5 things to consider in Vocus sale

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Australian telco Vocus has put its New Zealand assets up for sale, and there is plenty of speculation about prospective buyers – an overseas telco, a New Zealand telco, private equity, management buyout… and so on.

Vocus NZ is the third largest fixed line provider in New Zealand, and has achieved scale via acquisition of brands that include Orcon, Slingshot, Flip, 2talk, FX Networks and Maxnet. It is sometimes noted there are over 90 internet service providers in New Zealand, but only 12 entities (some of which are collections of companies) earn over $10 million in gross revenues, according to Commerce Commission in its annual calculation of the Telecommunications Development Levy.

The Vocus investor presentation shows that in FY2017 its NZ business made $323 Million in revenue, $57.5 million in EBITDA and has 16% of Ultra Fast Broadband connections. Assuming the new buyer bought the entire NZ business, here are five things to consider.

The bundle

According to venture capitalist and internet pioneer Marc Andreessen there are “only two ways to make money in business: one is bundle, the other is unbundle.” An example of the latter is Apple unbundling the album on iTunes and selling single songs. An example of bundling is pretty much what every internet service provider does when it reaches scale, in an effort to raise its ARPU (Average Revenue Per User) by adding adjacent services.

As Vocus NZ CEO Mark Callander told Foresyte Report last week: “I’m a big believer that when you have 14% market share like we have, the best energy me and my team can do is get to 25% market share.”

According to Callander there are three services that an ISP can bundle with broadband – content, mobile and electricity. Vocus has, for now, ruled out content, has an MVNO agreement with Spark (see more below) and has chosen to bundle electricity services. Retailing electricity is low margin, but electricity customers – of which Vocus now has 9000 –  are relatively low cost if you have the customer service infrastructure in place such as the contact centre, consumer applications, and sales and marketing functions.

While the electricity sector is currently regulated to incentivise investment in power generation (to ensure stability of supply) rather than to promote a highly competitive market’s worth noting that a “full scale review into retail power pricing” is part of the Labour-NZ First Coalition agreement.

Which could be to Vocus’s advantage, if the new government, as a result of the review, decides to tip the regulatory scales a little more in favour of competition.

Mobile

Vocus has an MVNO (Mobile Virtual Network Owner) agreement with Spark, which means it resells Spark’s mobile service to its broadband customers. It has 21,000 customers taking up the service. Currently it is a retail-minus agreement but Vocus is pushing the Commerce Commission for a review of the MVNO market, so that it can potentially offer a differentiated service. Overseas there are examples of MVNOs that have just taken the radio function from the mobile network owner and provided all the other services – roaming, service delivery, billing, CRM, distribution, marketing and sales. Presumably this is the kind of MVNO offering that Callander would want access to.

Today mobile is a way to provide an additional service to broadband customers, but it could become critical to Vocus’s core business if fixed-wireless services compete with fibre broadband in terms of speed and reliability.

“I don’t see fixed wireless as a viable alternative at the moment, but you’ve got 5G (on its way), you’ve got changes in the telco act coming in terms of the structure with Chorus,” says Callander. “We now have a regulatory framework that is pricing in increase (for wholesale services), so there is actually pricing increases every year moving forward. It’s going to be impossible to maintain the kind of price points we see now.”

Rural customers

Vocus doesn’t offer rural services because it doesn’t make commercial sense. Callander told the Foresyte Report that the extension to the Rural Broadband Initiative, in which the Rural Connectivity Group – a joint venture between Spark, 2degrees and Vodafone – is “showing positive signs”.

“Essentially, we’ve been subsidising the investment in rural through the TDL (see above), through the build out of 4G and improved fibre out to these areas,” he says. Adding that the RCG has to come in with the objective of “opening up competition for all and not being closed.”

Business and Consumer

Vocus has retired the CallPlus brand for its business offering and is in the process of the consolidating its consumer brands to just two – Orcon and Slingshot. Would it be possible for a buyer to carve off the business customers, and retain the consumer brands?

While public-facing Vocus Communication and Orcon/Slingshot offer different products, it’s likely the back-end services – such as international and domestic backhaul – are intertwined and could be challenging to separate.

Outliers

 As befits a company that has grown both organically and through acquisition, there are some outlying products and services, which may or may not need to be tidied up. There is the VoIP service 2talk which continues to operate as an independent business unit – what will its fate be? And there are the legacy products to be found in long-forgotten websites belonging to ISPs that were purchased along the way – for example Maxnet’s unlimited dial-up plan for $26.50 a month, which serves a shrinking of 24,000, and shrinking. It may not survive post-sale.

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