Weaned off the wires
Just 25 years after the mobile market got its first competitor, there was every indication of a swift transition away from fixed-line connections to wireless and cellular networks that would seamlessly hand off to each other and deliver considerably more than voice and Internet.
Rich new ways to share data were apparent early in the new millennium as consumers moved up to latest generation mobile phones. In fact the term ‘phone’ was becoming an anomaly, as these multifunctional handheld devices were MP3 players, sound recorders, video and still cameras, digital assistants with email and Web clients, and video-conference terminals. With the growing capacity of memory cards, they were able to store huge amounts of data.
There were more than three million mobile-phone users in New Zealand with Telecom and Vodafone roughly splitting the market and continually looking at ways to improve their edge. The overall cellular market was estimated to be worth around $2 billion. New Zealand had reached saturation point for phone penetration with over four million phones in the market, more than enough for every man, woman, and child. The numbers, however, included a million connections relating to second phones, phones that were no longer in use, or cellular links for business or applications such as security monitoring. Many customers had one phone from each network to take advantage of their various special offers.
Future growth, reliant on next generation phones and faster speeds, appeared to be stifled by high calling costs, incompatibility between existing CDMA and GSM networks and the lack of a long-promised third competitor. Potential third network players had made empty promises for years but by the end of 2007 relief was in sight, with plans to regulate the mobile market and at least three new mobile players allegedly waiting in the wings.
Telecom and Vodafone remained at each other’s throats, expanding the capabilities of their networks to more locations, boosting their marketing to appeal to youth with pxting , video services, mobisodes, and music downloads, as well as improving roaming agreements for more affordable global coverage. The battle for customer attention and retention was only expected to get fiercer, as carriers looked to speed, mobile-landline-wi-fi handoff, next generation location-based services, videoconferencing, and bundled services including landlines and fast Internet.
The Commerce Commission had been formally investigating ways to achieve improved competition and pricing. Both Telecom and Vodafone were under pressure from the government and consumers to bring their prices down to a more acceptable level. New Zealand mobile phone prices were among the highest in the developed world; 70 percent higher than the OECD average, and the second highest in the developed world in 2005, 2006, and 2007. It was hoped new rules of engagement would have the same impact on the mobile market that unbundling Internet access was having on broadband.
Amping for the future
Achieving mobile network competition in New Zealand mirrored the obstruction, delays, and tactical parrying that had slowed uptake of competitive phone calls and dial-up Internet.
Having acquired spectrum in 1989, wholly US-owned BellSouth New Zealand invested nearly half a billion dollars into building its nationwide cellular network through an ‘islands of coverage’ strategy, where the most densely populated areas were served first. Once issues of leakage into the Telecom network were resolved, BellSouth mobile went live from 11 July 1993 under the slogan ‘This is Tomorrow,’ deploying new digital mobile technology, known as GSM.
It was up against Telecom’s Advanced Mobile Phone System (AMPS) analogue cellular network. A year and a half later it had achieved 80 percent coverage and was moving data as well as voice, claiming 10,000 customers. By 1995 it had added 20,000 more customers.
It was a hard slog, and in retrospect BellSouth managing director Keith Davis doubted the company would have gone ahead with its plans for New Zealand had it known the difficulties that lay ahead in its battle with Telecom. “This is not a deregulated environment,” Davis complained to Wired magazine writer Bob Johnstone in mid-1995. “This is an environment where the power of regulation has been passed to the incumbent.” BellSouth found itself at the mercy of Telecom with no government offices to which it could send its lobbyists. There had been some rude shocks since its network went live.
In order to deploy international roaming, BellSouth had to ask Telecom to provide the necessary authorisation signals. It alleged Telecom’s engineers had stalled the process in order to give their colleagues time to patch together a competing product. “Business is all about time,” fumed Davis. “The whole cornerstone of Telecom’s policy is delay.” Another thing that bugged Davis was the interconnect agreement BellSouth signed with Telecom. “It’s unfair … We’re a network operator, yet they charge us full retail rates for interconnect, while their resellers get a 20 percent discount for carrying calls.” This is not the level-playing field that Davis claimed the Godzone Government promised BellSouth, whose market penetration remains very small.
By 1996 BellSouth claimed 95 percent coverage and around 40,000 cellular customers, or 11 percent market penetration, compared with Telecom’s 300,000 customers. Then, after much speculation, the news was out: Vodafone had won approval to acquire BellSouth New Zealand for $750 million in November 1998. Vodafone was the largest cellphone company in the United Kingdom, and one of several bidding for BellSouth after its US parent decided to quit Australasia. It had never made a profit, although it was expecting to inch into the black in the year of sale. It had over 120,000 customers – about 18-20 percent of the cellular market – compared with Telecom’s 492,500.
Communications Minister Maurice Williamson explained he was always trying to negotiate a fair path between Telecom’s intransigence and BellSouth’s bickering. “I had some lunatic companies trying to do things that they literally weren’t set up for. BellSouth came here and tried to run a cellular phone company and for six years they bagged me on a daily basis: ‘It’s not possible to make progress. You need to regulate. You need to give us access to their network. You need to get customers on our books because we just can’t function.’ I found it interesting because they chose to come here and invest, knowing what the regime was. If I had changed it, they’d have every right to be grumpy. I said, ‘I’m sure you guys are smarter at investing than I ever was.’
“In the end, BellSouth gave me the final ultimatum. Really nasty. They brought in the big boys, the finger-pointing, the lawyers and so on. ‘If you don’t do something, we’re outta here. We’re going to walk from New Zealand. How do you think that will look?’ I said, ‘Well, I’ll be disappointed if you do, but if you do I can’t stop you and I most certainly am not going to get into regulating, moving wealth from one balance sheet to another.’ Then the news came out in the papers three months later about the $750 million sale to Vodafone. Vodafone arrived, the bosses came to see me the following week and said, ‘Can you do us one favour?’ Can you stay right out of the market in terms of regulating and controlling? We want to win our customers the old-fashioned way with price, product and service.’
“Well that was a refreshing change. They were only 18 percent of the cellular market, but they were confident that within five years they would be the biggest cellular provider in the country. It had nothing to do with my failure to regulate, they were sold to a new owner and had a totally different, fresh approach to their customers and products and services and they got all the young kids involved,” said Williamson.
Vodafone in acquiring BellSouth took ownership of 138,000 customers and a leading-edge digital GSM system, which allowed paging, messaging, and email, and was a serious leap ahead of Telecom’s analogue service. Its phones could also be used in New Zealand and Australia and most of Europe. Telecom had the market numbers but was still in serious catch-up mode as far as delivering a digital service went. Meanwhile a third cellular player, Telstra, the international arm of Telecom Australia, had acquired bandwidth and was planning to have its own GSM service but ended up doing a deal with Vodafone, which provided a service in exchange for access to the spectrum.
Cellphones get sexy
Cellphones suddenly became sexy – they were no longer just symbols of yuppiedom. A whole new generation of converts had gone mobile with voice calls only making up part of the picture. Technology was squeezing more into less as the cellphone – once tagged the brick because of its unwieldy nature – became a personal fashion item that slipped comfortably into jacket pocket or purse.
New Zealand cellphone penetration slowly moved from 10 percent in 1995 to 17 percent in 1998. Serious momentum began after Vodafone bought GSM operator BellSouth, trebling its customer base in the first year. It introduced prepaid phones and dropped prices forcing Telecom to lift its mobile game. In June 1999 Vodafone announced it would spend $200 million over the next two years to upgrade its cellphone network to cope with increased demand. Telecom followed suit in August with plans to replace its mobile telephone network with new CDMAOne digital technology.
Vodafone and Telecom released figures showing huge growth in the number of mobile phone connections in the last quarter of 1999. Vodafone’s connections grew by 35 percent in the three months to 31 December 1999 to reach 397,000 while Telecom’s mobile connections grew by 13 percent over the quarter to reach 858,000. By the end of 2000 more than 41 percent of New Zealanders owned a mobile phone, up from 27.6 percent in September 1999. Vodafone now had close to 638,000 customers, blossoming to 900,000 by mid-2001, while Telecom’s subscriber base also grew rapidly to over a million with more than 300,000 using its digital service.
The major driver from the latter half of 2000 had been the speed young people in particular had embraced SMS, more commonly known as text messaging. Up to a million text messages were being sent between cellphones every day. A new language of shortcuts, like in the early days of the telegram, was being used for efficiency and to squeeze as much information into the allowable size for each 20-cent message. The abbreviated words became a kind of teenage code between students in university lectures, between friends arranging to meet, or for passing on sensitive data or gossip. However there was still no agreement for interchanging messages between Vodafone and Telecom’s new digital CDMA network.
SMS was the stepping stone to more sophisticated services using the WAP, which could take advantage of next generation cellular networks. WAP was the standard for integrating the Internet with cellphones, pagers, and other digital mobile devices. Its micro-browser displayed key information from specially designed web sites.
IDC Internet researcher Patrick Pilcher said it was only a matter of time before you could order pizza, place a bet on the TAB or participate in an on-line lottery. Weather, news, and share prices were among the first applications. “One of the first major WAP applications in the world was developed here by Hewlett-Packard. In March 2000 Ericsson got permission to test technology capable of transmitting high-speed Internet and videoconferencing at 472kbit/sec, making New Zealand the first country to get a glimpse of a working third generation (3G) system.”
Both carriers had their goals set for 3G mobile networks and the services that would run on them. The cellular market was proving lucrative – the average cellphone was typically used for 18 months, then discarded for an upgrade. Vodafone’s My Vodafone portal had fax, email, and was soon to provide mobile banking, news, and weather. Users got their own email address and accessed information from their cellphone or PC. Newcomer iTouch was ready to deliver ‘alerts’ for news, sports results, and the share market, and Ericsson’s e.Zebra.net had a similar stable of text services. Key content providers included the much improved NZ Herald site and TVNZ’s revamped nzoom news and information portal.
Telecom had plans to extend data beyond its AirNote service through network enhancements in 2001.
Vodafone was upgrading its GSM digital network to use General Packet Radio Service (GPRS) technology to enable Internet access at speeds up to 100kbit/sec and Telecom planned an upgrade to a digital CDMA service during 2001. Both carriers were keen to continue extending their networks up to 3G services, which would enable even faster surfing and greater functionality on mobile devices.
In mid-2001 Gartner Group believed wireless Internet would have a billion users by 2005 and suggested phones with the capabilities of a pocket PC would drive exponential growth. IDC was convinced Internet-connected mobile devices and m-commerce were the next big thing, expecting 419 percent annual growth in mobile revenues from US$29 million in 2000 to more than US$20 billion by 2004.
The humble cellphone was becoming an indispensable part of our lives as we sought closer contact with family members, business associates, and customers wherever we were. Vodafone launched its GPRS network in June 2001 and designated New Zealand a global centre of excellence to test the way forward to 3G. It had partnered with Clear Communications and TelstraSaturn to resell its business-based mobile services including transport and despatch systems, tracking and logistics and mobile workforce productivity, typically accessed from a handheld computer connected to a GPRS phone. A major shortage of phones was slowing the uptake, but mobile devices with GPRS chips were about to open up a raft of new opportunities.
As part of an evaluation of its offshore investments, Telecom pulled the plug on a $151 million plan to roll out a CDMA wireless network in Australia, instead taking a 19.9 percent stake in Hutchison 3G Australia, a company set up to develop 3G services there. Locally, having invested $200 million, it launched its CDMA network in July 2001, covering more than 98 percent of New Zealand’s populated areas. Subscribers could take advantage of secure transactions, custom-built business applications, email, news, weather, games, entertainment, a what’s on section, horoscopes, share prices, and a pay-per-use Web portal. Telecom had upstaged Vodafone by reducing the cost of downloads. Vodafone’s casual rate was $30 per Mb, or up to 30Mb within a $190 monthly plan compared to Telecom’s casual rate of $8 per Mb, or a monthly plan of 70Mb for $100.
The pricing war was complicated by the need for speed. Telecom’s CDMA (14.4kbit/sec) was faster than Vodafone’s existing GSM network (9.6kbit/sec) and had stronger in-building and sea coverage. Even its next generation service had an edge over Vodafone’s GPRS, delivering only 20-40kbit/sec compared with up to 100kbit/sec for Telecom’s CDMAOne upgrade. There were 537 million subscribers using GSM phones around the world, mainly in Europe. For CDMA, focused on the United States, there were 90 million subscribers. Both had strong growth in 2001.
There were many distractions in the alphabet soup of acronyms and sci-fi promises. Greater awareness of global trends, fear of built-in redundancy, and a slowdown in the tech markets were fuelling a healthy scepticism. Around the world telcos and equipment manufacturers were under serious financial pressure as they slashed staff numbers, restructured, and re-focused. They had invested hundreds of billions for 3G spectrum rights, and now had to build those networks in an uncertain environment. Major consolidation was ahead.
While Telecom and Vodafone had their eyes fixed on 3G nirvana, they also had the billion-dollar challenge to cover New Zealand’s rugged terrain. There were challenges ahead for next-step networks. Which carrier would offer the most useful solutions to real world problems at the best price? A killer application to drive things forward was still missing. No one wanted to invest in applications that ran on one platform, only to find their customers and business partners were using the other flavour.
Did users really want to receive important business information on a cellphone with a tiny screen, cramped keypad, and awkward interface? And what about the next wave of hype – video on your phone? At $8–$30 per Mb, it didn’t seem particularly inviting.
Becoming TXT addicts
The mobile phone market levelled for a while from mid-2001 through to 2002 when vanilla phones, basic communication, and some enhanced services were all the carriers could offer. As they moved their digital networks up a notch or two, however, they found dozens of ways to add value.
Prices for standard cellphones had dropped so far that everyone could afford one. They were even being given away by the networks to encourage subscriptions. After a stalemate there was now an agreement in place to exchange txt messages between networks. Everywhere you went people were txting each other. For example 260,000 texts were sent as part of a Telecom promotion in the first two days of the Louis Vuitton Cup in 2002.
Telecom’s next generation CDMA1x network launched in July 2002 was capable of 153kbit/sec with coverage across 97 percent of country. Just 14 months later it had more than 200,000 customers on board. The battle was on to encourage users to move up to Telecom’s 027 and Vodafone’s 021 (029 to TelstraClear customers) next generation digital networks. The latest craze was pxting or sending images across the networks at 50 cents a time with phones that could link to a PC card or digital camera. With this capability you could send an image from a cellphone to an email address anywhere in the world.
Cellphone mobile penetration was well over 60 percent. Both major carriers claimed they were now leading the market; one set of statistics showed Telecom with 1.3 million (analogue and digital) and Vodafone 1.2 million. Call plans were similar across both networks; the most popular was a monthly fee of $35 for 200 off-peak call minutes and a two-year commitment or a prepaid offering requiring regular $20–$50 top-ups.
Smarter, smaller, sexier cellphones, we were told, were needed to access the growing number of sophisticated services being offered. The new generation WAP phones were not only functional but fashionable, coming in a rainbow of shades and patterns with snap-on bodies and endless accessories ranging in price from $250 to $2500 for all the bells and whistles – snap-on camera, fax, email, SMS, Web browsing, and integrated PDA.
The attractiveness and usefulness of next generation cellphones was even having a major impact on the sales of PDAs as the all-in-one communications and computing device. The handheld PDA and mobile market had declined 10 percent year on year worldwide, while smartphones had achieved 239 percent growth in the data transmission area with Sony and Nokia leading the way.
There were a growing number of convincing reasons why old-style analogue phone users should move up to digital, including clarity, text messaging, Web browsing, taking photos, and impressing people at cafes with the latest polyphonic ringtones. The battle for content was heating up. Vodafone Live! and Telecom Mobile Services were both delivering a growing suite of offerings including sophisticated games and consumer services.
In November 1999, fewer than 60,000 txt messages were sent across Vodafone’s network daily, but by the end of 2003 it had reached 1.8 million. The ability to send images was also helping to shift the image of the cellphone from voice only, with tens of thousands of images a day moving about the networks. The same reluctance for sharing across networks had arisen with a solution on pxting taking time to work through.
The New Zealand mobile phone business was estimated to be worth $1.7 billion. To June 2003 penetration was at 67.7 percent with Vodafone and Telecom on a relatively equal footing, sharing around 2.5 million connections. Telecom had more than 400,000 callers on its digital 027 network and the remainder on its analogue 025 network, which would eventually be phased out.
Camera phones common
According to wireless industry analyst ARC Group, by the end of 2003 more than 55 million consumers worldwide would own camera-phone handsets – more than double the 25 million mobile units sold in 2002.
The growth would come from existing mobile phone users replacing their handsets with more feature-rich models, rather than first-time buyers. ARC said 15 percent of handsets worldwide featured built-in cameras and predicted that by 2005, 130 million handsets with camera capability would be shipped globally; with the additional boost of 3G roll-out this was expected to increase to 210 million by 2008.
The future promised better image sensors, more on-board memory for picture storage, longer battery life, and network improvements to make picture sharing easier. Solid growth was expected over the next five years when smartphones would be commonplace and camera phones ubiquitous and most likely integrated into smartphones.
Momentum was mounting for mobile to rival wireline communications with the next generation of cellular networks optimised for multimedia content, and handheld computers that doubled as telephones. During 2004 the mobile networks were increasingly focused on the upwardsly mobile who liked to have everything literally at their fingertips, no matter where they were. Field workers were being liberated from the office with real-time access to databases, work scheduling and order taking via laptops or handheld devices.
Home users were offered a much greater range of entertainment and information; browsing, email, novelty ringtones, games, and information services from news to restaurant and movie guides were essentials. The next level meant newer phones doubled not only as cameras but MP3 players, sound recorders, and organisers. People upgrading to second or third handsets with leading-edge multimedia features kept the market strong. Some even had one of each to take advantage of the different deals being offered; for example Telecom’s $10 texting which allowed 500 texts to be delivered a month compared to Vodafone TXT 150 for $25 a month.
New Zealand had, however, been sternly criticised for having among the highest costs for landline-to-cellular calling rates, and the Commerce Commission was looking at ways to get these down.
The rates for exchanging calls between networks had been as high as 27 cents per minute and the Commission was recommending a drop to around 16 cents a minute. It estimated consumers could benefit $185–$217 million through lower mobile and land-to-mobile charges. An MED report claimed New Zealand mobile prices were among the highest in the OECD, with users paying 46–80 percent above the average.
The real reason carriers were charging more in New Zealand was because they could, quipped Australian researcher Paul Budde of BuddeComm. He cited an unfavourable mix of unregulated mobile market, a duopoly comprising Telecom and Vodafone, and the absence of technology platform competition (Telecom used CDMA and Vodafone used GSM) as the true features of a market that made consumers ripe for the picking. It had nothing to do with geography and population dispersion as the operators claimed.
Telecommunications Commissioner Douglas Webb said his office had been concerned for some time about the high cost of mobile, and the low level of use compared to other OECD countries, but fixed network issues had occupied most of his time. The next step he suggested was removing roaming and co-location services as barriers to entry, possibly through regulation. “New Zealand mobile prices are above the OECD average and appeared consistently across all user types to be higher than we would expect if this market is competitive,” said Webb.
The introduction of number portability across the market was also expected to make a difference when it was introduced in April 2007. Both carriers conceded the OECD numbers looked bad but pointed to the fact that the average price per call had been rapidly trending down over several years, and the cost of mobile build-outs costs hundreds of millions of dollars. IDC telecommunications analyst Chris Loh agreed mobile pricing had improved but shouldn’t be allowed to overshadow a more important subject: the absence of new mobile entrants.
“The question has to be asked, if there is a lot of revenue in the market and a lot of profit to be chased they why don’t we have three, four or five mobile carriers?”
Meanwhile both carriers were investing millions into 2.5G and 3G cellular networks that took the brakes off mobile capabilities, opening the way for faster data and a host of new services that rivalled those on broadband Internet. Vodafone was spending about $400 million on its wide-band CDMA 3G network, which would go live in the main centres in 2005. It had a 55 percent share of the mobile market with 1.6 million customers for its 021 GPRS network with data speeds of 40–60kbit/sec. It planned high-speed mobile data services, high-quality music, video clips and full videoconferencing. Its W-CDMA network promised a top speed of 384kbit/sec, although the average would be much lower than that.
Telecom’s new 3G EV-DO (evolution data only) mobile network was rolling out in the main centres. The $40 million investment in technology was largely an upgrade of its existing 027 CDMA1x network which offered 80–155kbit/sec throughput. EV-DO, marketed as T3G, would have a top speed of 2.4Mbit/sec but an average of 500kbit/sec. It would initially focus on business customers for data access through PC cards in laptops and handheld devices. Telecom planned business and entertainment services including video messaging, film, music and sports clips, information services, and television on the handsets along with the ability to talk to several people at once and use the phones as a walkie-talkie.
Networks lift game
The once humble cellphone had not only broadened its brief to handle Web surfing, music downloads, video clips, and a range of information services, but was positioning to complement or even replace the fixed-line home phone.
Revenues from traditional cellular voice services were starting to slow by the end of 2006, forcing Telecom and Vodafone to become technically and culturally more creative, with new levels of service. The Commerce Commission, for example, had given Vodafone the go-ahead to expand into the high margin, multi-billion dollar fixed-line market.
Research showed about 15 percent of New Zealanders used mobiles for home and business calls, compared to the trend across Europe where 50 percent of people used their mobiles for most of their calls. By June 2006 Telecom was claiming 1.8 million mobile customers with revenues of $709 million and Vodafone 2 million customers and $1.1 billion in revenues from the cellular market. Telecom said 30 percent of voice calls were now being made at home on mobiles. The number was around 50 percent in Scandinavia and the United States.
The announcement in October 2006 that Vodafone had snapped up Internet provider Ihug for $41 million gave the network an edge as it looked to broaden into fixed-line and broadband. Vodafone planned to assign its mobile handsets seven-digit local calling codes, to access landlines from within a 100 metre ‘homezone,’ for free local calling. Telecom had similar plans for mobile-fixed offerings ‘at some stage.’ Its first move came early in 2006 when it allowed home phone users to nominate one Telecom cellular number for inward and outward calls for $10 a month.
In February 2007, after separate investigations by the Advertising Standards Authority, both Vodafone and Telecom were found to have misled their customers. The Telecom advertisement promoting its Freedom Plan stated customers could call between a Telecom 027 mobile and a Telecom home line as much as they liked for $10 per mobile per month. But the small print said “normal charges apply after 60 minutes.” The Complaints Board found the ad to be misleading. Vodafone’s ‘best mate’ ad, which offered customers the opportunity to call, video, and text another Vodafone customer for $6 per month, was also found to be misleading, as the ad did not state the plan was only available to prepaid customers.
Meanwhile both carriers were again upgrading their respective cellular networks and announcing new speeds and charges. Vodafone was spending more than $200 million to up the broadband cellular stakes. Its W-CDMA mobile network launched in August in 2005 was facing a major upgrade using HSDPA (high speed download packet access) technology which hiked up its throughput, in optimal conditions, to between 1.6Mbit/sec and 7Mbit/sec. Its existing 3G broadband network was delivering average speeds of 800kbit/sec–1.4Mbit/sec. Charges began at $30 a month, but required a ‘Vodem’ for the PC or Mac, a special laptop card, and a 3G router to share the higher speed connection with other devices.
Telecom began work on upgrading its national cell sites in February 2006 to broaden coverage for enhanced mobile broadband capabilities through its Rev-A upgrade, which would provide maximum download speeds of 3.1Mbit/sec (average 800kbit/sec) and uplinks of 1.8Mbit/sec. Users needed a data capable mobile phone and a mobile broadband card to access the 027 network. Telecom’s New Zealand customers would be among the first in the world to experience the enhancements to the EV-DO mobile broadband technology. Martin Butler, Telecom’s general manager of business products, said the roll-out would continue throughout the country during 2007, to cover 70 percent of the population. The $15 million mobile broadband revision undertaken by Alcatel-Lucent was part of Telecom’s ongoing investment in mobile data technology and ‘would not be the last CDMA upgrade for Telecom.’
Mobile data costs had come down considerably. Vodafone, for example, dropped its rates for 1Gb of data from $149 to $49 early in 2006. It now had monthly data plans ranging from $30–$60 (200Mb–1Gb data cap) while Telecom’s casual data for downloading was $8 per Mb; a monthly rate of $10 would reduce that to $1 an Mb, and if you paid $99 a month, you wouldn’t get charged again until you hit the 400Mb cap when it was 50 cents an Mb.
Telecom, having invested more than $250 million in its mobile technology over the past three years, shut down its analogue 025 network late in 2007 and migrated most of its customers across to the 027 digital service. It had signed up 100,000 new mobile subscribers in the December 2006 quarter, compared to Vodafone’s 89,000 growth. Telecom’s 10 percent growth and the new business rival had taken on essentially took mobile penetration in New Zealand to close to 100 percent.
Vodafone chief executive Russell Stanners said his company’s ‘big hairy audacious goal’ was to become New Zealand’s top telecommunications company by 2011. He was convinced the future was mobile where the focus would be on bundling in fixed services, but serving up the majority of voice and data to the individual, not the desktop. Vodafone would not succeed if it were to only follow Telecom. The biggest challenge he said was changing people’s dependence on the fixed phone.
The breakthrough for Vodafone came from the Commerce Commission’s ruling that allowed it access to Telecom’s residential and local calling market. From February 2007 Vodafone’s two million customers were able to make local calls to Telecom’s fixed phone lines and Telecom’s fixed-line mobile customers would be able to do the same within set geographical areas.
After its acquisition of Ihug it had wasted no time targeting Telecom customers with a range of plans for unlimited national and overseas calls at a competitive price. It invested $200 million on its 3G digital network, including global roaming and high-speed transmission. Goldman Sachs JB Ware analyst Andrew White believed Vodafone could double its share of the market by 2011 and had the right components: no-cost local interconnection and full number portability from April 2007, which meant Telecom customers could move across without changing their numbers, plus increased network capacity and its ownership of Ihug, which was already eating into Telecom’s toll revenues through its competitive toll plans.
Vodafone’s Stanners said it was increasingly difficult for his parent group, the largest mobile carrier in the world, to invest in New Zealand because of uncertainty over regulation. Meanwhile the prices it was setting for rivals to access its cell towers was part of the bigger picture being investigated by Commerce Commission, which was looking at why New Zealand had only two mobile phone operators, and the perceived barriers to market entry.
For the June quarter, Vodafone announced it had added 24,000 customers, boosting its subscriber base to 2.268 million, 168,000 more than the previous year, and further consolidating its position as market leader ahead of Telecom’s 1936 million customers. Growth was being driven by ‘non-voice services and an increased mix of high value customers.’ However, average revenue per customer was slightly down. Telecom had continued to grow its market share over ten consecutive quarters.
After cementing a deal with Nokia Siemens Networks, Vodafone announced its plans to roll out a W-CDMA 900 radio network to increase its coverage, especially in rural areas. The increased coverage, through the opening up of the 900MHz band for 3G technologies, meant this would be cheaper than other technologies, and require only half the base stations of traditional 3G solutions. Nokia Siemens Networks said the technology could provide a two- to four-fold increase in coverage. Commercial delivery of the new W-CDMA 900 nodes began in July 2007 with the service due to go live in the first half of 2008.
Moving up the ranks to become a fully-fledged full-service provider had its obstacles. One of them was the need to have the right kind of billing system in place, to not only keep track of customers but the various services they were using, the suppliers of those services and arrangements with those wholesaling services to third parties. In 2006 Vodafone signed up M2, Compass, TeamTalk, Ihug, and Orcon to become resellers of its wholesale service with a plan for launch by mid-2007. This was stalled by the problems with its IBM-developed on-account billing system, delaying its Mobile Virtual Network Operators (MVNO) project for several months.
In mid-July 2007 Vodafone began offering its first complete phone and broadband package, claiming this would save up to 60 percent on calls to its own cellphones and on toll calls; those signing up to a landline for 12 months would also save 20 percent on line rental. It had lowered its home-to-mobile price to 39 cents a minute, compared with Telecom’s rate of 71 cents. The offer to business customers was expected to translate to home users and trigger a competitive response from Telecom.
British-owned Vodafone had about 55 percent of the mobile market but only 30–40 percent of those were business customers. David Kennedy, research director at telecommunications consulting company Ovum, said the bundled deal reflected a global trend to protect the existing customer base and generate new revenues in developed markets where mobile connection growth had slowed. “I’m not expecting a dramatic shift because in a way Vodafone has stepped up to the mark that Telecom has already set. Had Vodafone not done that, then you might have seen some quite dramatic changes in the market.”
While mobile services would be delivered over Vodafone’s network, all fixed-line services were provided under a wholesale deal with Telecom. IDC’s Darian Bird said phone companies wanting to survive over the next few years needed to become one-stop telco shops. “A few ISPs will be able to offer mobile and fixed bundles, but Vodafone as the network owner will have more control over pricing and products.”
The government insisted mobile market competitiveness was an essential piece of the broadband jigsaw and the Commerce Commission was immersed in a full-scale investigation into mobile roaming and co-location. Mobile prices, which the OECD claimed were the highest or second-highest among its 30 members for some categories, were not acceptable, said Communications Minister David Cunliffe in June. A government decision to investigate mobile termination rates had already resulted in rapid decreases in the price to consumers.
Cunliffe said mobile issues would become increasingly important with the potential entry of a third mobile player. The government was watching closely to ensure existing players did not engage in access-denying behaviour, with investments by both existing players likely to bring 3G mobile broadband within reach of most mobile customers over time. Cross-investments such as Vodafone’s purchase of Ihug and Kordia’s purchase of Orcon implied more complex competitive dynamics and some consolidation ahead.
TUANZ boss Ernie Newman said a decision by the Australian telecommunications regulator to cut mobile termination charges to nine cents per minute showed New Zealanders were getting a bad deal. In April the New Zealand government accepted voluntary offers from Telecom and Vodafone to gradually reduce fixed-line-to-mobile termination rates, but the Australian move showed up the disparity between New Zealand and international rates.
Telecom had offered to reduce its mobile termination rate from 20 cents a minute to 12 cents a minute, and Vodafone said it would drop the rate from 20 cents a minute to 14 cents, over the next five years. In Australia, the regulator had declined similar offers from mobile companies, saying the terms and conditions were unreasonable. “Termination rates are a major component of retail fixed-to-mobile calls and a reason we are paying silly prices such as 71 cents a minute for a call from home to a cellphone.”
Newman said Minister for Economic Development Trevor Mallard obviously did not understand, in eliciting the undertaking from the local carriers, that mobile termination rates were “falling like a stone” around the world. As a consequence he had “locked us in for five years at the world’s highest prices.” He said the government should cancel its deal with both companies and hand the issue back to the Commerce Commission to consider. In 2005 the commission recommended mobile termination rates should be regulated, saying it would lead to cheaper cellphone calls. When asked by the government to reconsider its decision, it again recommended regulation. In the report released in May 2006, the commission did not specify a termination rate but said regulation could save phone customers between $46 million and $63 million over five years.
When the commission’s draft recommendation on roaming and co-location services was released in August 2007 there was a sigh of relief from mobile junkies who were hoping to see the cost of calling trend down more quickly than it had been. It may also have provided the incentive for other players to enter the market. The commission recommended national roaming and co-location should be subject to price regulation as designated services. It recommended the Telecommunications Carriers’ Forum make changes to the co-location code “to provide a dispute resolution mechanism for replacement costs, as well as apportioning the costs of co-location based on space utilisation.”
Telecommunications Commissioner Dr Ross Patterson said the proposed changes should improve the chances of entry for a third mobile player. “New Zealand and Slovakia are the only OECD countries which do not have three or more mobile operators … The recommendation . . . is likely to facilitate new entry, which will lead to more competition, greater choice of provider, lower prices and more innovative products and services.” The Commission said it had assessed Vodafone’s undertaking as an alternative to regulation but felt that in its current form it was “not likely to promote entry into the New Zealand mobile market.”
Ernie Newman urged the commission to act with haste on producing a final version and “avoid any diversions that might delay its process.” The government should not treat the recommendations as “an opportunity to invite the phone companies up to the Beehive to re-litigate.” Vodafone was ‘surprised’ by elements in the draft report and would seek clarity on a number of points. It was concerned at the move to allow Telecom access to the national roaming service on Vodafone’s network.
That news may have only served to make Vodafone more aggressive in its stated goal to become number one in the market. It launched a 12-month free basic broadband deal in mid-August for customers who signed up for a 12-month contract for home phone, talk2, and other plans. Qualifying customers would get a monthly credit of $30 for 12 months against their access charges for core Ihug broadband plans. Vodafone had essentially stepped out the rest of the market with its actions. The result was a price war at ISP level to try to stem the churn across to the mobile carrier, which had obviously taken lessons from its nemesis in its attempts to win and retain new business.
Then OECD figures again confirmed New Zealand was struggling to keep pace with its international peers. Phone calls in New Zealand were still among the costliest in the OECD, with only one of the fixed and mobile plans surveyed rating in the top half of the 30 countries. Statistics released by the Commerce Commission covering the June 2007 quarter showed very little change in the price of mobile packages. With telecommunications prices falling around the world, New Zealand slipped down the rankings, sitting firmly in the bottom quarter.
While Vodafone’s plans ranked better than Telecom’s in the comparisons, the Commerce Commission criticised the ‘extraordinary number of restrictive conditions’ of its best ranking plans. The plans that Vodafone described as ‘bare bones value’ had long contract terms, heavy contract termination penalties, and no handset subsidies or international roaming. Telecom mobile packages languished at the bottom of the table with its Go Prepaid Mates Rates plan costing nearly double the OECD average, as one of the worst performers for occasional mobile users. When the commission compared Telecom’s home-line deals with those offered by TelstraClear, Telecom’s rival came out on top, even when it was reselling Telecom services.
Speed limit exceeded
And just as the local market was heating up on the international front there was news of a technological breakthrough that would ultimately pitch mobile data services against anything the copper landline or existing cellular carriers could serve up. Revolutionary advances in wide-band CDMA revealed by Nokia Siemens Networks indicated mobile phones would soon be able to download feature-length movies within minutes. The technology, positioned for commercial release in five years, would see download speeds of more than 100Mbit/sec and had already been demonstrated at Germany’s Fraunhofer Institute for Telecommunications (Heinrich Hertz Institute).
A lab test showed a Virtual MIMO (virtual multiple input multiple output) uplink using the SDMA (space division multiple access) technique, to communicate with a base station simultaneously on the same radio channel, produced an aggregated uplink speed of 108Mbit/sec. Virtual MIMO required only one power amplifier and transmission antenna for each device, reducing production costs and power needs. According to Nokia Siemens New Zealand account manager Mike Smathers, mobile download speeds were currently around 3.6Mbit/sec. “That will jump to five, ten and then 20Mbit/sec in the next year or so but we won’t see 100Mbit/sec for at least five years. This is all part of the roadmap for wide-band CDMA,” he said.
Of course everything comes at a cost, especially with the current ‘user pays, per megabyte’ approach of carriers keen to clip the ticket every time you pass go. It was enough to cope with the cost of existing bandwidth charges let alone what a 100Mbit/sec service might cost, as Kiwi blogger Cameron Slater discovered when he visited Australia for three weeks.
He was astounded when his bill for data use came through for $7230 or $328 a day. The Auckland businessman cried ‘extortion’ and demanded the Commerce Commission investigate roaming fees. Slater, known by his on-line name ‘Whale Oil,’ had been on a standard Vodafone 1Gb a month package. On his June 2007 road trip, he used his laptop and Vodem to surf the Internet and compile his blog for less than two hours a day. His records showed 218Mb of data was used roaming on the Vodafone Australia network, charged at one cent a kilobyte. On other networks, 165Mb of data was used, charged at three cents a kilobyte. Slater complained to Vodafone NZ, saying the data bill was more than the cost of his petrol, accommodation, and car rental for the entire trip. A Vodafone customer in Australia would have paid $50.95 for the same data usage and a Telstra customer just $24.89.
“I fail to see how an electron sent from my laptop is any different from an electron sent from an Australian laptop in Australia … These charges are immoral, unconscionable and utterly unjustified by any measure you care to choose,” he said in his email to Vodafone, disclosed to industry weekly Computerworld. Vodafone’s local customer support replied GlobalRoaming was ‘a premium service’ attracting premium rates from other telcos and consequently domestic limits don’t apply. Spokesman Paul Brislen said such charges were standard around the world and reflected what the Australian telcos, for example, charged Vodafone NZ.
Despite all the announcements and grand plans there was still a long way to go before New Zealand got a third carrier, before existing carriers achieved cross-network compatibility, delivered more affordable roaming arrangements and launched their next generation broadband cellular networks. A number of key factors remained uncertain, including what companies would do with the newly acquired spectrum from the government and the impact of legislative changes on existing and intending players.
Ahead of the government’s decision to regulate the mobile market there was an air of uncertainty. The legislation would open up the way for mobile roaming by requiring competing carriers to have access to each other’s networks at regulated prices. Vodafone said the proposals would have a serious negative impact on the business case for its planned network build. It had already built a new 3G network capable of providing high-speed mobile broadband to 60 percent of New Zealand’s population, but further plans were on hold until it had clarity about the way ahead.
The Commerce Commission had proposed market entrants be able to access new network technologies, including 3G, wi-fi, and WiMax, in addition to the existing 2G networks. “The commission is seriously misjudging the real effect on investment of requiring us to make 3G and all other new technologies available to roaming competitors immediately,” warned Vodafone general manager of corporate affairs, Tom Chignell. Meanwhile, both TelstraClear and CallPlus told the Commerce Commission they were having difficulties nailing down commercial agreements with Vodafone, and regulatory changes were imperative.
Both networks had moved into music downloads and even movie downloads, chasing the international trend. While screen size and processing power limited what was possible, more powerful phones continued to lift customer expectations. While the market had reached saturation point for phone penetration there was always the next generation of services and handheld devices to keep driving things forward.
Regardless of whether a third independent mobile carrier entered the market, there would be more options for consumers than ever before as TelstraClear and Orcon explored ways to add value to rebrand Telecom and Vodafone services and the government put the squeeze on to bring prices down. There would not only be differentiation in network offerings but a continual evolution in the design, branding, and capabilities of the different devices that interfaced with the mobile networks.
Apple’s much hyped iPhone was on the horizon, computer maker Hewlett-Packard had entered the fray with new phones that converged the capabilities of its iPAQ handheld computer, and a range of devices more focused on services than loyalty to a particular carrier were shifting the market. Even Google was building its own mobile device.
There was no doubt the mobile phone would become an integral part of the wider wireless network, handing off between the home, public networks, hot spots in cafes, and the work environment. However the value of new, expensive, handheld hybrid devices, and the networks that supported them would be dependent on quality of service, guaranteed access, and consistent speed and tariffs that didn’t have users sweating about download charges or the cost of pay-per-use services.
The future, it seemed, would have a lot to do with bundling, as the mobile phone networks sought to win business from the fixed-line carriers; for example Vodafone, Orcon, and TelstraClear offering cheap broadband alongside home line and cellular connectivity. With cheaper cellphone calling rates, the huge chasm between free local calling on fixed-line phones would start to dissipate. But Telecom’s interim plan was to offer packages of tolls, on-hold, answer phone, caller ID, mobile handoff to home or office and broadband to keep us linked into the copper.
The future of cellular was glimpsed by the huge interest shown when Sky TV delivered eight channels of TV to Vodafone’s 3G mobile customers and state-owned Kordia began trialling technology that let mobile phones act as fully functioning mini-TV sets. An unknown factor was the wireless market and whether new hybrid phones would enable seamless handoff between regional and local hot spots.
All eyes were on the new contenders, impending regulatory changes, and what new services, handsets, and price points might be offered – particularly for data transmission – as true cellular competition finally took shape. Regardless, it was no longer a wrangle over who had the most cellular customers, but who could attract and retain customers for services right across the $6 billion telecommunications market.
 Godzone, Bob Johnstone, November 1995
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 Interview with Maurice Williamson, June 2007
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 Third-generation mobile cellular network
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