2degrees of penetration: mobile upstart an upstart no more as big customer gains announced

Eric Hertz

The last time 2degrees released its customer numbers in February 2010, it had managed to attract 206,000 New Zealanders with a combination of attractive pricing, smart marketing, a much-loved frontman and a giant ‘log-oh’. Just over one year later—and 19 months since it first opened its doors in August 2009—that figure has more than doubled to 580,112. 

While it’s still well below Vodafone and Telecom’s numbers (2,465,000 and 2,170,000 respectively, according to annual reports), it’s a much bigger share of the market than most telco analysts were predicting (ABN Amro Craigs predicted it would have 100,000 customers at the end of its first year). The Herald reported that it 2degrees 11 percent of the 5.237 million users, compared to four percent cent a year ago. Not surprisingly, chief executive Eric Hertz, who announced the results at a press conference in Auckland this morning, is pretty chuffed.

“Lower pricing was just the beginning,” he says. “Since February last year we’ve opened 10 stores, launched nationwide 3G service and provided monthly plans that don’t lock you into a long term contract. Then we created real handset competition via well-priced, feature-rich smart phones and continued to pleasantly surprise Kiwis with simple plans that offer more for their money.”

2degrees, which invested $250 million in its own network, started out aiming for the lower-value pre-paid customers. And at the time, chief marketing officer Larrie Moore told NZ Marketing the company saw the New Zealand market as the perfect storm.

Consumers were “crying out for change”, there was close to 100 percent mobile penetration and New Zealanders love to use mobile phones but “hardly ever did unless the boss was paying”. The decision to focus on entry-level mobile was easy given 70 percent of the market uses pre-pay, the complications around reselling fixed-line products in an already crowded market, the 4.2 million Kiwis spending $2.2 billion in the sector each year, the likelihood of mobile broadband soon becoming commonplace and recognition from consumers that wireless technology had more potential than fixed line.

“What we were thrown by was the complexity of the offer, the premium pricing. People were paying an awful lot and not getting a lot for it.” And that, he says, comes down to a lack of competition: there was no need to compete on price in a duopoly. Both players had half the market, so they competed on other things, like technology, calling buckets and friend deals. But he says the offers were so complex, particularly when it came to certain prices for on- and off-net calls, that the relationship between customers and providers became tense. “No one likes to get that surprise bill.”

“I think what we’ve done is connect with Kiwis in their pockets but also their hearts. And I think that’s important. What [our competitors]have done is dazzled customers with technology,” he said.

At the time, he said the intention was always to create awareness, gain customers, get a foothold in the market and move up the pecking order through new innovations at a good price. And with “coverage to 97 percent of where New Zealanders live and work and 24/7 New Zealand-based customer care”, Hertz believes the company has now become now a full service, full scale telco option.

Hertz says one of the most encouraging signs for 2degrees has been the fact that one quarter of its customers (defined as anyone who paid for voice, txt or data services on its network over the past 90 days) have brought their number across to 2degrees.

When asked at the press conference about the average revenue per user, an important measure of success in the telco realm, Hertz chose not to divulge them. But with data demand doubling every two months as consumers choose more sophisticated devices, 40 more stores set to open throughout the country by the end of the year and a recent announcement of an extra $100 million investment in network capability, he says there are big plan afoot and “this would be a good time to avoid signing a contract with our competitors”.

The 2009 OECD Communications Outlook report showed that New Zealand’s ratio of mobile revenue to total revenue was 16 percent in 2005 and was just below 30 percent last year. Compare that to Japan, where it sat at 70 percent, and it seems there’s plenty more room for 2degrees to grow.

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