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New Zealand’s two largest mobile operators – Vodafone New Zealand and Telecom NZ (TNZ) – are at a key juncture. They must decide whether to spend big and attempt to take a leadership position, play it safe and settle for second place in the market, or possibly even sell out. Ovum believes that both operators will not have ruled out exit strategies. Vodafone is losing market share, while TNZ could be in a prime position for acquisition now that it is free of its fixed network business, Chorus.

The logical buyer is Australian telco Telstra, whose local fixed broadband business, TelstraClear, needs a shot in the arm. That could come in the form of the acquisition of one of New Zealand’s mobile network operators, which would provide TelstraClear with new fixed–mobile convergence opportunities, such as offloading mobile traffic to fiber or Wi-Fi. If Vodafone or TNZ is sold to Telstra, the remaining operator will find it difficult to compete as Telstra will be able to use its significant cash flow and experience to take the leading position in the New Zealand mobile market.

Is it a case of “it’s as good as it gets” for Vodafone in New Zealand?

This might be an opportune time for Vodafone to exit the New Zealand market as its customer base is coming under attack from TNZ at the high end and 2degrees at the low end. Upcoming LTE capex will also affect the operator’s performance, but is necessary if it is to continue to attract high-end customers. The Vodafone Group may be better off selling out of the geographically isolated markets of Australia and New Zealand, which have a combined population of just 27 million, and putting its time and resources into European and emerging markets with better growth prospects.

TNZ’s mobile capex budget is currently restrained, which rules out a high-risk LTE deployment to entice Vodafone’s top-end customers to churn. This cost constraint is likely to be reinforced when TNZ’s new CEO, Simon Moutter, takes up his position in September 2012.

TelstraClear needs scale, and Telstra is willing to spend

TelstraClear operates a small cable network in New Zealand, and wholesales Vodafone’s mobile service to approximately 50,000 customers. TelstraClear – which is essentially a fixed-only broadband operator – needs scale, and it will be able to achieve this through the acquisition of a mobile business. The operator currently holds 50MHz of spectrum in the 1800MHz band and 30MHz in the 2100MHz band, but has consistently ruled out building a mobile network from scratch.

The good news for TelstraClear is that Telstra expects to have excess cash flow of A$2–3bn over the next three years. Having ruled out share buybacks, this money is earmarked for acquisitions in Asia. While some may argue that New Zealand is not technically Asia, there is a considerable opportunity for Telstra to strengthen its position in New Zealand.

It makes a lot of sense for Telstra to buy an established mobile operator, and export its successful T-Box/Foxtel media strategy to New Zealand. TelstraClear already has a strong position in the New Zealand enterprise segment, and the acquisition of a mobile operator would strengthen its position in the consumer segment, especially as it prepares to tap the fiber opportunity that the Ultra Fast Broadband fiber-to-the-node network will offer.

Not good news for the last man standing

If Telstra does decide to acquire one of New Zealand’s mobile operators, it will be able to transfer its expertise in the Australian market to New Zealand. This will make it extremely difficult for the remaining operator, which will have to compete with a reinvigorated TelstraClear. If TelstraClear were to buy Vodafone, TNZ would need to become a lean mobile outfit and settle for second place in the market as it will not have the resources to regain market leadership. However, we believe that it makes more sense for TNZ’s CEO to prepare the operator for sale in the wake of the spinoff of Chorus, rather than being left in a potential defensive play against a “new” TelstraClear.

Ovum believes that market consolidation won’t have a significant impact on value operator 2degrees, which has managed to gain a market share of 16% since it entered the market in 2009. 2degrees is close to breaking even on its EBITDA, and its value pricing could strike a chord with the 650,000 customers that are yet to churn from TNZ’s CDMA network, which is due to be turned off in July 2012. The problem for 2degrees is that these CDMA customers are mostly low value and prepaid. While this is good for market share, it doesn’t offer the same lucrative returns as postpaid customers.

The other significant problem for 2degrees is that the on-net/off-net traffic disparity refuses to change dramatically, despite lower mobile termination rates. It continues to be difficult for 2degrees to compete with Vodafone’s well-entrenched “Best Mates” on-net offers, which Vodafone is protecting by offering less attractive off-net deals. In addition, Ovum believes that the regulator is unlikely to intervene in the retail pricing arena. The only trade off for 2degrees is that it could be granted cheaper spectrum in the 700MHz band for LTE than either of its larger competitors.