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CORRECT: Spark, Vocus chase higher margins

CORRECT: Spark, Vocus chase higher margins in 'saturated' broadband market

(Fixes CallPlus/Vocus relationship in lede)

By Paul McBeth

Aug. 22 (BusinessDesk) - Spark New Zealand and CallPlus's owner Vocus Group are targeting bigger margins in a "saturated" broadband market where firms are fighting aggressively for market share.

Auckland-based Spark increased gross margin by 6.7 percent for its $685 million of broadband revenue in the 12 months ended June 30, benefitting from cheaper wholesale access to Chorus's network as its wireless broadband customer numbers rose to 116,000. Switching customers to higher-value fibre products also boosted the margin. Meanwhile, Vocus's New Zealand business boosted its earnings before interest, tax, depreciation and amortisation margin to 16.9 percent, which it put down to automating more processes and closely managing its network costs.

The focus on profitability by the two companies, which collectively service 894,000 broadband customers, comes as new players enter the retail service provider market and compete more aggressively on price. Spark's broadband revenue slipped 0.6 percent despite adding 13,000 connections to 700,000, while Vocus NZ said its monthly average revenue per user shrank to $70.05 from $71.21.

Spark managing director Simon Moutter told an analyst briefing that broadband was no longer a "growth product" and was "relatively saturated" where 70 to 80 brands were vying for customers. The company itself has multiple brands with its core product positioned as a value-proposition with Lightbox and Spotify add-ons, whereas Bigpipe and Skinny pursue cost-conscious customers.

"There's no point entering the broadband market thinking it's this big new growth product category that everyone can have a piece of. It's mature, it's saturated," Moutter said. "The pricing behaviour and acquisition efforts look more like what you'd see in a growth market where it's only 50 percent penetrated."

An industry body, the Telecommunications Carriers' Forum, today published its annual report showing New Zealand's broadband plan prices are 5-to-15 percent below the OECD average and mobile plans are 27-to-47 percent cheaper.

"Ten years ago, the costs of telecommunications services were double the costs of some other utilities such as electricity,” TCF chief executive Geoff Thorn said. "As we have better infrastructure in place, the cost of delivering those services has decreased – and those savings are passed on to the consumer."

Spark is focusing on widening margins across its business and is restructuring to introduce Agile working processes to cut labour costs, as well as increasing automation and digitisation. It hopes to become the lowest-cost operator in the country and wants to achieve a 30 percent-plus ebitda margin, from the current 28.4 percent.

Vocus New Zealand, which operates CallPlus, 2talk, Orcon, Slingshot, Flip and the local fibre line provider previously called FX Networks, boosted ebitda 8 percent to $61.3 million on a 4 percent increase in revenue to $363.5 million.

The Australian-owned company also owns electricity retailer Switch Utilities, which it uses to sell bundled products, a strategy it said was successful in attracting mass market customers, where Vocus also focused on "taking unfair share in UFB footprints". It too is targeting a low cost operating model through digital investment.

Elsewhere, Spark lifted mobile connections 2.8 percent to 2.46 million, underpinning a 6.9 percent gain in mobile revenue at $1.28 billion. Vocus added 3,000 mobile customers, but remains a minor player with 24,000 connections.

The introduction of competition has also seen Spark take a smaller share of profits from the Southern Cross submarine cable. The company's dividend fell $11 million to $50 million in the year and is expected to fall to between $10 million and $20 million in the 2019 year "as the level of pre-purchased capacity from large customers decreases."

The trans-Pacific submarine cable lost its monopoly position with a joint venture between Spark, Vodafone and Two Degrees Mobile linking New Zealand and Australia, and more recently the launch of the Hawaiki cable spanning the Pacific.


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