Executive summary
We expect the overall retail telco market to remain almost flat (2019-2023 CAGR 0.4%) with mobile growth driven by a move to post-paid plans and 4G/5G to offset the structural decline in fixed voice.
Total retail revenues will reach NZ$5.5bn in 2023
With UFB deployment nearly complete and the launch of 5G and Hyperfibre, we expect a rise in competitive intensity as players look to capture share across a broader set of product offerings
Fixed voice continues its structural decline as subscribers shun the landline and migrate away from standalone fixed voice services to mobile bundles and broadband + VOIP bundles
The UFB rollout is on track and 79% of the population can access UFB as of September 2019. The Government’s target is to make UFB available to 87% of the population by the end of 2022
The NZ Government recently announced a set of reforms including a move towards utility-style regulation, copper deregulation in areas where UFB is available, and increased oversight over quality and reliability of broadband services
Figure 1. Retail telco market revenue growth rates by segment
SOURCE: VENTURE INSIGHTS
Fixed Voice & VoIP
Fixed Voice revenue will continue to contract at a CAGR of 11.5% between 2019-2023 as subscribers shun the landline and migrate away from standalone fixed voice services to broadband + VOIP bundles
Mobile
Mobile revenues will continue to drive a majority of the telco market growth at a CAGR of 3.9% on the back of increasing smartphone penetration, rising data consumption and a rise in the number of devices per household. Total revenue set to reach NZ$3.3bn in 2023
However, this market is about to see a rise in competitive intensity and incumbents are expected to lose some consumer wallet share as competition emerges in the higher ARPU post-paid segment
It has been 10+ years since MVNOs launched in NZ. Their current subscriber share is only 1% (5% including sub-brands), but this could change with the entry of super cheap MVNOs such as Kogan
5G, including spectrum auction for 3.5 GHz band in early 2020, is a key trend to look out for in 2020. Spark and Vodafone are already offering 5G services to their customers
Fixed Broadband
Fixed Broadband revenues are expected to grow moderately across our forecast horizon at 0.3% CAGR during 2019-2023, driven by rising penetration of fibre and household growth, reaching NZ$1.5bn in 2023
Gigabit speeds are driving the adoption of 100Mbps and above plans, which now account for 88% of Chorus’ fibre connections. Average connection speed for Chorus customers in now 100+ Mbps
While wireless broadband may not pose enough of a risk to fixed broadband for now, there is scope for significant take up with almost one-fifth of respondents from our latest NZ survey indicating they are willing to switch to a wireless broadband service within two years. An updated survey will be published shortly.
UFB - 79% population coverage by September 2019
Target – 99.8% population coverage by the end of 2023
SOURCE: VENTURE INSIGHTS, THE MINISTRY OF BUSINESS, INNOVATION AND EMPLOYMENT (MBIE)
Rollout progress – UFB ahead of its targets
The UFB has completed 87% of its targeted rollout with 79% New Zealanders able to connect and more than 879,000 connected homes and businesses
The UFB had completed 87% of the network rollout by September 2019, 1% ahead of schedule, and was comfortably on track to achieve its rollout targets of 2019. The UFB rollout has progressed rapidly and has outpaced the NBN
While the UFB's take-up had lagged behind its Australian counterpart over the years, but both UFB’s and NBN’s take-ups were almost equal at 55% in 2019. We expect UFB take-up to surpass the Australian NBN’s over the next year
In New Zealand, consumers have a choice between continuing with their existing copper service and moving to the UFB. In Australia, consumers must migrate to the NBN within 18 months of the NBN becoming available or risk having no internet access
We note that the Government’s announcement to deregulate copper access in areas where UFB is available accelerated the UFB take-up. This will be further accelerated as UFB wholesale prices are reduced. For instance, Chorus will reduce its wholesale pricing from NZ$65 in 2018 to NZ$56 by mid-2020
We also expect higher fibre take-up to be driven by the rising penetration of video streaming services and the increasing number of connected devices per household
Figure 3. Take-up rates – UFB vs NBN
SOURCE: VENTURE INSIGHTS, MBIE
Note: *NBN by June 2019 *UFB by September 2019
Figure 4. UFB Households and businesses able to connect in 000’s
SOURCE: VENTURE INSIGHTS, MBIE
Note: Planned forecast ended in June 2018
Telco market forecast by vertical
Mobile maintains its dominance while fixed voice continues to lose share as consumers embrace VoIP services. Total retail revenue will reach NZ$5.5bn in 2023
The NZ telco market has seen a flurry of activity in the last four years with the sale of 700MHz spectrum for 4G, increasing fixed broadband speeds, the launch of multiple SVOD services, the rise of bundled mobile plans and further industry consolidation, the launch of 5G and the sale of Vodafone to a consortium of Infratil and Brookfield Asset Management
The 4G and 5G rollouts in particular have enabled telcos to offer wireless broadband services as an alternative to the existing fixed broadband technologies and the UFB
Fixed voice continues its structural decline as the mobile phone becomes more ubiquitous. Consumers are shifting their allegiance to the mobile phone for voice and mobile phone calling has overtaken fixed voice calling. VoIP services are also becoming a preferred choice for voice communications
We forecast growth in Mobile driven by higher smartphone penetration, more competitively-priced smartphones and unlimited plans, and the arrival of 5G networks. We expect modest growth in Fixed Broadband driven by the UFB rollout. Altogether we expect the retail telco market to remain flat through to 2023
Fixed Broadband: We expect revenue growth of 0.3% CAGR across our forecast horizon from 2019-23Mobile: We expect revenue growth of 3.9% CAGR through to 2023 to reach NZ$3.3bn
Figure 5. Total Telco market revenue by vertical
SOURCE: VENTURE INSIGHTS
Retail telco market forecast by vertical
Mobile revenues will account for more than 60% of the NZ telco market driven by rising penetration of postpaid and higher take-up of mobile bundled offerings
We believe growth in the NZ telco market will be driven by mobile and fixed broadband while fixed voice will continue its structural decline
Fixed broadband: We forecast fixed broadband to increase its revenue share in the retail telco market from 21% in 2011 to 27% in 2023, driven by household growth at 1.0% CAGR and sustained household penetration of 90%. We also expect revenue growth to be driven by an increase in the number of devices connected to fixed broadband networks at a per household level
Mobile: We forecast mobile revenues to remain the largest segment of the NZ telco market and increase its share to 61% of the total market by 2023. We expect this to be driven by the rising penetration of the postpaid segment, higher bundled mobile plans and increasing penetration of 4G networks and early 5G networks
Fixed voice: Fixed voice will continue its structural decline within the NZ telco market decreasing from 37% share in 2011 to 12% in 2023, as customers cut the cord by migrating to mobile only service
Figure 6. Total Telco market revenue by vertical (NZ$mn)
SOURCE: VENTURE INSIGHTS
Mobile forecasts
Mobile to remain the largest and the most competitive segment of the overall telecommunications market with NZ$3.3bn in revenue in 2023
We estimate mobile market revenue to grow at a 3.9% CAGR to reach NZ$3.3bn by 2023, driven by enhanced bundled offerings, higher proportion of post-paid plans, improved 4G networks and the launch of 5G services by the MNOs
We expect growth to be driven by increased levels of penetration with a substantial portion of the population owning multiple devices
Service revenues are forecast to increase as a result of the rising volume of mobile data consumption and enhanced mobile connectivity
M2M revenues are forecast to grow at a 17.2% CAGR (2019 – 2023) as a result of increased connectivity across networked devices driven by broader industry migration and adoption of Internet of Things (IoT)
Venture Insights forecasts the following (by 2023):
Penetration (excl. M2M) – will increase to 149% by 2023;Subscribers – we expect subscribers to grow at 3.7%, above population growth at 1.2%; and
ARPU – we expect Mobile ARPU to remain steady at NZ$30 till 2023, supported by growth in post-paid plans in place of prepay plans where the former also has a more predictable pricing and revenue stream
Figure 7. Mobile forecast
SOURCE: VENTURE INSIGHTS
Fixed Broadband forecasts
Rising broadband penetration and household growth to drive fixed broadband revenues
We expect Fixed Broadband revenue to increase slightly across our forecast horizon to 2023 at a CAGR of 0.3%. Increase in subscriber numbers will be offset by pricing pressures as bundled services, e.g., with utility offerings, will put pressure on broadband ARPUs
The UFB rollout is ahead of schedule in terms of number of premises able to connect, driving up subscriber numbers
We forecast the following (by 2023):
Penetration to be sustained at 90% of households, driven by continued UFB rollout and a push by Spark for its fixed wireless services to reach more remote homes;
Subscribers to grow at a 1.0% CAGR to 1.7m subscribers by 2023, driven by growth in households at a CAGR of 1.0% and stable penetration rate; and
Fixed broadband ARPU expected to decline at a CAGR of 0.7% through to 2023, driven by limited price power in the market, bundling with utility services and the higher take-up of unlimited data plans.
Figure 8. Fixed Broadband forecasts
SOURCE: VENTURE INSIGHTS
Fixed Broadband demand drivers
Unlimited data connections become mainstream driven by the rising popularity of video streaming services
Increasing penetration of video streaming services in New Zealand is driving a rapid increase in data demand. About one out of every four New Zealanders are using a video streaming service. Monthly data consumption per connection increased by more than 3.5x and overall monthly network traffic increased by more than 7x between 2014 and 2019 on the Chorus network. We believe this accelerated growth was driven by the launch of SVOD services such as Lightbox and Netflix in 2015
The increasing penetration of streaming devices and Smart TVs along with broadband bundles that combine SVOD services with traditional broadband will only add to the growing demand for data. In addition, traditional video providers are moving online – TVNZ has started streaming all its channels
Unlimited data connections now account for seven out of every ten households in New Zealand. We expect the demand for unlimited connections to keep growing through to 2023, fuelled by increasing online content and emerging technologies such as AR/VR with fibre enabling a majority of the growth
A very high penetration of 100Mbps or faster plans also contributes to the increase in data consumed
Figure 9. Monthly broadband data consumption per connection on Chorus network
SOURCE: VENTURE INSIGHTS, CHORUS 2019
Figure 10. Share of broadband connections by data cap on Chorus network
SOURCE: VENTURE INSIGHTS, CHORUS 2019
Need for speed
Nearly 13% of Chorus’ fibre connections are on 1Gbps.
Chorus and other Local Fibre Companies (LFCs) launched their Gigabit speed tier for the UFB in 2016
Chorus announced the average monthly connection speed across its network had reached 100Mbps in March 2019 driven by uptake of high speed plans. Chorus had 13% of its customers 1Gbps+ plans in December 2019
In 2017, the Government announced that 87% of the New Zealand population will have access to Gigabit speeds by the end of 2022
Majority of UFB subscribers are opting for higher speed tiers with 100Mbps and above connections growing almost 3x from 30% in 2015 to 88% in 2019. We note that the introduction of Gigabit speeds in 2016 has resulted in a decrease in subscribers in the 50Mbps speed tier with a majority of these subscribers moving to speeds of 100Mbps and above
In comparison, the Australian NBN has seen its subscriber mix dominated by plans of less than 100Mbps. In fact, the subscriber share on the 100Mbps and above plans has decreased from 18% of all connections in 2015 to approximately 9% in 2019 as NBN increasingly focussed on rolling out non-fibre connections.
Figure 11. Chorus UFB speed mix
SOURCE: VENTURE INSIGHTS, CHORUS, NBN
Figure 12. NBN speed mix
SOURCE: VENTURE INSIGHTS, CHORUS, NBN
Revenue market share of key players
New entrants such as Kogan and the growth of challengers such as MyRepublic and Trustpower will take some market share from leaders Spark and Vodafone
We believe the largest player in the market, Spark, will lose ground in terms of revenue and subscriber share as it is forced to move away from its vertically integrated structure and as the UFB creates a more level playing field in the fixed broadband market
We believe that market leaders Spark and Vodafone will experience slight declines in their revenue market share by 2023. We forecast the rest of the market to grab share driven by the entry of new entrants from the energy sector and the rise of challengers such as MyRepublic, increasing from 21% in 2015 to 28% by 2023
An increasing number of players both from telco (Vocus – Slingshot) and energy (Trustpower) are bundling broadband services and offer discounts on energy+broadband plans. This has had a positive impact on overall competition, with Trustpower holding ~6% of total broadband market share in 2019
NZ has been a leader in the bundling of telco and utility products. As communications products become increasingly commoditised, we expect to see this bundling trend continuing with an increasing number of players in the market
MVNOs and sub-brands combined now hold ~5% of subscriber share in NZ, and the MVNO share is ~1%. This is a small share, but MVNOs are expected to keep gaining market share slowly and steadily. Entry of Kogan with its cheap plans in 2019 is expected to stimulate this growth
Figure 13. Retail telco revenue market shares
SOURCE: VENTURE INSIGHTS, COMCOM
Convergence with Power
NZ has a high percentage of convergence of telco and other services. Utility providers have been successful in bundling telco services into their offerings and acquiring market share
New Zealand has a comparatively high mobile service convergence level (mobile bundled with any combination fixed voice, broadband and payTV from the same provider) but is now experiencing increased competition across mobile and broadband services
The most successful companies providing bundled services have been energy companies offering new telco products, e.g., Trustpower. We believe this is due to the fact that customers find switching mobile or telco products to be more agile and straightforward than switching energy. Furthermore, telco products are more varied and flexible offering more incentive for customers to switch to suit their specific and changing needs
Figure 14. Examples of utility and telco convergence (NZ)
SOURCE: VENTURE INSIGHTS
MVNOs in NZ
New entrants such as Kogan promise lower costs to the consumers
The MVNOs currently hold only ~1% of mobile connections in NZ, and MNO sub-brands another ~4%. This is much lower than Australian MVNO subscriber market share of ~15% (Source: Australian MVNO Market Overview, Venture Insights, 2019), suggesting that there is a scope for growth on the demand side. However, there are significant obstacles on the supply side
NZ’s small population of ~5 million is a challenge to MVNO growth. The MVNOs offer cheaper products but rely on scale to break even. NZ’s small population means that the market cannot sustain many MVNOs
In May 2019, the regulator the Commerce Commission ruled out regulating MVNO access to networks, saying that the costs of regulation, particularly the impact on investment incentives outweighed any competitive benefits
The MVNOs might attract consumers with lower prices and service differentiation. For example, Kogan, offers monthly plans starting at NZ$18 (NZ$5 for limited time). Freemium models, better customisation and customer service, targeted distribution models and innovative bundles are also options. Vocus has stated that it would start to promote fixed wireless broadband later in 2020 through its wholesale mobile arrangement with Spark.
MVNO opportunities may also be led by MNOs’ wholesale strategies and their willingness to improve the quality and technical capabilities of the wholesale offer. Spark hosts Trustpower (from 2019) while 2degrees hosts Warehouse Mobile and Vodafone started hosting Kogan mobile in 2019. The launch of 5G by Spark and Vodafone may encourage them to offer their 4G and 5G network capacities to MVNOs, putting a pressure on 2degrees in terms of pricing and 5G rollout. However, if this does not occur it is difficult to see any immediate MNO impetus for significant MVNO growth
We also think that some kind of wholesale separation of Vodafone is a possibility under its new Infratil/Brookfield management, which could dramatically improve MVNO prospects in the market
Figure 16. MVNOs and sub-brands in NZ
SOURCE: VENTURE INSIGHTS
Wireless broadband offers better economics than the UFB with Spark and Vodafone aggressively marketing it as an alternative to fixed broadband. 5G promises high speed too
Over the last four years, the New Zealand mobile market has seen the launch of several wireless broadband services, first by Spark owned Skinny Mobile, which was followed by Spark’s own wireless broadband service in April 2016. Vodafone launched its wireless broadband service in December 2016
In November 2019, Spark launched 5G wireless broadband services in five towns in South Island. In December, Vodafone switched on 5G services at 100 cell sites for its mobile customers. These 5G services offer speeds comparable to the UFB. 2degrees has expressed its intention to launch 5G but hasn’t made any announcements yet.
The arrival of 5G will provide fixed wireless with better economics and comparable speeds as compared to fixed broadband, posing a challenge for NZ’s UFB companies. More than 20% of Spark’s broadband connections are wireless now, and it expects to add 20k new connections in 2HFY20
In a Venture Insights consumer survey, when we asked respondents with fixed broadband household services (such as fibre or copper) if they would consider switching to a wireless broadband service, 18% indicated they would consider switching within the next two years. We also found that more than 30% of respondents were willing to move to 5G within two years of launch. There is a clear scope for growth of 5G fixed wireless services in NZ. An updated survey will be released shortly.
Rumours of health issues related to 5G are still a matter of concern to the general public. The telcos are campaigning to persuade the general public on the safety of 5G. The NZ ministry of health released a factsheet on 5G suggesting that there is no additional harm posed by 5G as compared to the other radio technologies. Notably, the NZ exposure standards limit public exposures to at least 50 times lower than harmful limits
Figure 17. Fixed broadband customers willing to shift to wireless broadband
SOURCE: VENTURE INSIGHTS NZ CONSUMER SURVEY, OCTOBER 2018
Figure 18. Consumer willingness to move to 5G
Hyperfibre by Chorus
Chorus’ response to 5G?
Wireless broadband represents a good option for NZ mobile operators to bypass the UFB (for some customer segments) and protect their margins. The launch of high speed 5G has added to this challenge faced by UFB
Chorus plans to present a robust competition to 5G with its Hyperfibre, promising ultra-high speeds several times higher than currently possible with 5G. It plans to provide speeds as high as 2Gbps and 4Gbps in South Island (Queenstown, Arrowtown, Wakatipu, Wanaka and Cromwell) in February 2020. The services will be expanded to Auckland and other areas. These high speeds being offered and advertised by Chorus can potentially undermine the 5G take-up by the NZ consumers and businesses. Its 2020 rollout plan is illustrated in the figure below
Chorus’ UFB network is already capable of Gbps speeds. Therefore, we expect that the incremental cost for Chorus to provide 2Gbps or 4Gbps speeds on its network will be low. To retain consumers and incentivise them from moving to 5G, Chorus could offer them more data and Gbps speeds at almost no additional cost
Chorus argued in its recent HY20 results presentation that growing video demand, coupled with rising numbers of devices using high-bandwidth technologies such as WiFi6, will generate demand for these speeds.
The year 2020 promises heightened competition between wireless and fixed broadband providers to offer better pricing and speeds ultimately benefitting the consumers
Figure 19. Chorus Hyperfibre rollout plan
SOURCE: VENTURE INSIGHTS, CHORUS
Chorus 1HFY20 financial update
EBIDTA rises by a modest 4.4%
During 1HFY20, Chorus got a new CEO, completed its UFB1 rollout (2011-19), launched Hyperfibre, reached an agreement with Rural Connectivity Group to provide mobile backhaul, issued 7-year EUR300 million bond and merged its customer care and network field management teams
The 1HFY20 operating revenues were down NZ$6m as compared to 1HFY19 due to a reduction in field services activity requested by third parties for network relocation and the EBITDA grew by 4.4%. Operating expenses decreased by 12% over 1HFY19 due to transition to an increasingly fibre-centric customer base, and a net reduction in regulatory related costs
Broadband revenues increased as mass market broadband connections increased by 20,000 and ARPU grew due to growth in proportion of customers on higher speed plans. Copper voice and date services revenues declined to a decrease in number of connections
Chorus now has 68% of its UFB programme connections on fibre, with 1Gbps plans now accounting for 13% of its fibre plan uptake. The 100Mbps plan is still the most common plan, with around 50,000 new connections in the last six months, as compared to 29,000 new connections on 1Gbps
Guidance:
EBIDTA between NZ$640m-NZ$655m. This was revised from their prior estimates of NZ$625m-NZ$645m due to a good broadband connections performance and ARPU in H1, cost savings, reduction in the Telecommunications Development Levy and greater fibre uptake
Gross capex unchanged at NZ$660m-NZ$700m range
Figure 20. Income statement
SOURCE: CHORUS
Figure 21. Connections
SOURCE: CHORUS
Spark 1HFY20 financial update
Highest revenue growth in three years
Spark’s revenue grew by 4% due to good performance in mobile (5.5% growth in high-margin mobile service revenue), growth in cloud, security and service management (up 12.3%), Spark Sport and moderation in the rate of legacy voice declines. EBITDAI grew by 2.2% due to reinvestment of benefits of cost-out activities to partially fund current and future revenue growth
In mobile, the pay-monthly connections grew by 62,000 and number of unlimited connections more than doubled. Pay-monthly ARPU stabilised for the first time in at least three years due to moderation in rate of business ARPU. Spark has revised their full-year mobile service revenue growth target to 4-5% from 2-3%
In broadband, gross margin improved by 4.2% but there was a connection share loss of 3,000 and the rate of wireless broadband growth moderated. Customer demand for more data continued to drive ARPU growth, with unlimited and ‘unplan’ broadband plans now accounting for 70% of the broadband base. Spark has revised full-year wireless broadband connection growth target down to 20,000 from 30,000
In cloud, security and service management, revenue grew by 12.3% due to further penetration of core cloud services and ongoing shift of customers to more flexible and future-proofed cloud-based IT models. Spark expects the full-year revenue to grow by 8-10%
Voice and other managed services revenues declined by NZ$26m (compared to prior year’s NZ$51m). Migration of customers to higher-margin managed data services partially mitigated the impact of revenue declines on gross margin
2020 spectrum auctions are key to Spark’s wireless broadband business and a broader rollout. Spark will announce its next three-year strategy at its Investor Day on 2 April 2020 after the auction results are known
Figure 22. Income statement
SOURCE: SPARK
Figure 23. Connection mix by input type
SOURCE: SPARK