Has 2degrees shot itself in the foot?

Our new mobile operator’s launch went largely to script, with business users ignored (there’s no 3G data, data cards or BlackBerry support, for example, and international roaming rates are steep) but killer pre-pay rates that undercut Telecom and Vodafone by half. But even at the low-end of the market, 2degrees’ tactics could backfire, reckons one analyst.

Pre-pay price slash
If you’re on pre-pay, then 2degrees rates are mouth-wateringly cheap. Voice calls are 44 cents a minute, compared to 89 cents a minute on Telecom and Vodafone pre-pay plans. Txts, at 9 cents, are also half the cost. Calls to other 2degrees mobiles cost 22 cents a minute, and calls to 21 countries (including Australia, the US, UK, South Africa and China) are included in the 44 cent flat rate.

New Zealand has a much higher rate of pre-pay customers than the OECD average (71% by MED figures). And on the face of it, it seems the low-hanging fruit should just fall into the 2degrees' basket.

Not so fast says IDC analyst Rosalie Nelson: “My biggest challenge with this approach is that no matter how much 2degrees may argue about closed net pricing [mobile termination rates], the reality is that this is what the market is accustomed to having their Best Mates and their TXT2000.” Cajoling them into paying by the txt won’t be easy.

Ms Nelson says the way 2degrees plans have been pitched, it’s possible that many budget users will buy a 2degrees sim as their second sim card.

For 2degrees, that could be a very bad thing, with a customer swapping in their Telecom or Vodafone sim for outbound calls or txt on their plan that rewards them for sticking to a circle of frequent contacts, and using their 2degrees sim on the same phone for getting in touch with less frequent contacts.

That would put 2degrees on the wrong side of the mobile termination rate equation (MTR being what telcos pay each other when a call terminates on the another's network).

Live by the mob ...
Ms Nelson's theory is backed by reaction from the mob. The new carrier has a huge following on Facebook - nearly 9000 strong - but reaction to today's plans was decidedly mixed (even allowing for some gaming from rivals). Some are as enthusiastic as every; others grouse about the lack of a $10 txt or best mates style plan.

2degrees' new boss, Eric Hertz, can be under no illusion that his company's launch line-up is swimming in the shallows. His last role was chief executive at Seattle's Zumobi.com, a Microsoft spin-off that develops smartphone apps for Apple's iPhone and other high-end handsets.

Wither data?
Ms Nelson was more relaxed about 2degrees paucity of data support. There are no 3G cards, tethering support or in fact any 3G data of any kind at launch. Phones can get Edge data (rated at 240Kbit/s) but there are no plans and the casual rate is a nosebleed 50 cents a megabyte/$500 a gigabyte. There is no BlackBerry support, no iPhone and, bar the Nokia E63, a very workaday, narrow selection of handsets (seven from Nokia, two from Samsung; the company is banking on many bringing their phone with them to its network).

2degrees’ Tex Edwards emphasises that “this is a marathon, not a sprint ... we're focussing on prepay because that's where the pain is right now". 3G data, data cards and other high-end frills will follow.

Mr Edwards words echo those of of new chief executive Eric Hertz, whose last role - at tiny smartphone application start-up Zumobi.com - made him keenly aware of the potential of smartphones, netbooks and other devices beyond the cellphone, giving rise to his 500% market penetration theory.

Ms Nelson tends to agree, saying that 2degrees has done a good job of branding itself, and that data will no doubt follow once the carrier is established. At this point, she says, it’s hard to tell if the voice and txt focus arises from technical challenges, or a strategic decision to focus exclusively on the low-end of the market at this point.

2DEGREES: VITAL STATISTICS

Headquarters: Newmarket, Auckland
Chief executive: Eric Hertz
Chairman: Bill Osborne
Founder: Tex Edwards (2000)
Former names: Eco-net; NZ Communications
Owners: Trilogy International Partners (US) - 52%; Communication Venture Partners (UK) - 26%; Hautaki Trust (provider of spectrum) - 20%. Balance held by private investors, including Tex Edwards’ KLR Hong Kong.
Investment so far: $250 million
Tax payer funding (via the Hautaki Trust): $10 million
Network: 2G/3G Own infrastructure in Auckland, Wellington, Christchurch and Queenstown; customers will roam - invisibly, to them - on Vodafone’s network outside those areas. Nationwide network build promised; no time table
Chin wag free sim card triallists: 50,000
Customer projection (ABN Amro Craigs): 100,000 first year (2% of market), 200,000 second year (more projections here)
Retail strategy: No company-owned or dedicated stores. Will sell sim cards and phones through partners including Noel Leeming, Bond & Bond, Dick Smith Electronics, Warehouse Stationery, Pak & Save, New World, Foodtown, Countdown, Woolworths, Shell, Mobil and BP. Direct retail presence promised by new chief executive Eric Hertz, down the track.
Accidental benefactor (Pinot Noir category): 2degrees.co.nz
 

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