Non-traditional players could gain hundreds of thousands of broadband customers in a slowing market, a top analyst says.
"We see some fallout for Spark and the other large retail service providers [RSPs], with potential for Contact Energy, Mercury and Sky TV to grow to as many as 400,000 broadband connections over coming years," Jarden head of research Arie Dekker said.
That would represent 22 per cent of today's market.
Today, the fixed-broadband retail market is dominated by four well-established internet providers (shortly to be three, if the Orcon Group-2degrees merger goes ahead as expected): Spark with 40 per cent) share of connections, Vodafone NZ with 21 per cent and Orcon (13 per cent) and 2degrees (7 per cent) with a combined 20 per cent, according to the Commerce Commission's 2021 Annual Telecommunications Monitoring report.
Mercury is the next largest player on 6 per cent, having inherited around 112,000 broadband customers when it purchased Trustpower's retail business last year. Contact has around 50,000 broadband customers. No numbers have been released for Sky Broadband yet, but the firm has indicated its still very early days for the service, which was soft-launched last year.
The Commerce Commission's 2021 Annual Telecommunications Monitoring report puts New Zealand's total internet connections at 1.8m. That represented 4 per cent growth over the prior year, but with the key driver of immigration choked off, the market has started to stall, retail providers say.
Dekker says the market is now close to saturated - and that for those who still don't have an account, it's mainly for financial reasons.
But that doesn't mean a zero-sum-gain situation.
Sky TV initially seemed to be shaping up for a direct partnership with UFB fibre wholesaler Chorus, but after Sophie Moloney replaced Martin Stewart as CEO at the tail end of 2020, it switched to the lower-risk, if also lower margin, strategy of partnering with Orcon Group (formerly Vocus NZ), which provisions Sky Broadband behind the scenes.
One strategy didn't change: using Sky Broadband to make Sky's pay-TV more sticky. The company is offering an entry-level UFB fibre plan for a keen $69 for those who bundle pay-TV - but the rate increases to $79 if you drop your Sky Starter TV plan.
Sky has initially targetted its own customer base for broadband (a process that will take some time to filter through the market, given many will be on 12-month or longer contracts with other broadband retailers) but says it will ultimately target the wider market.
The advent of the UFB (Ultrafast Broadband) fibre network - now nearing completion after a decade-long rollout - has helped to open up the market. Previously, an onsite visit was required when someone hopped between retail providers.
With the upgraded electronics installed with fibre, the process can be done remotely. And it's made it relatively easy for any company to set itself up as a retail internet service provider, with a little help from Chorus (or its peers in the regions) - a development that underpinned the power companies' move into broadband.
Spark, Vodafone and 2degrees/Orcon Group do have one ongoing advantage: fixed-wireless, or using a mobile network to deliver home or small business broadband - is now a substantial part of the market, and one they will probably largely keep to themselves, although there has been some limited wholesale activity such as Spark provisioning fixed-wireless for Trustpower.
Increasing Sky Broadband penetration is one of the reasons Dekker upgraded his Sky TV target price from $2.42 to $2.55 this week (shares closed at $2.40 yesterday). Cost control, the anticipated return of the dividend and the broadcaster's new streaming box - due mid-year - are other factors. Dekker maintained the "buy" rating he introduced with a December upgrade. Sky is due to deliver its first-half result on February 24.
While the 2degrees-Orcon Group merger, which the Commerce Commission is due to rule on in March, will be possibly the biggest telco development of the year, Dekker doesn't anticipate any immediate shakeup. Initially, he expects an inward focus.
The third and fourth-placed telco players will form a more potent number-three competitor to Spark and Vodafone, as 2degrees mobile network and Orcon Group's fixed-line business (including its own fibre network and house-brand power retailer) combine.
But there will be substantial work integrating the two operations. Key questions are still open around who leads the combined business, and which branding will be maintained, among other major issues.
Orcon Group and 2degrees put their respective IPO plans on hold when they entered their $1.7b merger talks.
Dekker says it's hard to say if they would want to list their merged business - but he does note that one motivation is now off the table.
He says while 2degrees built a good business over the past decade it was constrained, to a degree, by the indebtedness of its US majority shareholder, Trilogy International Partners.
Now, the ComCom allowing, 2degrees getting into bed with Orcon Group, which has two deep-pocketed owners: Aware Super, Australia's largest superannuation fund, and the heavy-hitting, ASX-listed Macquarie Group.
"So the merged entity's access to capital is going to be better than it was," Dekker says. "But they are still going to have to continue to be disciplined about how they capital to make sure they're getting adequate returns."
Dekker notes that fixed-wireless now accounts for around 15 per cent of the market, although Chorus, with aggressive performance upgrades, has waged an effective counter-attack of the past year.
He sees Spark - the largest fixed-wireless player - focussing on maintaining its market share in the segment, while Orcon Group/2degrees and Vodafone achieving growth in wireless broadband, which could be a key weapon against the new players' incursion.
The Jarden head of research adds that the merged Orcon Group/2degrees will also have more heft in industry negotiations in areas such as a possible expansion of infrastructure sharing.
He also sees the merged business to display more financial muscle in the 5G spectrum auction due earlier this year. Spark, which placed bids totalling $149m for various blocks of spectrum, dominated the 4G auction, followed by Vodafone ($66m) and a trailing 2degrees ($44m). This time, Dekker expects it to be even-stevens.
With Orcon Group/2degrees' initial inward focus, and the overall telecommunications market growing, Jarden is not expecting any seismic impacts from the big merger this year, Dekker says.
"We expect industry profitability to be stable with some potential for growth in 2022 and into 2023," he says.
Spark could lose some wholesale revenue, while Chorus could have some backhaul revenue clipped.
"[But] we do not expect industry consolidation to have more than a marginal impact on Spark and Chorus."