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CallPlus buys Orcon — deal makes sense

While CallPlus isn't saying how much it paid to buy Orcon. Assuming CallPlus paid the right price — which is a safe bet — the deal makes far more sense than any alternative mentioned in recent weeks.

Selling internet services in New Zealand is brutal. Margins are wafer thin. Competition is tough. And the cost of customer acquisition is high.

The path to profit is to build scale so that unavoidable, fixed costs spread over the widest number of accounts. Then find ways of adding value.

It's about to become more brutal.

In the copper era ISPs had the option to differentiate by putting their own kit in exchanges. With fibre, they have to buy from the same menu of services from Chorus and the local fibre companies, all at the same price within any region. That leaves ISPs little room to play with.

So scale is essential. Orcon was never going to get there from here. CallPlus had a shout of building the necessary scale, but it would have been slow, possibly too slow. Picking up a competitor short circuits that. It makes sense.

CallPlus' press release says the company has a 15 percent market share. I suspect there could be more consolidation to come.

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