Telstra, Vodafone's trans-Tasman tryst

Telstra's intentions in New Zealand have always been a mystery, but could the potential sale of its TelstraClear unit to Vodafone be a prelude to bigger things?

For most of the last ten years I have had questions regarding the position of TelstraClear in the New Zealand market. There have been as many strategies as there have been CEOs at Telstra, but needless to say there has been no clear direction and no clear longer-term strategy.

Over that period what has become clear is that the telco has not been serious about its investments in New Zealand, and one potential scenario has always been a situation where Telstra would eventually leave the country (always keeping, of course, a presence for its Trans-Tasman business). Another scenario that has also done the rounds is the takeover of Telecom New Zealand by Telstra.

Telstra’s expansion into New Zealand was initially a defensive move, following Telecom New Zealand’s purchase of AAPT in Australia in 2000. From then on things quickly became a game of tit-for-tat, with everybody coming out the loser. Telecom NZ was the first one to move out when it sold its AAPT business at a great loss, and, in the absence of the need for a defensive strategy to stay in New Zealand, it became only a matter of time before Telstra made a major decision about the future of TelstraClear.

Vodafone New Zealand is now talking to Telstra about acquiring TelstraClear and rumours have it that this is a prelude for Telstra to take over Telecom New Zealand.

This raises the possibility of three interesting outcomes.

With the NBN deal done Telstra is sitting on a lot of cash and is exploring where it wants to invest. If the rumours regarding the takeover of Telecom are not true then obviously it would have taken a look at New Zealand and came to the conclusion that TelstraClear and New Zealand didn’t fit into that picture. 

On the flipside if Telstra is still keen to absorb Telecom NZ  it would have come to the conclusion that there are synergies in merging the two operations across the Tasman and that such a merger would lead to very significant cost savings in New Zealand.  

This strategy would fit in the global trend were telcos, in order to survive in an environment where revenues are either flat or going downwards and new technologies that will see a rapid undermining of the their traditional revenues by OTT operators, need to find new ways to progress and there is no other way to do this than to cut cost and this merger could indeed assist in that.

What does it mean for Vodafone NZ?

For Vodafone, on the other hand, in a market that is blurring the borders between mobile and fixed infrastructure it is in need of a better presence across these areas. It already has made moves in the past in that direction and these current negotiations herald a further step in that direction. It will pick and choose the TelstraClear elements it likes and over time merge them into the Vodafone business. Bundling mobile and fixed-line services will be a key issue. It can also lay its hand on more spectrum and some good backbone networks, which will be welcome in relation to the rollout of 4G; and in general it will be able to extend its customer base in the SME and corporate markets.

Another interesting conclusion we arrive at here is that Vodafone is keeping its New Zealand /Australia business. The two are closely integrated and it will cost serious money to separate them. The strategy in Australia seems to be a slow merger of infrastructure between Vodafone and Optus and that could, over time, either lead to a different position for Vodafone in the Australian market, or to a more gradual withdrawal, depending upon how the company performs over the next year or so.

Back to New Zealand, if Telstra does not take over Telecom NZ it is hard not to conclude that Vodafone will become the long-term dominant player in the New Zealand market. So this will mean that there will be significant scrutiny of the possible deal. But the government and the Commerce Commission will also need to accept that the New Zealand market does have competition limitations – it will have to be innovative in planning how to balance the competition issues with the commercial realities. Perhaps some stringent wholesale/resale clauses and sharing of mobile infrastructure with companies such as 2Degrees will be attached to the merger.

Obviously this will also have a serious effect on Telecom NZ and it will be most interesting to see if this company can transform itself to match the marketing vigour of a rival like Vodafone.

On the other hand, if Telstra does make a move on Telecom NZ  the market dynamics in New Zealand could be strengthened, and such a comprehensive scenario might be more attractive to the regulator. One difficulty will be that a more efficient operation will involve fewer people and – be it short-term or long-term – the merger will have a negative effect on the people currently employed within Telecom NZ; and that, of course, will have some political implications. 

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.