Interview: 2degrees CEO

Eric Hertz discusses the possibility of a fourth mobile provider, moving to profitability and launching 4G services

Could there ever be a fourth mobile provider in New Zealand?

“There could always be a fourth entrant but I think anybody who would face that challenge and look at that opportunity in New Zealand has to really understand what it takes to do that in terms of brand, distribution, customer support,” says 2degrees CEO Eric Hertz.

“We’re 750 people now. Look at the publicly available information on what we’ve spent to get here and so anybody who would look at a population of 4.3 million, or a connection base of 20 million if we assume there are multiple SIMs. What’s the true potential to deliver on profitability in this market?”

Computerworld pointed out that a similar argument could have been made against a third player entering the fray, when Vodafone and Telecom had the $2 billion market to themselves.

“That’s why I wouldn’t rule it out,” says Hertz. “There are plenty of other people with brands and distribution, so I wouldn’t rule it out. I think it’s a different equation with the prices where they are today as opposed to where they were four years ago.”

Profitability

Since 2degrees launched in August 2009, it has acquired one million customers. Having passed that milestone Hertz says it’s less about customer numbers now, and more about revenue market share.

He says 2degrees has 12 percent market revenue in New Zealand. So is analyst Paul Budde right when he says a company needs 25 percent?

“I don’t think that’s true. I think that depends on your cost structure to be viable. We aspire to be 25 percent market revenue share. And I think that’s achievable for us over the long term, the next three to five years,” says Hertz.

While the company isn’t returning a profit to its shareholders, it is EBIDTA positive. “That means we don’t have to call on our shareholders anymore, we can stand on our own two feet.”

Shareholders

2degrees is a private company with five shareholders, three of whom make headlines.

There is the dominant 58.66 percent shareholder, Trilogy International, a partnership between John Stanton, Terry Gillespie, and Brad Horwitz. Although the company was formed in 2005, the founders have over three decades of international telco experience, and have owned numerous mobile networks.

But Trilogy has invested in just three mobile networks; 2degrees and networks in Bolivia and the Dominican Republic. Hertz bristles at the suggestion Stanton is at twilight of his career.

“He’s six months younger then I am and I’m not ready to retire, I don’t consider this my twilight.”

The third shareholder, with 10.1 percent, is Hautaki Limited, the commercial arm of Te Huarahi Tiki Trust, which received a portion of 3G spectrum at a discounted rate and formed the nucleus of New Zealand Communications, the forerunner to 2degrees.

A similar solution may have been on the table during discussions between ICT Minister Amy Adams and Maori Party co-leader Pita Sharples regarding the Treaty of Waitangi claim on the 700MHz spectrum.

But the government gave Maori nothing, although it “is investigating the establishment of a $30 million ICT development fund.”

Was Hertz disappointed when the Trust missed out on an allocation of 700MHz spectrum?

“That was never clear, that was never on the table. I’ve never assumed that had anything to do with 2degees and we weren’t part of those discussions.”

During the last capital raising, Trilogy helped shore up Hautaki’s stake in the telco with a $2.5million loan at 10.5 percent over five years. The same deal was not at time extended to minority shareholder KLR Hong Kong Limited, whose representative is Tex Edwards.

Legal action ensued, with Edwards also bringing action against 2degrees in the Employment Relations Authority over wrongful dismissal. Both cases were settled late last year. Neither party will discuss it.

“I don’t want to talk about it. I think Tex and Bill [Osborne from Hautaki] together created something unique, New Zealand owes them a lot, he [Edwards] still has a piece of this business. I have a responsibility to him as a shareholder as much as I do to the other shareholders and that’s what’s important for us now, is to deliver on that promise.”

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Expanding and upgrading

When 2degrees launched, it had infrastructure in four cities. Outside of that coverage customers roamed on Vodafone’s network (in a deal whose terms are secret). However by June this year, 2degrees will have covered 90 percent of Vodafone’s network with its own infrastructure. To date the network has cost $500 million – including $100 million debt equity with technology partners Huawei. And it will need to be upgraded to accommodate 4G/LTE services.

The company has paid $15 million for TelstraClear’s 1800MHz spectrum, and has plans to launch services. When?

“Soon, I’m not going to tell you because I don’t want my competitors to know exactly,” Hertz says.

But it’s likely to be a public launch from the get-go, rather than a trial. “I don’t know if trial offerings do much for customers, except maybe the ones who are trialling, so you’ll see it when it’s ready for prime time.”

In terms of the network upgrade required for 4G, Hertz says 2degrees may be in a better position than its rivals, who have older networks.

“Because we have recent technology it is a relatively short step,” he says. “Antennas are an issue, which means tower loading issues and tower configurations and that kind of thing. The electronics at the base is the fundamental question, and what it takes there.”

Asked if Huawei will be its 4G technology partner, Hertz replied: “I don’t know; I’m not willing to say for sure.”

700MHz spectrum

Hertz wants to see the 700MHz spectrum allocated equally among the three mobile telcos at a reasonable price, citing the European example where the price of the 3G spectrum was so high that many of the telcos, who acquired it, couldn’t afford to build a network for many years.

He dismisses Vodafone’s argument for 20MHz (this would create an allocation of 20MHz out of the 45MHz available), and its promise to go out to rural areas first.

“If they felt so strong about rural they could have launched 1800 (the spectrum Vodafone has used to launch its 4G service) in rural,” he says.

As to whether shareholders will have to reach into their pockets to pay for a 4G upgrade, he can’t say.

“That depends on the speed of the roll out.”

Another option could be to list on the stock exchange, but Hertz dismissed recent speculation that 2degrees was considering a float, although “it’s always something you keep on the table.”

Fixed line

In the long term 2degrees might look to building fixed line capability, either through acquisition or partnerships.

“It’s really a question for us and our investors – do you want, 25 percent revenue share of a $2 billion market, or would you rather have a 20 percent of a $5 billion market, which includes the fixed? That’s an easy first question,” he says.

“Then, what is it going to take to get there. You have to have the right systems and capabilities to deliver on the promise.”

Big shifts

He points out there have been “big shifts” in the industry in the past year, most notably the sale of TelstraClear to Vodafone, and the announcement of new trans-Tasman cable to be built by Vodafone, Telecom and TelstraClear. The latter has Hertz worried.

“I’m concerned about the trans-Tasman cable because I don’t know if it will truly bring capacity for the whole industry or just capacity for dominant players, we don’t understand that.”

He’s also nervous about the upcoming review of telco regulation - will it encompass hard-fought regulation such as those around mobile termination rates?

“Any time you change the rules it makes you nervous because there is uncertainty. From an investors’ point of view there is a level of uncertainty that you wouldn’t expect,” he says.

As for Hertz, who is an American, he says he’s not going anywhere. His family have settled in New Zealand and have acquired residency. “This is home. It’s a wonderful place to live. I’ve worked and lived in seven different countries and the quality of life here is unequalled. I don’t know why people leave.”

* Eric Hertz and his wife Kathy Hertz died in a fatal plane crash on Saturday March 30.

1 Comment

Pare Hayward-Howie

1

Such a tragedy. Does anyone know the nationality of his wife Kathy. She looks Maori.

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