Vodafone and Slingshot are agreeing to hold wholesale hands whilst kicking each other competitively under the table.
Vodafone’s agreement to wholesale its newly unbundled Red network to prime competitor Callplus marks a new era of pragmatism — and competition — in the NZ market. Simultaneous co-operation and competition have always been uneasy bed partners, and often a source of tension between the retail and wholesale divisions of a carrier. Yet telecommunications markets are founded on the efficient wholesale and resale of broadband and bandwidth — Kordia, FX, Orcon, TelstraClear and of course Telecom are all active players, to name but a few.
The difference here is that Vodafone is making a new, high-value access network available on a wholesale basis before it has even completed deployment.
The benefits to Slingshot are clear: it doesn’t have to face the upfront capital costs of investing in its own unbundled network. Depending upon its arrangement with Vodafone, it can selectively invest as it grows, choosing to invest in unbundling at an exchange when and if it gets enough subscribers to justify it.
But what’s in it for Vodafone? Vodafone announced only three months ago that it was investing $50 million in its unbundling strategy of 40 exchanges in Auckland, before expanding into other centres.
So why is it equipping a prime competitor with the tools to target and cannibalise Vodafone’s own customer base? A lower risk approach would have been for Vodafone to wholesale its unbundled services only after it had achieved a degree of retail saturation with its unbundled broadband services.
Yet the risk to Vodafone are not as high as it first appears:
Slingshot’s (and indeed every ISP’s) main competitor is Telecom with its 60% retail broadband market share. Vodafone will be betting Slingshot acquires Telecom customers, giving Vodafone a slice of new revenue pie.
Providing unbundling as a wholesale option helps to minimise the risk of DSLAM overbuild, and consequent price wars. Internationally, unbundling has led to proliferation then consolidation; in some markets large numbers of ISPs have selectively unbundled in the same central city and urban exchanges, seeking to cherry pick the highest value customers. This has led to sometimes debilitating price wars and failure or consolidation. NZ already has Orcon, Vodafone and, apparently, TelstraClear all focused on a similar unbundling footprint. Having CallPlus as a late unbundling entrant could be more disruptive than having it as a wholesale partner.
Vodafone’s brand, mobile leadership and marketing capability puts it into a different league to CallPlus. Not that CallPlus should be underestimated as a competitor; IDC estimates it held 6.5% broadband market share in June, compared to Vodafone’s 8.5% share. But the market trend towards mobile and fixed bundles and converged mobile/broadband data plans means Vodafone will have gone down this path confident of its ability to compete with Slingshot at retail.
CallPlus has an established small-to-medium business (SMB) market share, particularly in fixed calling, which Vodafone has struggled to attract. Vodafone may have made a judgement call that it can generate wholesale revenue from a market it has struggled to access itself.
However, this is riskier: Vodafone has a high mobile market share in the small business market — by one 2007 IDC survey, Vodafone held 50% mobile market share in companies with less than 50 employees. It has the potential to expand this into broadband – and an unbundled CallPlus may represent tougher competition in this sector.
Politically, Vodafone has an extremely strong incentive to proactively drive wholesale competition, given the regulatory scrutiny of mobile competition and regulation.
A wholesale provider does not have to carry the escalating costs of acquiring customers, providing equipment, and managing service and retention. It can generate revenue — indirectly — from markets it cannot target on its own account.
And, of course, Vodafone is not subject to the regulated pricing that dictates Telecom Wholesale’s market positioning; it can, to an extent, determine the attractiveness of its offer and the scale of competition from its wholesale clients.
Will this prove truly disruptive to Telecom Wholesale and the market? Potentially.
Vodafone’s unbundled network will cover the strategically important main centres, making it an attractive partner. But ISPs will continue to mix n match according to their wholesale needs at a time of significant market evolution and change.
What may truly change the gameplan is if Vodafone takes the next step, installs its equipment into Telecom cabinets and then opens up the sub-loop on a wholesale basis to other carriers. It carries strategic risk — but it would then be competing with Telecom at every level and it would take Vodafone-controlled fibre much closer to the home, which it needs to really drive its own truly integrated fixed and mobile broadband service.
But today that is just speculation. So let’s applaud the initiative, but hold back the celebratory fireworks until we see just how aggressive and committed Vodafone is willing to be to its new wholesale business, given its determination to “Paint NZ (Retail) Red”.
Nelson is telecommunications research manager for IDC New Zealand.