New 2degrees boss sees 500% market penetration

Following the shock resignation of 2degrees’ chief executive Mike Reynolds, NBR talks to his successor, Eric Hertz (54), who will relocate from Seattle to Auckland literally days before the new telco’s launch. The American immediately charts a new course for 2degrees in at least one area, and reveals his time-frame for becoming cash-flow positive.

A 30-year telco industry veteran, Mr Hertz has served as a region chief executive for Bell South International in Central America and, most recently, headed a Microsoft spin-off called Zumobi, which focussed on smart phone applications.

NBR: On Wednesday I spoke to Trilogy International Partners’ senior VP Stewart Sheriff, who was in Auckland to announce that his investment company had executed an equity swap that sees it take a 52% stake in 2degrees. I note Trilogy’s also based in Seattle, and you’ve got ties. Were you recruited by Stewart?

Eric Hertz: Not Stewart himself, but people from Trilogy, which was created [in 2005] by people I knew from Western Wireless. I was domestic chief operating officer at Western Wireless. We haven’t actually worked together since the end of 2005, but we’ve stayed in touch.

NBR: And you also know Mike Reynolds?
EH: I’ve known Mike for 12 years; both worked for Bell South International. He has an offer than takes him back home to Florida.

NBR: Why did he leave? It is quite extreme to resign on the brink of a launch.

EH: He’s been outside the US for 20-plus years and he had an opportunity to go home [to Florida]. I’m not at liberty to say what the position is, because it’s a publically traded company and they haven’t announced it yet. We’ve got similar styles and a good relationship so it’ll make for a very smooth transition.

NBR: Do you have a fixed-term or open-ended contract with 2degrees?

EH: It’s very open-ended. I’m here for as long as the company will have me. I like to see things through. I’ve helped launched wireless operators in Ecuador, Panama, Nicaragua and Guatemala.

NBR: I can see how Trilogy can fulfil its mission of finding untapped growth potential in the three other countries it invests - Haiti, The Dominican Republic and Bolivia. But isn’t New Zealand quite a mature, saturated market?

EH: It’s not about how we carve up 100% penetration; we’re moving toward a world where there will be 400 or 500% penetration over the next four or five years. We will have multiple devices that connect to the network. Me and my wife both have cellphones and we both have Kindles. The iPhone is leading to huge growth in web services; we’re just seeing an explosion of devices. [New Zealand’s current mobile ownership rate is 108%, helped mainly by people who own more than one phone; in Europe, many countries have hit 150% market penetration, with data cards and dongles more popular.] We all have essentially the same core network technology, so a lot of it will be about who has the best services.

NBR: But 2degrees is going to launch with supermarkets and gas stations as partners [in fact, the company has been actively dismissive of Telecom and Vodafone’s retail expansion]. But surely if you’re going to trying and sell someone a smartphone and a netbook with 3G and so forth, and better services, you need an environment where you can sit down face-to-face with a sales rep?

EH: Absolutely. At its very heart this is a service business so you do need to have that ability to have face-to-face service.

NBR: But you won’t have any retail outlets when 2degrees launches.

EH: This is a marathon, not a sprint.

NBR: Looking at the start-ups you’ve been involved in previously, how long did it take them to turn a profit?

EH: Wireless start-ups are very capital-intensive [2degrees has spent $250 million so far]; it’s not uncommon to take two or three years to become cash-flow positive. That’s why 2degrees is fortunate to have long-term investors.

NBR: So two to three years from launch would be the time-frame for 2degrees to get into the black?

EH: I think that’s not unreasonable. Yes, I accept that. What’s different about 2degrees is we’re trying to build as lean and cost effective organisation as we can until demand builds.

NBR: 2degrees has said it will continue to expand its network nationwide, beyond the current Auckland, Wellington and Christchurch [elsewhere, customer roam, invisibly, on Vodafone] after its August launch. Are you committed to that, and when will it happen?

EH: Yes. It’ll be driven by customer demand, and the areas of customer demand.

NBR: Will you be looking for more co-location? You’ll be aware it’s been quite a hot issue that 2degrees has built its own towers rather than taking advantage of collocation rights?

EH: Gosh, in North and South American there are a lot of shared towers. There’s a whole industry of tower companies who do nothing but create sites. It’s easy for an incumbent to make co-location difficult and slow but for customers better then more quickly we can get to that the better. They lower the cost and the environmental impact.

But think about this - you could take all the towers owned by all the companies and put them in one company. That’s the sort of thing that would help get to 500% penetration.

NBR: You’d like to see the Commerce Commission peel towers from 2degrees and Telecom and Vodafone and put them into a separate company?

EH: I’d like to see the market get to that point. The regulator’s done a good job at encouraging co-location.

NBR: Has the regulator done a good job on mobile termination rates?

EH: Termination rates are remarkably high here. In order to bring in new services the likes of which I’ve talked about the termination rates have to come right down. I’ve come from markets with duopolies and markets with seven competitors. Where termination prices come down the fastest you see the lowest prices and the lowest roaming rates. In the US, both carriers bill their own subscribers only for a call, and termination rates are fractional. I’m confident we can tell the story of how the economics works in the rest of the world. It’s a marathon, not a sprint.

NBR: Is this your first time in New Zealand?

EH: It's the second, actually. After I finished graduate school [an MBA at Wharton] my wife and I did what you'd call an OE. We biked around the world, including a month in New Zealand in 1985.

NBR: I have to ask a parochial question. Do you think you’ll get any backlash from being an American, especially not that a US company now has a majority stake in 2degrees?

EH: As an American I’ve worked in a lot of different cultures. From everything I’ve seen, New Zealand is a very accepting and welcoming place. I don’t come here as an American. I come here as a telecommunications professional. And 20% of the ownership is Maori [held by the Hautaki Trust]. I’m excited about the business opportunities there. [Chairman] Bill Osborne is very active on the board.