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A story in the NBR says Indonesia's PT Telekomunikasi may invest in 2degrees. It then reports Australian telecommunications analyst Paul Budde says it's only a matter of time before Spark buys 2degrees.

Budde is negative about 2degrees. He says:

Five years on and to a certain extent it is a bit of a wonder that the company still exists.

He is consistent. When 2degrees began operation in August 2009, he said there was: "little opportunity for success".

Budded says Spark will buy 2degrees

Budde says bigger carriers have swallowed all the similar small mobile companies elsewhere in the world. He says Spark is the only logical candidate for that in New Zealand. In Budde's view overseas investors won't be interested, the most likely case is that Spark will buy the company and run 2degrees as its low-cost brand. He doesn't say whether this means as well as or instead of Skinny.

2degrees isn't worried by Budde's comments. The company says: "Our revenue grew by 20 percent last year and costs reduced by 20 percent. Our shareholders are happy with progress".

However, 2degrees is now five years old and doesn't look like making a profit in the immediate future.

When the company started executives told me the plan was to be profitable in seven years. Despite the 2degree's success winning one million customers and, with the help of the Commerce Commission, fighting off uncompetitive mobile termination rates, it doesn't look on track to meet that target.

2degrees plan B

There is a way 2degrees can stay in business, deliver value to shareholders and return to profitability. The mobile phone carrier could sell its network and frequency licences to Spark, then reconfigure as a mobile virtual network operator or MVNO on the Spark network.

This approach has advantages:

• It's good from a competition point of view. The Commerce Commission wouldn't be happy if the number of mobile competitors dropped from three to two. Dropping from three to two-point-five is better.


• In round numbers Spark combined with 2degrees control roughly as much suitable cellular spectrum as Vodafone. If there are imbalances, that could be tidied up as part of any regulatory approval. Spark would be able to consolidate spectrum to offer some of the world's fastest 4G speeds.


• Spark's mobile business isn't as profitable as Vodafone's. Adding 2degrees one million addition connections as a single wholesale customer would change the company's financials and underpin further network investment.


• 2degrees already has great customer service and support. Keeping that intact will keep competitive pressure on Vodafone and Spark.


• 2degrees has already shown it can sell mobile services and support customers. Freed of its network, the business could thrive.

For the deal to work, 2degrees would have to secure long-term guarantees over prices and access to technologies, but that should be well within the grasp of the companies negotiators.

I'm interested to hear what others think of this plan and whether there are any obvious flaws.

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