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Analysts have poor form predicting 2degrees' future

There's an article in the Herald this morning called "Questions over 2degrees future."

It's a little on the nose in one obvious respect as the effort to recover Eric and Cathy Hertz' bodies continues.

But it also makes me think back to the eve of 2degrees' August 2009 launch, when I talked to various analysts about the mobile newcomer's prospects.

According to the pundits (some of whom are also quoted this morning), they were pretty bleak.

Craigs saw 2degrees hitting 2% market share in its first year, then doubling to 4% in its second.

Forsyth Barr pointed to the fact Hutchison's "3" (since bought by Vodafone) took six years to reach 8%. 

"Longer term I would expect 2degrees to be a sub-10% share proposition,” (now departed) ForBarr analyst Guy Hallwright told NBR.

They were, of course, totally wrong.

On the back of its classic Rhys Darby "giant logo" ad, cleverly-pitched plans and canny political lobbying, 2degrees' blew away expectations by racing to 8% market share in its first year (according to the Commerce Commission, which collects figures from each carrier) - well ahead of the predictions of IDC and all-comers.

By year three, it had hit the 1 million active customer mark, or roughly 20% mobile market share (as of February, Vodafone had reported 2.31 million customers - excluding around 50,000 on TelstraClear Mobile and Telecom 1.72 million*).


August 2009: launches
February 2010: 209,000
March 2011: 580,000
February 2012: 876,000
June 2012: 950,000
August 2012: 1,000,000 (around 19% of total mobile connections).

2degrees' customer growth has slowed. But at the same time, market innovations like shared data have seen it start to make headway in in coveted contract customers (whose numbers Mr Hertz put at 100,000 last year), 

The company faces challenges. It's very success, and the regulatory changes it has so pushed for and won, have made the market much more competitive.  

We do know that 2degrees majority owner, Trilogy, is a nuggety company whose billionaire chairman John Stanton has more hits than misses in his long telco investment career.
Trilogy has sold out of some of its investments (notably Irish third mobile entrant Meteor), but it's kept others.

You could just as easily write a spec story about Vodafone selling its NZ operation (given the company has sold out of some markets, notably Japan), or someone buying Telecom (freed from its Kiwishare restrictions on foreign ownership since the Chorus spinoff).

Landline gap?
2degrees lack of landline business has been identified today as a weak point. Here, there's been speculation 2degrees could buy an ISP. Orcon is on the block. Speaking to the Commerce Committee, Kordia chairman David Clarke recently made Orcon sound pretty unattractive as he mused that ISP's could be seen in a "race to the bottom."  

Mr Clarke quite possibly made his comments about Orcon's strategic challenge of facing "two giants" (Telecom and the merged Vodafone-TelstraClear) in the context of trying to play down his political masters' sale price expectations.

2degrees making a landline play (a la Vodafone buying iHug), remains a possibility. But Mr Hertz indicated if his company does make a more, it would be more likely to partner.

The greater point stands that the landline market is becoming more and more commoditised and thankless, while the 4G market (where 2degrees bought $15 million spectrum divested by to ease the Vodafone-TelstraClear deal) is looking like a promising frontier. Mr Hertz often spoke to NBR about the proliferation of mobile gadgets beyond the cellphone. 

Only one guy right
Looking back to my August 2009 story, there's only one prediction that looks like panning out: Eric Hertz' statement that 2degrees should break even by year three.

In August last year, he told NBR the company was on track for a break-even 2012 on an earnings before interest and tax (ebit) basis (the company has yet to post its 2012 result with the Companies Office; previous results have been posted around June). If the company does break even, it will be an impressive improvement. For 2011, it reported an operating loss that halved to $82 million on revenue that increased 72% $185 million. The loss was pinned on the company - which has spent around $500 million so far - still being in "investment mode."

Mr Hertz conceded the low-hanging pre-pay customers had mostly been picked. Telecom and Vodafone would fight harder to defend their turf as 2degrees targeted higher-yielding small and medium business customers. 

Nevertheless, we're starting to see it win some chunk deals, like it's recent 500-connection contract with Waikato University, displacing Telecom and Vodafone.

And Mr Hertz didn't see any slowing down. He told NBR he wanted a third of the market, or 1.5 to 2 million customers.

Given the way Trilogy operates around the world, his successor will keep their foot on the pedal.

* Total mobile connections outnumber people by dint of some having more than one SIM due to a second cellphone or, increasingly, a data stick or tablet or other cellular-capable gadget. Numbers don't include "machines" like burglar alarms.

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Comments and questions

I wonder why analysts use connections as the measure of market share? It is totally pointless to use such a measure without also looking at revenue since there could be millions of connections with virtually no arpu.

2D might have circa 20% share by connections, but by revenue they have circa 12%.

Makes sense to move into the Total Telco market and grab 20% of a $5B market. Will be interesting to see if they enter through acquisition or perhaps start by dipping two toes into a fibre/fixed voice product for business.

Game on!

Dec 2012 to Feb 2013 saw Vodafone port outs to 2D / Telecom drop to almost a standstill and ports back to Vodafone climb by quite a large %. I am sure this will be reflected when Vodafone announces its next lot of results and it will start adding the new NZ Police connections as well, which is over 6k in the coming months.

I think Voda have done well because Telecom has been so inept (Telecom's biggest handicap is that it runs on politics and a legacy of bad decisions). 2Degrees entered the market as Vodafone was shifting into an incumbent mentality and really shook things up. Regardless of what others might say, I think we owe 2D a big thanks just for that fact alone.