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Vodafone has announced the acquisition of fixed operator TelstraClear in New Zealand. The acquisition gives Vodafone a fixed broadband market share of approximately 35%, and it now owns a number of significant fixed assets in New Zealand. The acquisition will strengthen Vodafone’s appeal to New Zealand customers, particularly in the enterprise segment, where integrated offers are increasingly important. Vodafone’s acquisition of TelstraClear is consistent with its strategies in other markets, and Australia is now the only developed market where the operator does not have a substantial fixed business.

The deal leaves New Zealand with a more consolidated and rational telecoms industry. However, it also increases the pressure on Telecom New Zealand (TNZ), which must make some difficult decisions about its future mobile strategy.

Vodafone plays true to its strategy

Vodafone’s acquisition of TelstraClear is another step in the global operator’s strategy of becoming an integrated telecoms operator in all of its markets. While Vodafone already bundles mobile and ADSL services in the New Zealand consumer market, the acquisition of TelstraClear will enable it to better target the lucrative enterprise space, where integrated offerings are increasingly important. Vodafone will inherit a substantial market share among the top 50 New Zealand enterprises from TelstraClear. However, it will need to leverage this customer base in order to justify the A$600m price tag for TelstraClear, which was higher than market expectations.

Vodafone’s worldwide effort to move customers onto integrated tariffs is important for two reasons. Firstly, it confirms Ovum’s view that mobile-only operators have a limited future in developed markets. On the consumer side, it is increasingly important that mobile operators bundle voice, SMS, and fixed broadband services to remain competitive with their competitors’ integrated offerings. However, the ability to offer bundled services in the enterprise space is even more important.

Secondly, bundling mobile voice, SMS, and data with fixed broadband services helps mobile operators to safeguard themselves against the threat from over-the-top (OTT) players. Combining all of these services with generous monthly voice and messaging quotas adds to customer stickiness and offers strong opposition to OTT services such as WhatsApp and Skype.

A good result for New Zealand, but what’s next for TNZ?

Vodafone’s acquisition of TelstraClear brings a more rational structure to the New Zealand telecoms market. The fixed industry was too fragmented for a market of only 4 million people, and the acquisition has provided Vodafone with sufficient scale in its fixed operations to make it a credible rival to TNZ. The final result is that there are now two large integrated operators with sufficient scale for mass market operation alongside smaller value-seeking players. We expect that pressure from New Zealand’s third-placed mobile operator, 2degrees, and several smaller fixed ISPs will ensure that competition remains strong in the market. The only real alternative to Vodafone’s acquisition of TelstraClear was a Telstra acquisition of Vodafone, which we discussed in detail in the opinion piece “New Zealand mobile market at a consolidation crossroads”.

The big question now for both Vodafone and TNZ is what to do in the mobile market? While Vodafone is currently the mobile revenue leader, the two operators’ networks are comparable. In such a small market, only one of the operators will be able to take the high-risk approach of investing heavily in HSPA+ and moving first on LTE. The other player would then become the “alternative” player to the technology market leader, which is a strategy that has been adroitly played by Optus in Australia. We believe that Vodafone is more likely to take the high-capex investment approach as it is currently the clear revenue leader and is better able to justify the additional investment.

If this occurs, TNZ will be at a crossroads in terms of its mobile strategy. The operator must either challenge Vodafone for leadership by adopting a high-capex strategy, or choose to become an alternative player. TNZ does not currently occupy the mobile leader position that would underwrite a major investment, nor does it have the backing of a well-resourced strategic investor. As the acquisition reportedly includes a no-compete clause that rules out a Telstra purchase of TNZ for several years, it seems increasingly likely that TNZ will be forced to adopt the alternative player strategy.