Opinion: Can 2 Degrees handle the heat?

Simplicity and value must be backed by service

After almost a decade in the wings, 2 Degrees has finally gone live with New Zealand’s third mobile network amidst fanfare, rhetoric and genuine “give it a go” goodwill from Kiwis.

The launch itself carried few surprises (well, at least to those who track the industry closely), which was perhaps surprising in itself. Anyone expecting a disruptive data plan — as in a “I must have one of those” handset line-up or a clever strategy to attract communities of users — would have been disappointed.

Instead, the offer is a mass-market prepay offer based on simplicity and value: a halving of per minute voice and text tariffs and a simple two-tier tariff structure. 2 Degrees customers will be charged one rate for all off-net, national and international calls and texts, and a cheaper rate of 22c for calls to 2 Degrees customers and fixed lines if they buy a monthly top-up of $20 or more.

That’s it. No bundles, no “buy this, and you can add that on” model and no data push with the exception of an expensive (and slow) GPRS/EDGE tariff.

Will it work?

The company certainly deserves credit for its brand and marketing. The combination of the sassy and humorous marketing campaign using New Zealand “cult” comedian Rhys Darby and the “half rate” headline is attention grabbing. It allows 2 Degrees to capitalise on anti-Vodafone and Telecom sentiment, particularly given the high cost of plan coverage.

The flat rate tariff to overseas countries will be attractive to international students, recently-returned ex-pats and new migrants — although Skype and calling cards remain a compelling alternative. As well, the ability to personalise a number, for example, “022 Plumber” may attract sole traders and small business users who have to call outside a closed community of users. And there is value bundled into the offer and top-ups, such as each $2 SIM carrying a $2 credit.

But simplicity and value must be backed by service. Teething pains are to be expected, but the ongoing fiasco around 2 Degrees online security and ordering of SIMs seriously cracks credibility. Users regard online ordering as a basic “hygiene” factor: if this goes wrong, what else will? The issue is not that the problem occurred: it is the time taken to redress it.

IDC also believes 2 Degrees has over-estimated the value subscribers put on low-price off-net calls or text. No matter how much the company may rail against closed net pricing models, consumer mobile behaviour is now firmly founded around their communities through $10 text, Text2000, or Best Mate.

To move to a total “pay as you go” model requires a change in user behaviour and a return to tracking SMS and calls.

This carries a risk to 2 Degrees. IDC believes that instead of attracting the whole of a customer’s business, the current pricing plans will instead encourage multi-SIM usage. Prepay customers will mix and match — keep their Telecom or Vodafone SIM for their text and voice bundles, but use 2 Degrees for outbound and international calls or text. This means 2 Degrees will capture a small portion of customer revenues at a higher price in outbound termination charges. And that is not a sustainable model.

Of course this is just the first step. 2 Degrees has time to test market responses and shape tariffs and plans accordingly. But if it wants to rapidly gain scale, IDC believes it needs to innovate around current market behaviour, not try to drive a sea change in entrenched thinking and behaviour. And bundling innovation requires advanced and robust back-end customer service and billing systems that are not cheap. Strategy aside, it is not clear the extent to which 2 Degrees has the operational capability to launch truly disruptive plans.

Based on international experience, IDC has always been conservative on 2 Degrees ability to win market share beyond 5 percent. Yes, we are likely to see a literal explosion in mobile connections based on active SIMs. 2 Degrees will be able to claim a high volume of new customers.

But the question will be how many go through a first and second top up? And how many users will port their mobile numbers to the company for the long term, rather than simply buy a second SIM for casual usage?

Sustained price leadership requires cost leadership — the ability to keep taking cost out to retain margin — and as a start-up 2 Degrees needs to build brand from scratch, create distribution channels and generate some economies of scale whilst expanding its own network and service portfolio.

Having said that, 2 Degrees may exceed expectations if it can win the hearts and minds of New Zealanders, who love to support the underdog, and set the pace on innovative price plans. Vodafone and Telecom, and now TelstraClear, are entrenched mass market players and 2 Degrees has an opportunity to mine out underserved segments and build its own ecosystem of complementary partnerships and brands. The ultimate question will be how long it can remain a standalone, pure-play mobile business.

It is not the size of the competitor in the fight — it is the size of the fight in the competitor that matters. We wish them luck.

Nelson is research telecommunications manager for analyst firm IDC New Zealand

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