings via cross-channel content arrangements with the likes of Sky TV. Telecom’s rival XT network is an apparent attempt to mimic Telstra’s pioneering NextG network in neighbouring Australia, but it has had a first year it would rather forget. However, Telecom is investing heavily in the network and it should emerge as a strong platform for mobile data services once the technical problems are resolved.