New Zealand is close to half way through an ambitious project to boost internet speeds nationwide.
By the end of 2019 the first stage of the government sponsored Ultrafast Broadband project will be complete. UFB will connect the 75 percent of the population living in urban areas to a fibre network. A second stage will add roughly another 5 percent of the population to the network.
UFB Progress September 2014
Meanwhile the Rural Broadband Initiative will boost speeds for people living in country areas.
The Ministry of Business, Innovation and Employmentís September quarterly report says 80 ISPs offer fibre.
Follow the money
Thatís a lot of service providers for a small country. Not all are prospering.
Spark, New Zealandís biggest internet service provider, doesnít make money from broadband.
A panel in Sparkís 2014 annual report says the company has 669,000 connections. Thatís up 20,000 on a year earlier. Spark has a 49 percent share of the broadband market ó roughly half of all New Zealanders connect online using Spark.
During the year Sparkís broadband revenue declined 2.4 percent from $291 million to $284 million. The company reports broadband made a $12 million loss.
In its annual report Spark puts the fall down to: ďa strategic decision to hold share in the broadband market by re-pricing our consumer plansĒ. In other words ó intense price competition.
Unlike most of its rivals, Vodafone operates its own cable network in parts of Wellington and Christchurch.
Vodafone New Zealand doesnít break out detailed financials. That makes it difficult to know how well it does in broadband.
Vodafone first loss in 13 years
In 2014 Vodafone NZ as a whole posted a $27.9 million loss down from a $55.9 million profit a year earlier. The figures come from financial statements lodged with the Companies Office. That means Vodafone New Zealand made its first loss in 13 years.
New Zealandís third largest ISP is the CallPlus Group. The group owns the CallPlus, Slingshot, Orcon and Flip brands. The Commerce Commission estimates the group accounts for 13 percent of broadband connections. When the company acquired Orcon in June 2014 Chief executive Mark Callander said it had around a 15 percent market share.
CallPlus is private. There arenít easy to find figures to estimate its business performance in the broadband market. What is know is that Orcon was losing money before CallPlus acquired it.
At the time of writing Spark, Vodafone and CallPlus make up 95 percent of New Zealand fixed-line broadband connections.
Who makes money?
We know Spark and Orcon lost money on broadband services. We donít know if Vodafone and the rest of CallPlus are profitable. Itís reasonable to assume that even if they are in the black, at best, as a group the three ISPs break even.
This goes some way to explain why the three were quick to raise prices when
If 80 ISPs offer fibre, there are at least 75 smaller businesses sharing the last four percent or so of the broadband market. Many are regional or†in a niche and serve only a few hundred customers.
This ISP market tail is where things get interesting, because while they each have a relatively small share of the market, we can reasonably assume most of them are profitable or†break even.
How can we assume this? Because small ISPs rarely have access to capital. They tend to live hand to mouth. If they werenít profitable they wouldnít last long. Directors and business owners draw an income ó sometimes a good income from the businesses.
Snap doesnít file public results. However, I discussed margins and profitability with the company this time last year. Snap told me the business makes a profit with a margin of ďbetter than four percent, not as good as 10 percentĒ.
For now the Singaporean-backed MyRepublic is a minnow. It only started selling in October. And because it only sells fibre services, it can only address a fraction of the market.
MyRepublic is†small, but CEO Vaughn Baker has ambitions to be big and disruptive. The parent company in Singapore is a major player in that market and reshaped the ISP business after the city-state rolled out its fibre network.
On one level Bakerís strategy is simple. He aims to chase two niche consumer markets with special needs: gamers and online entertainment junkies. The MyRepublicís network is optimised for gaming and streaming video.
Price as a weapon
Price is part of that strategy. MyRepublic has gone with aggressive unmetered plans at around the $100 mark. With a Chorus line costing $38 and transport provisioning for unmetered data on a fibre line costing around $40 a month, thereís little room for a margin after taking support and other overheads†into account.
MyRepublic is operating on the crash through or crash model. It will either build enough momentum and pull customers away from existing ISPs to win economies of scale or it will burn through its investors cash.
At the time of writing MyRepublic isnít profitable,
That may sound reckless. If it works the potential rewards are solid. MyRepublic is taking the fight directly to the big three ISPs.
The indie ISPs
Away from the big three, Snap and MyRepublic are what I like to think of as the indie ISPs. You might also describe them as boutique ISPs. These are small, often regional, niche businesses ó in many cases the owners do everything including answering helpdesk calls from customers.
One indie ISP is Dunedin-based Wicked Networks. Wicked runs a wireless hotspot network in Dunedin and offers residential broadband services in that city. It also serves business broadband customers in Dunedin and Auckland through the Chorus network.
Small ISPs tend to have an intense focus on their specific niche. That could be as simple as being the champion for a small town or region. It can also mean specialising in, say, providing services for farmers in rural areas.
One interesting aspect of New Zealandís broadband market is that scale doesnít seem to help. If anything the bigger players are proportionately less profitable than the minnows.
That could be temporary. Sparkís quick repricing move after the recent Commerce Commission ruling suggests a fresh willingness to risk losing market share in return for better margins. It was a gamble that paid off with other big players making similar moves.
As New Zealanders move more to fibre, things will change again. In some ways fibre offers less scope to differentiate the basic service, so ISPs will need to find alternative approaches. MyRepublicís decision to opitimise for gamers and streaming video is an example of this. Local and niche focus by the indies are another.
Despite profits being elusive for the big players, New Zealandís broadband market looks†in good shape. There are big, largely undifferentiated ISPs and small, focused niche players. Competition is working as it should, customers get a good deal.