Spark boss Simon Moutter has signalled the company will double down on its push to offer wireless broadband as an alternative to services delivered over Chorus' wholesale network.
Speaking at the company's annual meeting today, Moutter said Spark has reoriented its business towards a wireless future and making a strategic shift from a traditional telco with international interests to being a New Zealand-focused digital services company.
The telco giant has replaced its old-world brand with a portfolio of "vibrant new brands" and a slow defensive culture with one that is "customer-inspired, fast and focused on winning".
Technology has also been brought up to speed and leading positions taken in platform IT services, analytics and video entertainment.
However, Moutter said he agreed with a recent IDC report on the New Zealand telecommunications market which pointed out that growth disguised a market under incredible price pressure.
The report described the broadband market as a “glum place for telcos”, Moutter said, with rising input costs and ruthless retail competition driving down margins.
"We agree with their analysis, and we are equally concerned about the current state of the market," Moutter said.
Citing a Skinny fixed broadband unlimited plan at $68 a month, delivered on 100 Mbps fibre if available, Moutter said Spark is left with left with only $16 out of the $68 after paying Chorus' wholesale charges.
That has to cover the costs of delivering the service, broadband management, national and international networking, customer service, sales and marketing, and billing and administration.
"All of that needs to be covered by $16, which frankly leaves us with no real profit margin," he said.
"You might think that Skinny is an extreme example – and it’s true we have a strategy that Skinny won’t be beaten on price.
"But this pricing reflects an extremely competitive retail market, and we only put this offer into the market to stem our market share losses to other retailers, many of whom offer a range of deals that include things like smart TVs, first three months free, bundled video streaming services or discounted Sky TV.
"If you factor in these freebies, the pricing isn’t too dissimilar to Skinny’s pricing. It’s a situation that drives margins seriously close to negative."
Something is going to have to give, Moutter said. A lot of the more than 80 broadband providers, he suggested, are in a financial hole.
"We are now at the point where it is likely cheaper to acquire a customer base from another provider through an M&A deal than it is to try to attract those customers through marketing efforts," he added.
"For that reason, we expect to see, and participate in, significant consolidation of the retail broadband industry over the next couple of years."
It is that environment that is pushing Spark to recreate vertical integration, using its own wireless networks where possible to deliver services.
Earlier this week, Chorus CEO Kate McKenzie signalled the network wholesaler would not remain passive in the face of Spark's efforts to entice broadband customers onto it wireless services.
"We can’t rely on all retailers to promote our products for us when they have their own competitive motivations," she said.
Customers have a "strong preference" for wireless connectivity, Moutter added.
"They want to be always connected, to have a seamless digital experience," he said. "Even in the home broadband space, it’s becoming a wireless world."
In many cases, he said, the customer experience on Spark's wireless broadband product was better than on Chorus' "ageing copper network".
Moutter said a larger than expected portion of the market is buying primarily on price and Spark would get better at serving such price-sensitive customers.
Simplification, digitisation and automation to reduce unit costs would continue.
"Customers are demanding 'more for less' and therefore profitability must be underpinned by further cost reductions," he said. "We need to become the lowest cost operator through radically simplified and digitised products, processes and services.
"A significant factor in our move to focus investment on wireless is the unhealthy state – from our perspective as a retailer – of the consumer fixed broadband market."
Spark is currently rolling out 4.5G, enabling speeds "into the 100’s of megabits per second", and is on the path to 5G.
"While we don’t expect customers to achieve these sorts of speeds all the time during ‘real world’ usage, they are still a quantum leap from basic 4G and consistently better than what can be achieved with standard ADSL broadband on copper," he said.
5G will be another massive leap forward to theoretical speeds of up to 20 Gbps, he said.
Moutter also suggested the Commerce Commission, which has announced a study into New Zealand’s mobile market, needs to ask whether the current market is working for New Zealand consumers.
"We say the answer to that question is a resounding yes, the market is serving consumers well," he added.
"We’ve therefore asked for a quick conclusion to the Commerce Commission’s review process, and are urging the Commission to consider early on whether it can identify any genuine indicators of market failure that might justify further investigation."