, posted: 10-Sep-2009 07:30

One of the key themes of the Commerce Commission's investigation into termination rates is that they are a barrier to entry for new players.

The theory goes like this:

Termination rates are too high, therefore we have no competition so customers suffer.

If we lower termination rates, competition will flood into the market and the ensuing bunfight for customers will see everyone better off.

It's a good theory - and one I partly subscribe to. More competition in any market drives prices down and that's good for everyone. On top of that, more competitors mean more innovation, which is dear to my heart, and should lead to cool stuff being developed that otherwise wouldn't see the light of day.

However, where I think the Commission goes wrong is its initial analysis of the market. The Commission seems to think there are only two players in the New Zealand market and that's just not right.

Let's see what's going on in the mobile space in New Zealand. Listed in no particular order:

1: Vodafone - 3G coverage out to 97% of the population. Trialling HSPA+ with a view to commercial trials and launch later this year/early next.

2: Telecom - 3G coverage out to 97% of the population. Trialling HSPA+ also.

3: Telecom - CDMA - good coverage (not sure of the latest numbers) but limited range of handsets and devices, due to be phased out (2012 I believe).

4: Two Degrees - GSM - coverage to 50% of the population (according to Eric Hertz on the radio this afternoon), roaming onto Vodafone's network for the remainder.

5: TelstraClear - MVNO - currently on Telecom's CDMA network, due on Vodafone's network shortly.

6: Black+White - MVNO - currently in launch mode on Vodafone's network.

7: CallPlus/Slingshot - MVNO - just launched on Vodafone's network, will have two brands in the market.

8: M2 - MVNO - related to B+W, will launch a separate brand I believe.

9: Compass Communications - MVNO - just launched on Vodafone's network.

10: Digital Island - MVNO - operating on Telecom's network.

Also we have Orcon getting ready to launch its MVNO service on Vodafone's network.

Telecom has said it won't wholesale its 3G network until 2012. Personally I think that's a mistake but that's Telecom's problem, not mine. We get to scoop up all the eager MVNO partners which is fine by me.

There's a lot of misinformation about what an MVNO is and what it isn't.

Myth 1: MVNOs just resell the network carrier's services.

There are two basic types of MVNO - they're on a sliding scale but these are the extremes. A Thin MVNO and a Thick MVNO

Thin MVNO: a step up from reselling - they basically take the existing packages and rebrand them. Slightly better than resale (they own the customer relationship, not the network operator) but only because it puts them on the path to...

Thick MVNO: the network operator sells them a bucket of minutes/TXTs/Data to do with as they will.

Thick MVNOs require a lot more sophistication from the MVNO because they need to know how to build plans/products and what the customer wants.

Most of Vodafone's MVNOs have started out at the thin end and will move up but TelstraClear, for example, I'm sure will be at the thick end. I should point out I have no insider knowledge of this - I'm just speculating wildly from what I've read in the press. TelstraClear, however, has the inhouse capability to build its own plans/services from the outset. That's what they've done with their MVNO on Telecom's network so I'd expect the same from them on Vodafone's.

Myth 2: MVNOs will never be successful because the network provider won't let them.

Try telling that to Virgin Mobile which has built a huge and loyal customer base in several countries based on innovative plans, good customer support and raft of other factors. Virgin in Australia ranks higher on customer satisfaction surveys than Optus does, despite using Optus's network.

Try telling that to BT in the UK, which doesn't have its own mobile network but uses Vodafone UK's (I believe).

And what about Tesco - newly launched in the UK market selling mobile and fixed line services. It doesn't have a network and it doesn't let that stop it. It's just been rated the best in the UK for customer satisfaction.

My point is, there's plenty of competition in the New Zealand market. It's at different levels, it's aimed at different market segments, but all of it is valid and growing quickly.

It's early days yet but surely if we've got this level of fight going on in a country of four million people, we're doing quite well?

Myth 3: MVNOs will always be more expensive than the network that carries them.

Let's have a look at pricing:

Two Degrees has gone to town with simple price points. This is a great move - easy to explain, easy to understand and a good price point: 44c/minute if you haven't topped up recently. Nine cents per TXT. Two Degrees isn't an MVNO, of course, it has its own network, but where it doesn't offer coverage it uses Vodafone's network. Does anyone think they're not serious about targetting those customers?

Well, argue as I might that Vodafone offers greater value, I thought instead I'd point you at Slingshot Mobile which offers similar rates. Or Compass Communications which is in the same ballpark.

There's more to come from all the operators I'm sure (including a Best Mate equivalent that allow you to call a Vodafone number as well as Black+White numbers).

Competition is alive and well and kicking up its heels. Customers will be the winners and it'll happen a long time before the regulated environment catches up in 2011.

Other related posts:
Of termination rates and regulatory holidays
Minister recommends regulation - Vodafone's response
Vodafone's response to the Commerce Commission's report

Permalink to Competition | Add a comment (25 comments) | Main Index

Comment by Chris, on 10-Sep-2009 09:20

Why do they need to regulate MTR's? we now have a 3rd Network operator wont that drive down prices on it's own? as a result of competition.

Author's note by jointhedebate, on 10-Sep-2009 09:28

Competition drives pricing, not regulation. We have competition but it's very new ... ironically I do believe some of the players have resisted the urge to get into the market because the Commission has been making so much noise about regulating, so they're been waiting to see what comes out of it before they jumped in.

Comment by Chris, on 10-Sep-2009 09:52

I find it funny that vodafone did not put down there per min charge for prepay calling when 2degrees launched. it been around 3 weeks now and it still at 89cents lol.

2degrees wanted to keep there prices secret until they launched, they said cause the others will copy. I now see that it was not necessary because vodafone have not made any moves at all, or Telecom for that matter

Comment by simon14, on 10-Sep-2009 11:47

The problem with MNVO’s is that the virtual operators are still at mercy of the network owner.


There is no way 2D can offer a best mate product because they have to pay Vodafone a per minute rate when 2D customers roam on Vodafone’s network and this make it uneconomical to provide the product. So as long as 2D piggy back off Vodafone, we won’t ever see a bestmate/family product available.


Black and White offer a BestMate addon, this is just a rebranded Vodafone product. I personally don’t know why anyone would join Black and White. The only difference is that B&W offer no term contracts. Other than that, their prices are exactly the same, if not more expensive than Vodafones. (The30 plan doesn’t include a bestmate, whereas Vodafones Choose 30 does, for the same price). I don’t really see any extra competition from Black and White.


Virgin in Aussie offer UNLIMTED calling from virgin to virgin mobiles on all their capped plans, starting from just $20 a month. Paul, you can’t honestly compare Virgins with our MNVO’s…. it would be IMPOSSIBLE for a MNVO in NZ to offer unlimited calling 24/7… not only to a few numbers, but to every number on its network.


I think the commerce commission is spot on for not including MNVO’s as other players in the market.

Comment by jointhedebate, on 10-Sep-2009 12:04

@Simon,Virgin is an established player that's been in the market for years. Our MVNOs are new and have been in the market for weeks.Give them time. It's a complex business - that's what's caused a lot of them to delay their launches. It's not as simple as setting up a plan or two and going to market - you've got to really know your stuff or you'll end up building a very successful plan that doesn't bring in any money.2D does indeed use Vodafone's network and until it builds its own 97%-population network (and is it actually planning to do that? I haven't seen anything about that) this is going to be an issue. That doesn't mean it can't offer a Best Mate or similar - far from it. 2D campaigned against such things early on in the process.CheersPaul

Comment by Chris, on 10-Sep-2009 13:06

Hi Paul, Yes 2Degrees are still building sites, and yes they will build to 97% because no operator can afford to keep on piggybacking off another network

Comment by Steve M, on 10-Sep-2009 13:32

- I'm not sure where you're headed with this one. Even VFs own experts agreed that VFs competition assessment was fatally flawed (i.e. not true, misleading, incorrect etc)

Page 39 - Question to VF's paid expert Economist

CHAIR: So how much weight can we put on your economic theory when we observe the conduct in the marketplace? Can we say well it's a fine theory and the model's predicted A but we actually are observing something else so we can really discount that model all together, it clearly doesn't represent - when applied to the New Zealand factual situation, it actually doesn't predict what's happening at all.

And while you're pondering that I'll lead on to the next proposition that you put following on from the first. Sorry, I'll just explain there's a series of three questions to John and then I'll ask the other parties to comment on the totality of the position.

Because your next statement is, and in fact this is a central position taken by your client, which is that if mobile termination rates are reduced this will reduce the intensity of competition between networks leading to higher prices overall and lower consumer surplus. I mean that's the basic fundamental conclusion that follows from the first.

So what I want you to do, again is to apply that theory to the factual situation in New Zealand today. And I want you to consider this, the state of the market with two well established incumbent operators and a recent new entrant. I want you to consider the response of those incumbent operators to recent new entry as set out in media statements. Telecom said; "We regard competition as good, it stimulates the market and creates real value for New Zealand customers". Vodafone said; "Vodafone was born to competition and we know what it is to join a new market and go after market share and so we welcome it. Competition will bring the best out of ourselves, Telecom, 2degrees and will benefit consumers".

Now taking those factors into account, are you still saying that if mobile termination rates were reduced that would have the consequence of reducing intensity of competition within the now three mobile networks in New Zealand and would result in higher prices for consumers?

Page 40 - after considerable too-ing and fro-ing:
CHAIR: So in terms of the economic position the suggestion that a reduction would reduce intensity of competition and lead to higher prices, you accept under the current market situation would not be the case?

DR SMALL: Conditional on where you're going to with that reduction, yes.

CHAIR: Yeah, yeah, cost-based.


For readers who are genuinely interested in this topic and who would like a balanced, non-partisan, non-biased overview of all parties views (i.e. not just VF BS), I highly recommend reading the ComCom transcipt on this.

Warning PDF:

There is some reasonably heavy reading in there, but at least you get the full picture, you get all sides of the story and then you can form your own educated opinion...

Comment by bcourtney, on 10-Sep-2009 15:13

Steve M - I think everyone that is reading this blog is 100% fully aware that this is Vodafone's take on things. Your autotext responses that try to point people to the ComCom transcript are tiresome and of no value

Comment by hellonearthisman, on 10-Sep-2009 16:47

I read that Vodafone would rather sell a wholesale MNVO that deal with true compition. Vodafone and Telecom MNVO's are a clatons versions of compition. If there was true compition in the market then the ComCom and would not be on your case,  they would have have a just reason to inverstergate.

Comment by Paul Brislen, on 10-Sep-2009 18:53


the idea that MVNOs aren't real competition is bizarre. Are you saying the only real competition in any market comes from those that build their own infrastructure?

In that case there is no competition at all in the fixed line market - only Telecom has a national network. Should we not regulate that so as to allow competitors to build their own networks before looking at mobile which has two and a half national networks?

Internationally, MVNOs are regarded as real competition for the simple reason that they ARE real competition. See also the examples above - Virgin Mobile, BT, Tesco and all the rest.

MVNOs aren't saddled with huge network debt up front. MVNOs can add more value and more benefit than the network owners because they don't have all that debt burden to consider.

There is true competition in the market but folk like Ernie at TUANZ simply don't see it. They see network building as the only form of competition and I hate to say this but New Zealand has got more networks than it should have. Consider the population. Consider the size of the country. If Australia can only just make do with three networks and can't sustain four (and the UK is moving from five to four even as we speak) then New Zealand should really only have one or two networks.

Not entirely sure how that will pan out but I suggest even Ernie wouldn't be impressed with that one.

Comment by Paul Brislen, on 10-Sep-2009 18:56

Steve, call me a liar once more and I'll start moderating your posts. I'm happy to discuss the views but this is ridiculous.

Stick to the topic.

Comment by Chris, on 11-Sep-2009 09:47

2Degrees Mobile have started off without debt according to them.

Comment by Paul Brislen, on 11-Sep-2009 09:52


They've invested $250m to build 50% population coverage - versus an MVNO that simply signs a deal and starts operating.

Perhaps debt isn't the word - should have said investment.

As an MVNO you really need a call centre and a marketing arm but you've (in effect) outsourced the entire network side of your business to another company... Much easier to start off with.

David Cunliffe (former minister of communication) used to talk about the "Ladder of investment" which was supposed to see telcos move from resale to wholesale to co-location of equipment to building its own network... it's a good theory but the current environment (in fixed) doesn't support it too well. In mobile, however, I think it's definitely working well.

Comment by Chris, on 11-Sep-2009 10:02

Yes I get that Paul. Tell me is it true that around 70% of the cell phone base is on Prepay?

Comment by Paul Brislen, on 11-Sep-2009 10:05

Hi Chris,

Yes, that's about right... for Vodafone NZ at any rate. Not sure about Telecom.

It's not uncommon around the world. Different markets develop different products and different populations prefer different offers. Two Degrees, after all, is 100% prepay.

I'm also not sure what the similarities/differences are between prepay and "pay as you go"... anyone care to chip in?



Comment by chris, on 11-Sep-2009 10:18

Well one thing I like about Telecom is that if you have your Cell on an account and you go to buy a new handset/accessory you can have it charged to your Telecom account and if you want you can pay it off over 12 months interest free, All charged to the Telecom account, I'm not sure if this a big plus but I thought I would share my info with y'all

Comment by mike, on 11-Sep-2009 11:09

Its sad too see all this effort wasted on something as trivial as MTR's.

If the the whingers put this much time and effort into something that matter, ie improving education, reducing crime, or improving the conditions for some of NZ's poorest, instead of bickereing about how much it costs you to txt your mate.

Once again NZ proving we are completely apathetic, unless it serves our own selfish agenda.

Comment by simon14, on 11-Sep-2009 11:55

Telecom OneBill is really neat.... it's effectively the same as an on account plan, but no base fees and you only pay for what you use.

Comment by Chris, on 11-Sep-2009 12:25

@Simon14 The One Bill Plan is CDMA only. Telecom want to sign new customers onto Contracts so they (Telecom) get more money, No more only paying for what you use. Now you can only go on a monthly One Rate plan.

Comment by langi27, on 11-Sep-2009 15:50

I'm also of the opinion that MVNO's add no competition to the market, how can competition exist where a contract is signed and both players agree to the rules of how to play?

Vodafone sets the price to which MVNO's access their network, they set the limits of what competition rules there are?  

2 Degrees has built a network and now can make their own rules, the key point being they own the hardware, they have the right to do whatever they like with that hardware. An MVNO does not have this right, they are limited to the deal that has been signed and the rules set out by the Network owner. 

and I also agree with comments from simon14, 2 Degrees is at the mercy of not only termination rates but roaming rates, and can only partially compete in this environment, AKL, WEL, CHC.

They cannot offer best mates because anyone roaming on Vodafone's network is subject to roaming charges. 2Degrees would bleed money and would be out of business in a few months.

This is not Vodafone’s problem as they have been kind enough to agree to the roaming in the 1st place, but it defiantly hinders competition. 

So until 2 Degrees can cut the cord both with termination rates and roaming, they will always be 2 steps behind.

Author's note by jointhedebate, on 11-Sep-2009 15:56

But that's a different issue to "termination rates don't let us compete"... MVNOs can and are profitable all around the world. Sure, they don't have the same level of freedom that owning a network brings (they can't decide which technology will be deployed, for example) but they also don't have the massive start up costs.

Once again I think of David Cunliffe's "ladder of investment" approach.

When you start up you have no customers and no income so you want your outgoings to be as cheap as possible (so you go for a resale deal - nobody in NZ is doing this that I'm aware of).

Once you've got some customers you move up the food chain by becoming a thin MVNO, then a thick MVNO when you've got customers/understanding of what your customers want.

From there you've got a customer base and you're making money but you don't have total control, so you build your own network.

If you want control, build your own. If you want to follow and undercut the network owners, be an MVNO. It's working all over the place and I'm sure it'll work here (for example, Slingshot Mobile's prices would have made the Vodafone retail marketing team have kittens, I'm sure).

And this idea that 2D can't offer Best Mate unless it gets regulation or builds its own network is odd - sure, off-net will cost more but that doesn't mean it won't still make money off those calls. Far from it.



Comment by langi27, on 11-Sep-2009 16:23

I'd also like to disagree with your Virgin comparison.

(mainly because i have nothing better to do with my Friday afternoon, and I should probably be working)

Virgin mobile setup when market penetration was well below 100%, they weren't necessarily offering a better package than that others but were aggressive in Marketing and already had brand awareness, plus a ton of money to do it, they had shops in all the right places, they advertised heavily and joined up with retail resellers Dick Smith, JB HI Fi, Harvey Norman and a whole bunch of others. Every time Virgin Music, Virgin blue, Virgin Atlantic came on TV people were reminded of the Virgin brand, people trusted them and those who were still to make a decesion about who they would go with jumped on board.

I certainly knew of Virgin before they were a mobile reseller. (same goes for BT and Tesco's massive established companies with too much money)

The NZ MVNO's have never had this kind of brand awareness or trust, to say they can be as successful as Virgin is not accurate.
We have well over 100% penetration and a new player has to offer a significantly better deal than the one they network are on.

There is a reason no one is flocking to Black and White, Slingshot, Callplus, their packages are not that much better than VF or Telecom's, they don't offer any sort of competition, nor have enough money to market themselves or setup retail outlets.

The network owners have set the rules of the game, and the MVNO's are playing the it as best they can.

Author's note by jointhedebate, on 11-Sep-2009 16:31

It's a Friday... I know the feeling.

You say:

Virgin mobile setup when market penetration was well below 100%, they weren't necessarily offering a better package than that others but were aggressive in Marketing and already had brand awareness, plus a ton of money to do it, they had shops in all the right places, they advertised heavily and joined up with retail resellers Dick Smith, JB HI Fi, Harvey Norman and a whole bunch of others. Every time Virgin Music, Virgin blue, Virgin Atlantic came on TV people were reminded of the Virgin brand, people trusted them and those who were still to make a decesion about who they would go with jumped on board.

And I agree, to a point. Sure, we don't have a multinational name joining in at this stage (TelstraClear is the nearest we have and they're a way off yet) but Slingshot, CallPlus and Orcon are all good strong retail brands already in this market (broader telco market). They have presence, they have retail might, they can market (all three are big marketeers) and frankly they're getting customers.

Virgin may have entered the market at a time when penetration wasn't at an all-time high (and I'd argue NZ Comms should have come in five years ago when there was still plenty of room) but 2D has already said it expects to see 500% penetration and in Europe we're seeing 130% penetration without too much trouble. There's plenty of room for 2D or the MVNOs to fill out...

In many respects, the MVNOs have a much better chance at this than 2D. 2D is purely a mobile company and has no fixed line component at all... the MVNOs are bundling mobile with fixed line and broadband. That's a very powerful bundle... it's the way Vodafone is moving worldwide and without that full offering you're pretty much stuck these days as a niche player.

Have a look at Slingshot's pricing and tell me they're not going to make a fist of it.



Comment by Chris, on 11-Sep-2009 17:22

@langi27 you mean: Auckland,Wellington,Christchurch,AND Queenstown. They do have there own cell towers in Queenstown but not everyone is aware of this. Queenstown is New Zealand's most popular holiday and vacation destination for international visitors you see.

Comment by KiwiOverseas66, on 13-Sep-2009 19:05

I don't know that MVNOs are exactly the kind of competition that the regulators and/or professional commentators might like, but I think it does constitute competition and its about the best that can be done all things considered.Comms is an expensive business - there's no real cheap way of setting yourself up as a national provider (and to be seriously considered as a provider - you have to be nationwide with full range of basic services from day one). In addition, NZ is a mature market with greater than 100% saturation - so it means high setup costs and a hard slog taking the customers off someone else. In the meantime the existing players aren't going to be sitting on their hands (and neither should they...competition is a two way street). That being the case an MVNO model does offer a way for new companies to get into the business, but its still not a walk in the park.Personally I bit skeptical of the "ladder of investment" scenario. Sure - every business has to start somewhere, but the idea reeks of some govt departments view of how businesses operate (and of course govt departments would know). I can just imagine the power point presentation in some govt conference room somewhere...... "and here's the ladder of investment leading to the balcony of profitability - and from there we look upon the ocean of consumer/ business harmony leading to happy voters for the next election"!My concern regarding the the CoCom view of termination rates is that its based solely on an statistical average of what they think the rates should be. I also get a bit worried when govt commentators come out with statement along the lines that high service costs charged by service providers has resulted in an "unacceptably high level of profit". You mean to say there's an acceptable level of profit? That demonstrates a fundermental lack of understanding about business. Don't get me wrong - as a consumer I would love to have cheaper rates, but as a business person I understand businesses are about profit, not social outcomes. Telling a company their level of profit is too high is like telling a racing driver they're going to fast.  

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Paul Brislen
New Zealand

You’ll have heard about mobile termination rates and how the Commerce Commission is investigating whether or not to regulate them. But what is a mobile termination rate, how does it work and why is it so important?

In this blog, we’ll try to answer your questions, tell you a bit about what we think and keep you up to date with the Commerce Commission and its process.

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