2degrees' purchase of internet service provider Snap, which gives it a foothold in the landline market, is unlikely to deliver a big shake-up in prices and it may also need to partner with a subscription video on demand service provider to be competitive, market commentators say.
2degrees chief executive Stewart Sherriff said customers had been pushing for some time for the country' third mobile network to also offer fixed lined services and his three options were buy, build or partner. He opted for buy, after previously partnering with Snap for the past two years, which will allow them to offer bundled products within the next three to four months.
"We'll be developing new product under the 2degrees brand that will be innovative and disruptive, we'll be a challenger brand that takes it to the big guys," he said.
Sherriff said there were three good reasons to go with Christchurch-based Snap: it has a gold-plated network that would allow 2degrees to take advantage of the UFB rollout; Snap was number one in customer satisfaction surveys for ISPs; and it had 120 really smart staff who had expertise 2degrees lacked.
The deal, for an undisclosed price speculated to be between $26 million and $30 million, will see Snap owner Mark Petrie took a shareholding in 2degrees and remain with the company as head of its fixed services division.
Telecommunication Users Association chief executive Craig Young said it was a positive move for 2degrees but it was unlikely to be able to shake up the landline market as it did the mobile market where it claims to have significantly brought down prices.
"Spark and Vodafone dominate the fixed lines market and it is already quite competitive. This is more to do with helping these two organisations (2degrees and Snap) compete and grow. They should provide more choice to consumers and business, they're really looking at the enterprise space," Young said.
Sheriff said half of Snap's current revenue came from enterprise customers and its aggressive push into fibre has seen it grab a 20 percent share of the residential fibre market.
Peter Wise, telco analyst for IDC, said Snap was already competitively priced and shouldn't lead to lower prices in the fixed-line market. It was a logical next step for both companies to gain more scale though, he said.
"2degrees has done well in mobile, particularly in pre-paid, but its growth has slowed recently and getting into the fixed market somehow, made sense. With the UFB rollout the whole of New Zealand is at the point of reviewing their broadband provider, over and above the normal, so it's a good opportunity to take the next step and good timing to get into the fixed market from that point of view," he said.
Snap, which is the country's fourth largest internet services provider, has already built a national network over the past 15 years but 34-year-old Petrie said the question was how to take it to the next level.
"The answer was pretty obvious, we will merge with 2degrees to primarily deliver us customers for mobile solutions. It's the best thing to do for my company," he said.
Snap had largely grown by word of mouth rather than marketing, Wise said.
"The question now is whether having the 2degrees brand behind it will be make enough of a difference to scale it to that next level," he said.
Both Wise and Young say consumers are starting to look for one provider for all their phone, internet and online content needs so 2degrees may also need to look at subscription video on demand (SVOL).
Spark is offering its Lightbox service for free for the next 12 months to broadband customers while Vodafone partners with Sky for its Neon service which justifies its higher $20 a month price by having exclusive rights to repeat quality HBO content.
Newcomer Netflix announced today it would launch tomorrow with Kiwis being able to access films and tv shows from its online streaming service from $9.99 a month, the cheapest in the market.
Netflix will be available on a range of devices including smart TVs, Apple devices, and gaming platforms. The other player in the SVOD market is trans-Tasman company, Quickflix which charges $12.99 per month.
Young said Netflix $9.99 price was "interesting" but consumers needed to consider that it wasn't being offered across all devices so comparing it to the other providers was tricky.
2degrees would need to match what its competitors are doing in terms of SOVD, Wise said.
"They'll have to come up with something. Maybe Quickflix is an option or developing something themselves though that would be difficult," he said.
Launched in August 2009, 2degrees has not yet turned a profit, although it pared back losses in calendar 2014 to $35.9 million, down 20 percent on the previous year's loss of $45.2 million. It reporting positive operating earnings for the second year since it was set up. Snap is profitable and has funded development out of cash flow.
