As the dust settles on the Government’s final Ultra-fast Broadband initiative decisions, the industry is only now turning its head to face the realities of this fundamental market shift.
The outlook is sombre, but not bleak. Yes, we are entering a period of complex transition with industry separation, ongoing revenue erosion and competitive disruption. But the industry scenarios range from widespread commoditisation and consolidation, to a revitalised industry built upon collaborative business models that skilfully leverage the core strengths of the telco.
It is against this complex backdrop that IDC NZ developed its top 10 predictions for the UFB Initiative.
• Fibre adoption will be steady but not stellar. Over five years we forecast fibre connections will grow to 96,200, representing seven percent of total broadband connections. Our conservative view of fibre adoption reflects the relatively small scale of the addressable New Zealand business market during the initial deployment phase and the mixed incentives for retailers to migrate to fibre. It suggests a cautious and targeted rather than aggressive migration strategy.
• Consolidation and stratification will redefine the market. The market will consolidate to two or three national providers that can offer mass market services at scale, and a limited number of regional, dedicated business and niche services providers. Consolidation will be driven by voice revenue erosion forcing a migration from legacy services, combined with growing fibre competition and the entrance of over-the-top players.
The industry’s focus will shift to profitability rather than topline revenues. This will push current providers to consolidate, merge or acquire for scale, diversify or quietly exit the market over the next four to eight years.
• There will be a long, slow market shakeout. There are superficially natural alliance and merger opportunities in the market: a consolidation of tier-2 players; TelstraClear acquiring mobile capability; Kordia privatised; Orcon sold. There is even potential for a significant disruptive play, such as the takeover or break-up of Telecom2 or Sky’s acquisition of an ISP. However, in general, limited growth opportunities and capital constraints will make consolidation defensive and iterative.
• Telecom is unplugged. The separated retail business, including Gen-i, has a strong incentive to drive an aggressive mobile broadband/substitution strategy and focus on managed services. It will exit markets, services and sectors as it retrenches – but then look for acquisition/partnership opportunities. With 66 percent of Telecom’s current workforce sitting across the Retail and Gen-i divisions, significant job losses are likely to accompany Telecom2’s transformation.
• Mobile-only households will grow to 14 percent by 2015. Mobile broadband will be a complement to fibre, but will also compete for wallet share. Some customers will forego fibre upgrades in favour of mobility; others will cut the cord completely.
However, over time mobile services will be treated as just another access network, alongside other wireless and fixed technologies. The priority will then shift to seamless integration across networks and devices.
• Telco providers face an increasingly unstable business model. Explosive data growth will drive up backhaul, core network and international capacity costs with no compensatory revenue growth. This risks stalling investment. It requires a new revenue relationship with third parties, based on premium connectivity – or 1risks demand for another round of government intervention and investment.
• Government will struggle to aggregate fibre demand. Decentralised budgets in health and education will prove intractable to aggregated procurement. This will inhibit uptake among smaller organisations that will weigh the cost of fibre services against other financial priorities.
• Copper to fibre migration will become a government priority. IDC believes customer inertia as a barrier to fibre uptake is being underestimated and will force the introduction of a managed migration regime in the next four to five years. This might include a formal migration agreement with Telecom, a change to copper pricing to make fibre relatively more attractive, or the introduction of an opt-out connection regime.
• Sky’s content glass ceiling remains – the battle shifts to enabling content. Sky will avoid regulatory risk through a more open partnership approach, but will limit opportunities for true IPTV competition. Telcos will resell Sky and use increasingly sophisticated bundling as a platform for managed ‘home-hub’ services.
• Telcos will be the arterial system for cloud services. Telco’s ability to deliver resilient managed connectivity will be critical to cloud development in New Zealand; but will require datacentre capability, and open, collaborative partnerships as part of a new two-sided business model.
The challenge for the telcos is to not only define their role in a UFB world, but to also effectively engage with the government as it sets the future policy and regulatory frameworks governing competition and influencing the investment environment.
Spragg is senior telecommunications analyst at IDC