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Telco fishhooks keep on-account customers wriggling

The Commerce Commission’s monitoring report is a tale of two halves.

On the one hand, you have a highly competitive market with prices well below the OECD average and fierce competition. Customers are being offered more for less and new offerings come to the market regularly.

Customers can buy data, voice, TXT, they can go on prepay plans or on account – and they’re loving it.

The other market consists of prices up to 190% of the OECD average, limited market energy, little or no competitive pressure and a distinct lack of creativity.

The reason for the difference is clear – 2Degrees.

The first market is the low-end prepay and on account segment where 2Degrees has vigorously burst on to the scene only a handful of years ago. The third entrant has radically changed the dynamic and the other two network incumbents have been forced to respond in kind.

Suddenly we see bundles on offer at $19/month that only months earlier had sold for $70/month. The drop in price has been matched by an increase in value – customers get more TXTs, more minutes, can call more friends and family members in more calling groups and have more data to use on their shiny new smartphones than ever before.

Since it arrived, 2Degrees has fought well in this market and achieved a great deal. Its customer numbers have long since passed the million user mark and are still rising. It’s very successful, so long as your measure of success doesn’t include “breaking even” because, clearly, the cost of spending on network deployment (and the impending launch of 4G as well) is not a trivial matter. It will be quite some time before 2Degrees is in the black.

The other market, however, is failing to deliver on that promise. High-end business and corporate plans, and larger on account offerings, simply aren’t seeing the same level of movement to 2Degrees and I’m wondering why.

It’s not as though the plans on offer don’t appeal to business or high-end customers. The same price points are attractive across the board and, while business customers care less about the costs associated with the service, the CFO certainly does and typically buying decisions are made at that level.

So why is it that 2Degrees isn’t carving the same level of fat out of this market?

I suspect it’s a combination of factors, not least of which is the speed with which customers can disentangle themselves from their contracts.

Prepay customers are free to move quickly and easily between providers. On-account customers face many barriers to switching, not least of which is the ever present “early termination fee,” which is often applied, even if you’re moving within the same provider to a better suited plan.

These fishhooks mean there is a lag in movement for on-account customers. Instead of simply picking up and shifting to a new provider, OA customers must wait until a certain time period has passed or until they’ve paid off their new “free” handsets (which of course are never free but rather “zero dollars up front” and which must be paid in full before customers are allowed to move on).

Early termination charges often include an extra fishhook – rather than simply repaying the cost of the device, they attempt to recoup the worth of that contract to the provider. Sign up for two or more years and you’ll find your “worth” is quite a bit and if you want to get away early, the break fee can be quite astonishing.

I think it’s high time we called these zero dollar handset subsidies what they really are: hire purchase agreements. You get to take the phone home with you but you’re tied to a provider for years and end up paying more for the service than you should.

It’s time, I think, that the Commerce Commission had a closer look at all of this and I’d go a step further and call on the government’s inquiry into the Telecommunications Act to consider the issue as well.

The numbers are clear for anyone to see – something’s stopping on-account customers from migrating to 2Degrees and it’s not the price point.

Paul Brislen is CEO of the Tuanz, the Telecommunications Users Association of New Zealand.

Comments and questions

This is circular. business demand forward based pricing, and expect their scale to give them better pricing. They then enter into a contract.
So when they exit early, they have to pay the piper....

I would also say that the effect of different pricing in different segments is not unique, in fact value based pricing exists in all industries. Airlines, property ...list goes on. Telco's then use this to pay for these wonderful services that everyone seems to want, don't want to pay for. 4G is gonna cost the industry 100's of millions in investement, is it unreasonable to expect a return on that?

It is the price point I would say, or atleast the fact that there is no difference between the prices on vodafone/2 degrees/telecom on the higher end plans.

There's no point moving if you don't save money.

Even if there is a +/-$10 difference telco's will happily discount your plans to their rivals equivilent to keep you with them.

the postpaid contracts are never more than 2 years, maybe 3-4 in the very high end corporate/enterprise market

2Degrees has been in the market for considerably longer than 4 years, and have had dedicated business plans for almost 3 years, so most, if not all, corporates would have rolled off their contracts by now and had the opportunity to review their provider

So if they wanted to move to 2Degrees they could easily have done so by now.

the question you should be asking is "If they could have moved to a cheaper option, why didn't they". If it's not to do with contracts, then it must be to do with something else - service levels for example. Or maybe because the 2Degrees brand is so strong in prepaid that it puts off the high end businesses because they see 2D as being a 'budget' service when what they want is quality.

Perhaps the reason 2degrees haven't gained traction in the post-pay market is because they don't offer fixed products. It's not as silly as it sounds.

Corporates look to do whole of business deals - no fixed line offering, no mobile business.

Small/medium sized business are keen for a good deal but they value their time as well so dealing with multiple suppliers for mobile and fixed just gets too hard.

Consumer post-paid customers are being offered bundled fixed/mobile plans now by Vodafone and Telecom (probably to defend against 2degrees).

In other words, the sooner 2degrees starts offering bundled mobile and fixed plans the sooner they are likely to start winning post-paid business.