2degrees declares war on Vodafone and Telecom

By Steve Biddle, in , posted: 6-Dec-2010 21:02

In recent weeks 2degrees mobile have upped the ante in the battle over Mobile Termination Rates (MTRs) here in New Zealand. 2degrees have declared war on both Vodafone and Telecom by offering prizes to users in return for soliciting bulk inbound SMS messages on their network - prizes that are funded by 2degrees from MTR revenue, and no doubt leaving them with a tidy profit on the side due to the huge volumes of traffic that the competition is creating.

MTRs have been a controversial issue in New Zealand and 2degrees have been very vocal about their objections to the current charges and the on going Commerce Commission inquiry into MTRs which has now been under way for over five years.

For those who don't understand MTR rates we'll start with a brief rundown. When calls are made between telecommunications networks, money is handed over from one network operator to the other. This charge, known as an interconnection fee (or termination charge) is designed to cover the cost of the network operator delivering the voice call or text message to the end party (or the 'B' party in the telco world). This model is known as Calling Party Pays (CPP), and is used by the vast majority of mobile and fixed line operators in the world to connect calls between networks. An alternative method known as Mobile Party Pays (MPP) is used by mobile operators in some countries such as the USA. Under MPP no interconnection charge exists and no money changes hands, instead the receiving party pays to receive a call or SMS.

MTR rates have become a very hot topic globally in recent years as regulators have tried to force these rates down. Here in New Zealand 2degrees have taken issue with the charges and have been very vocal in the past year, to the point of walking away from the negotiating table and withdrawing all offers after they took issue at the Commerce Commission preferring to accept voluntary undertakings from Vodafone and Telecom in late 2009, rather than forcing price regulation into the marketplace as 2degrees wanted. As of December 2010, yet another investigation is under way, with regulation of MTRs expected to occur in 2011, with pricing to be set by the Commission.

Two weeks ago 2degrees launched a promotion known as "Text Me Race" that exists solely to exploit termination rates, generating both significant revenue for themselves, and to no doubt send a clear message to both Vodafone and Telecom that they believe the current system is flawed. This promotion entices users to receive large numbers of SMS messages from off network mobiles (Vodafone and Telecom customers), and in return offers prizes to the users. In their initial week long promotion held just over a week ago over 700,000 SMS messages were received on the 2degrees network from the top 5 place getters, with over 230,000 messages alone received by the winner. The total number of messages received is unknown, but it's safe to assume that it's significantly higher!

With current SMS termination rates between Telecom and 2degrees of 9.5c + GST, and 6.25c + GST between 2degrees and Vodafone (negotiated as a special deal), this represents revenue to 2degrees of somewhere between $43,750 and $66,500 + GST, depending on the network that the messages originated from, for these top 5 users alone. In return 2degrees gave away 3 PlayStation 3's, a handful of free mobile phones, and $30 airtime credits if you received 1000 inbound SMS messages from another network. 2degrees have discovered a cash cow, and right now they're milking it as fast as they can. Today they have launched a new Xmas promotion, this time offering a LED TV for the top place getter, Xbox Kinect packages, free phones, and free airtime.

This type of business model of exploiting termination rates isn't new. In the late 90's it was exploited by an number of ISP's in New Zealand who offered free dialup internet that was funded by termination charges. This famously lead to the introduction of the 0867 prefix in New Zealand by Telecom New Zealand to manage traffic on their network, however the conspiracy theorists out there still believe the introduction of 0867 was a cunning move to Telecom to shut down the business model. Today the model is also used by 2talk who use the 028 prefix for their fixed line VoIP platform and allow people free forwarding of calls to their mobile phone as well as generating revenue for themselves for every call to an 028 number that is tied to a fixed line service.

One can argue that since the launch of mobile networks that MTRs have represented a legitimate funding source for networks using the CPP model. The question has to be asked however - is what 2degrees doing now ethical? Are they exploiting MTRs for their own gain? Should Vodafone and Telecom continue to deliver messages to the 2degrees network that are nothing other than "solicited spam"? If you're a Vodafone or Telecom user who's sent large amounts of messages do you feel short changed helping a friend to win a low value prize when the real winner is 2degrees?

2degrees are pushing for a Bill and Keep (BAK) pricing model where no money changes hands between operators, and they believe traffic symmetry occurs naturally. They believe "spam" isn't a problem in the SMS world, but that's clear is right now they're encouraging solicited bulk messaging which services no purpose other than delivering them financial gain. To me this is spam, even if it is solicited.

What is clear is that 2degrees have caught both Vodafone and Telecom off guard. The only unanswered question now is how much cash the cash cow will give out before it goes dry. People get dirty hands during wars, and only one side can win.

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Comment by Steve, on 6-Dec-2010 22:18

Good on 2degrees! Telecom and Vodafone are the ones who made the rules to this game. Telecom and Vodafone are the ones who set termination rates at prices far far far in excess of cost. Hopefully this will force Telecom & Vodafone to lower their termination rates to something closer approximating cost (thereby removing 2degrees incentive to run the competition). And hopefully this 'commercial negotation' (i.e. Telecom & Vodafone dictating the new terms to the game) happen faster than the regulator who's been looking into it for 5+ years (and still hasn't actually acted!!)

Comment by freitasm, on 6-Dec-2010 23:22

Things I wonder... For someone to receive 230,000 SMS there must be a "mechanical" element in there. Someone is using an automated process to send out all those messages.

Sure Telecom or Vodafone could just find who's sending this many messages and use the "fair use" policy built into all their contracts to terminate service?

Of course it would still be a cat and mouse game, chasing people as they move from SIM card to SIM card...

Comment by Andrew, on 6-Dec-2010 23:45

This is currently about the 5th Textme race 2degrees has done. I myself have won 3 phones from them

Comment by Kyanar, on 6-Dec-2010 23:54

The real question is how the 230,000 is generated - I'd agree that people aren't typing it out, but what exactly would 230,000 text messages cost to send?  That's apparently $46,000 in text messages on a regular $0.20 per message, and to be honest I cannot think of a single VFNZ or TNZ plan that would allow one person (or even a small group of people) to send that many messages without the proverbial lubrication being applied.  It'd cost $2300 just in Vodafone $10/1000 texts, and that's only on net.  The only thing I can think of is Telecom XT's "effectively unlimited" TXT plan, but didn't they phase that out (again)?

Comment by Regs, on 7-Dec-2010 00:34

i expect that a few posts on twitter and facebook to anyone (and everyone) in the world saying 'plz txt me coz i can win stuf' may well generate a lot of traffic... including txt spam

Comment by NonprayingMantis, on 7-Dec-2010 10:28

note also that 2D's facebook page is enouraging people to call Telecom's Santa line.   that is generating 2D interconect revenue too.  something like 25cpm IIRC.

Comment by kristinahunt, on 7-Dec-2010 18:12

This is only showing the true colours of 2degrees I hope the comcom take some action against them and Telecom cut off SMS sending to 2degrees!!

Comment by lucky015, on 7-Dec-2010 18:37

The current system is setup in a way to prevent new competition, 2degrees is using that system to make money in the hope that it will be rewritten to prevent them from being able to make money from it, If it gets rewritten it will probably be overseen by the governement and forced to be written fairly...

Looks to be a win-win system for 2degrees overall.

Comment by SteveON, on 8-Dec-2010 15:57

I actually beg to differ... Telecom and Vodafone both have deals to send x amount of SMS's for $. In order to be able to succesfully provide these deals at below MTR's: Assuming there is an inbalance of SMS to another network; the company needs a considerable market size.

However 2degrees is a small player, but have you noticed that they can offer 200 SMS's for only $10? Thus to provide the 2000 deal with a smaller market size and lower profitability on each SMS; because of roaming. I believe that 2degrees are using the TextMeRace in order to provide a blance to their 2000/1000 SMS packs.

Comment by Sam, on 13-Dec-2010 11:35

I think what 2D has done is great, it is drilling their competitors into the ground, making them money, and giving their customers prizes. I have so far invested in 2 unlimited XT sim cards worth about $100 each, and I have already won 8 IDEOS phones and one of the cheap nokias, Ii don't care if 2D is making money, because I am too, and they aren't bothered that we are effectively cheating the system kind of, but yeah, it's win win all round really. I think 2D is a great company and they are revolutionizing mobile networking in NZ. They are providing another path for us rather than to be continuously falling into the crap that TC/VF offer.

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Steve Biddle
New Zealand

I'm an engineer who loves building solutions to solve problems.

I also love sharing my views and analysis of the tech world on this blog, along with the odd story about aviation and the travel industry.

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I'm an #avgeek who loves to travel the world (preferably in seat 1A) and stay in nice hotels.

+My views do no represent my employer. I'm sure they'll be happy to give their own if you ask them.

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