Broadband market consolidation inevitable

Despite the apparent success in the unbundling of the local loop network, a report released today by IDC believes that the market can only sustain two to three mass-market competitors in the long term.

The other smaller operators will need to find niche markets, either in the business segment or as regional players.

Statistics New Zealand broadband figures released in the March 2008 showed New Zealand had 60 ISP providers – an unsustainable number for such a small market.

A high cost to entry and shrinking margins due to heated competition means the barriers to entry are simply too high for many of the smaller ISPs.

“With the competition at the point it is now really to have a mass market offering you need scale. We only have a couple of players in the market with that kind of scale, and there may only be room for one more. The cost is simply too high,” IDC telecommunications analyst Tim Shepheard said.

“Even so, when you invest that kind of money in adding equipment to exchanges, the business case to do so requires you to get a certain market share within that exchange."

Quite simply, this means the small ISPs have to rely on the goodwill of the big three to give them a decent wholesale price so they can compete, or the government may have to step in again and regulate.

In the most cynical business sense, is there any real incentive for the big three companies to ‘help out’ the small guys in such a cut throat market? “There has been some speculation that the unbundlers may offer sort of wholesale to the second tier access seekers – whether that comes to fruition is speculation at the moment,” Mr Shepheard said.

Report Summary

IDC's Telco Services Market Report showed that for the June 2008 quarter there was increased competition on the fixed line connection and broadband subscriber fronts  but with only small improvements in overall revenue market share.

Telecom and Vodafone now hold 83.4 per cent total market share, TelstraClear a further 9.2 per cent.

The broadband market saw 5.9 per cent revenue growth and over 47,000 new subscribers for the quarter, taking broadband population penetration to 20.3 per cent at the end of June 2008.

Telecom competitors now have 33.2 per cent of DSL lines, up from 29.9 per cent 12 months ago. Telecom did, however, have a strong quarter retaining 56 per cent of DSL connections at a retail level.
Their service offering has improved, reflected by the rise in customer retention to 56 per cent – a vast improvement over quarter four 2007, where it was just 26 per cent.

Vodafone and the Kordia owned Orcon were the fastest growing ISPs in the second quarter, with double digit broadband subscriber increases. Telecom and TelstraClear both recorded growth of 5.2 per cent and 5.1 per cent respectively.

The race is now on as Vodafone and Orcon successfully unbundled the first Telecom exchanges and are eyeing up several more. Telecom is required by regulators to unbundle 15 exchanges a quarter.

Orcon was the first to launch services on its own network in March 2008. The report estimates that by the end of the June quarter approximately 14 per cent of its broadband customers were connected to its new, faster broadband network.

Vodafone has been slightly slower and only has a few hundred broadband subscribers unbundled by the end of the June quarter, but expect this to scale up quickly as its marketing machine kicks into gear.