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Hamish Fletcher

Business reporter for the NZ Herald

Bright Spark - Telecom changes name

Today, Telecom becomes Spark. But as Hamish Fletcher reports, transforming the phone company is going to require much more than a name change.

Simon Moutter today hoists a new flag up Telecom's mast, marking its tack away from two decades as New Zealand's safe and stodgy telecommunications provider.

For the managing director, it's a signal of the company's new direction, towards a bright digital horizon of revenue growth and new services such as internet television.

Moutter's flag, bearing the new company name Spark, aims to jettison Telecom's past persona and chart a course to it becoming a competitive provider of communications, entertainment, and cloud computing services.

Moutter first revealed this new direction to investors 15 months ago, facing up to the company's uncompetitively high costs and a revenue structure heavily reliant on a landline business in continuous decline.

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His attempt to reach more bountiful shores is expected to take three to four years, and has already involved some tough decisions.

The most public of these was when the company axed more than 1000 staff last year in an effort to reduce costs.

It also pulled back from the Australian market, selling the rest of a poor performing telco business across the ditch, exited the Cook Islands and returned its focus to the local market.

Even as it slims down, Spark is still one of the largest companies on the New Zealand stock exchange, with revenue of some $4.2 billion in its most recent annual result, 6600 employees at the middle of last year, and is one of the country's biggest investors in technology.

While more cost cutting is expected, Moutter is adamant that he didn't come back to Telecom to "manage a slow decline", just by taking a knife to the business.

Moutter worked at Telecom until 2008, leaving to become chief executive at Auckland International Airport, before returning in 2012.

With Moutter at the helm, Telecom has also bought businesses, launched new ventures and invested in assets such as an extra block of 4G spectrum.

It has also stemmed the loss of market share in the broadband business, and won more mobile customers.

Spark still has a lot more to do "to achieve its ambitions," but Moutter says he is pleased with how the company is working through its plans.

"This executional excellence is why the time is right to make the brand change," he says.


Photo / Dean Purcell

He may be upbeat, but analysts - the weathermen of the sharemarket - say it's too early to tell if the company's strategy will succeed.

"You don't turn a ship around like Telecom straight away," says First NZ Capital's Greg Main.

"You can make some easy gains, but really the key question is can they really re-orientate their systems and processes internally to be a lot more agile and without any hiccups along the way."

And there are still dangers ahead.

At IDC - which researches industries such as telecoms and IT - associate research director Peter Wise says Spark is operating in a shrinking industry. "IDC is forecasting NZ fixed voice, broadband and mobile revenues to decline by 2.5 per cent per annum over the next 5 years ... Spark and the rest of the telco industry have a tough road ahead."

Similarly, Harbour Asset Management's Andrew Bascand sees no sales growth at the company in the next three years.

Read also:
Telecom takes fresh tack with Spark label and internet TV service
Hamish Fletcher: Pay TV the big Telecom news today

As to whether Moutter's strategy sinks or swims, Forsyth Barr senior equity analyst Blair Galpin believes that won't be clear for another two years.

"For me 2016 is really the point where we can start making a real call on how well Telecom has done," he says.

"2016 is the year when you'll start to have bedded down the cost savings that Simon and Telecom have been working through, plus you start to see the benefits of that investment and start to see real benefit of a higher market share than they would have otherwise got."

There are, however, already signs of change. Asked if Telecom is meeting its own milestones, Galpin says the company had indicated 18 months ago that it wanted to reduce staff levels and save on costs.

"We've seen that so they get a tick mark for that," he says.

"Things like even the Spark rebrand being quite quick, the decision to do [internet television service] Lightbox and then launching it relatively quickly for Telecom, these are the sort of things to me that are signs of a company that is changing," he says.

See a Spark provided timeline showing the history of the company and its name changes over the years:

Craigs Investment Partners research analyst Arie Dekker says the company can already be judged "reasonably well" on its moves to hold broadband market share and attract more mobile customers.

In the six months to December 31, the company gained 12,000 broadband customers and 108,000 in the mobile market.

"Broadband market share and fixed market share declines have definitely slowed or stopped," Dekker says.

"In mobile, which is an area where they've sort of underperformed, they've looked to actually add customers and add revenue growth. And there as well, it's not major, but they have clearly made some inroads."

First NZ Capital's Main also believes the company has performed in both these areas. "They seemed to have held market share in broadband and that's what they really needed to do," he says.

IDC's Wise says Telecom has been aggressively competing in broadband and mobile. "Incumbents can typically either employ a defensive strategy where they don't do much and rely on the inertia of customers not moving, or they can compete and match or even lead the market," he says.

Read also:
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"I'd say Telecom has moved to the latter position of proactively leading or at least very quickly matching the broadband market, not only on price but also technology ... Telecom were six months quicker to market with [faster copper broadband] VDSL than Vodafone, even though Vodafone is in theory the more attacking number 2 fixed player."

In charting Spark's new course, Moutter has also invested in new businesses and ventures.

These have included the company purchasing two cloud-computing businesses, Revera and Appserv, as well as launching two startups, internet television service Lightbox and data analytics unit Qrious.

Moutter says Spark still has some other "ideas up its sleeve" which it may try get off the ground.

"We wouldn't rule anything out - one thing I can say is that we are not going to stand still."

While the prospect of competition in the pay-TV market has aroused plenty of public interest, the company's two cloud-computing acquisitions are more likely to deliver results to shareholders.

They are also viewed as a much smarter investment by fund managers such as like Bascand, who is disparaging about Spark dipping its toe into internet television.

"The jury is entirely out on their approach to media and the way they're spending money in terms of kicking off their media offering. I don't want to be too dismissive of it because it's quite uncertain, as to in a couple of years time how we will be thinking about media and how we're viewing things, but I don't think a $20 million or $30 million investment is going to get them over the line. If you really want to do this you spend $300 million to $400 million," Bascand says.

And although Moutter has big ambitions for these new businesses, fund managers are still focused on cost-cutting measures as a way of the company sustaining its dividend payment - and that's where they will fix their attention when the company reveals its full-year results in a fortnight.


To most people, the name Telecom is about landlines, but the company no longer owns the fixed-line network. Photo / Peter Meecham

Naming rites

Simon Moutter is firm that the name change from Telecom to Spark is important, not just an empty symbol.

"The name matters," he says. "It has to have relevance, ignite passion ... it's the right thing for us to pick up a brand that's about the future, not the past."

To most people, the name Telecom is about landlines, but the company doesn't even own that ageing fixed-line network any more, says Spark's managing director.

"It's time for us to move on from Telecom ... this is about reigniting in the mind of customers and the public of New Zealand that Spark New Zealand is a business that is about digital services, about mobility, it's about cloud [computing], it's about internet television, a whole new world of data-based services."

Moutter's hope is that customers will see the name change as a "marker" - a "line in the sand" indicating that the company has already changed a lot from the "old fixed mobile infrastructure business to a digital services business".

Changing Telecom to Spark comes at a cost of $20 million, involving branding changes at 71 stores, three websites, 135 vehicles, 2700 phone boxes and 8000 signs in dairies or service stations.

Asked about that cost, Moutter says Telecom spends $8.5 million a day running its infrastructure and providing services.

"So it's really a little over two days' spend for what should be a 30-40 or 50-year investment. It's not a big deal."

The company's overall corporate parent is now called Spark New Zealand, and its ticker code on the NZX moves from TEL to SPK.

Its retail arm is now Spark Home, Mobile and Business, and its ICT arm Gen-i becomes Spark Digital.

Telecom Digital Ventures - which builds new services for the company and its customers - is now Spark Ventures.

Some business units are not caught up in the move, and the mobile brand Skinny will keep its name, as will broadband sub-brand BigPipe.

Watch: Telecom changing to Spark

Video

The leading players

Who's who in Spark's key markets

Broadband

Spark: Market share: 49 per cent. Has made the call to hold customer share, at the expense of revenue. Spark's broadband revenue for the year to June 30, 2013 was $431 million, down by 13.8 per cent.

Vodafone: Market share: 32 per cent. The big multinational competitor and part of the world's second largest telco. Gained scale when it bought up TelstraClear in 2012.

CallPlus/Slingshot/Orcon: Market share: 15 per cent, after recent purchase of Orcon. The locally owned rival to the big two.

Mobile

Vodafone: The country's biggest mobile provider lost 13,000 customers in the three months to June 30, when it reported 2.323 million subscribers - just 3000 less than it reported at June 2013. Vodafone stole the march on 4G, launching the mobile internet service first in March last year.

Spark: About 1.9 million customers at the end of last year. Has focused on winning share in this market, and total mobile connections jumped by 108,000 over the six months to December 31 last year. Spark this year outbid Vodafone for the last block of 4G spectrum put up for auction by the Government, giving it an advantage in the rollout of faster mobile internet.

2degrees: Has not updated the market on customer numbers since announcing it had reached 1 million in 2012. In late June it launched 4G mobile internet services in some parts of the country, the last of the three big mobile operators to do so.

Television

Sky TV: Expected to soon announce a subscription video-on-demand service. Sky has far more resources than Spark to dedicate to content, and has just renewed its exclusive deal to screen content in this country from Home Box Office, which has the rights to shows such as Game of Thrones.

Spark: Has developed Lightbox, a streaming internet television service due to be available from the end of this month. It will screen shows such as Orange is the New Black, Breaking Bad, and Arrested Development.

Netflix: The online television giant is coming to New Zealand - according to unconfirmed reports. If Netflix does come to this country with its vast array of TV shows, it could leave Spark's Lightbox dead in the water. While it is blocked for most New Zealand internet users, Slingshot has allowed its customers access to Netflix, though it remains to be seen if the United States service will crack down on this.

Getting to Spark

1990: Telecom, then a state-owned enterprise, is sold into private hands for $4.25 billion.

1991: The company lists on the NZ Stock Exchange.

1996: Creates Xtra as an internet provider, which three years later launches copper-line broadband services.

2006: Government announces regulation requiring Telecom to "unbundle the local loop", to give other companies access to the copper-line network and improve the quality of broadband. The move has a disastrous impact on Telecom's share price.

2008: Telecom splits its business into three parts - Chorus (infrastructure), Wholesale, and Retail.

2009: Telecom launches its XT mobile network, which months later suffers massive outages.

2011: Telecom splits from Chorus, which becomes a separate listed company to take part in the government ultra-fast broadband scheme.

2014: Telecom changes name to Spark.

- NZ Herald

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