New Zealand's mobile players are at a key juncture.
The markets two biggest operators - Vodafone New Zealand and Telecom NZ - 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.
Both operators will likely have not ruled out exit strategies. Vodafone is losing market share, while Telecom could be in a prime position for acquisition now it is free of its fixed network business, Chorus.
The logical buyer is Telstra, whose local fixed broadband business, TelstraClear, needs a shot in the arm. That could come mean an acquisition of one of New Zealand's mobile network operators, giving TelstraClear new fixed to mobile convergence opportunities.
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.
As good as it gets?
This might be an opportune time for Vodafone to exit the New Zealand market as its customer base comes under attack from Telecom at the high end of the market, and 2degrees at the low end.
Upcoming LTE capital expenditure will also affect the operator's performance, but is necessary if it is to continue to attract high-end customers. The UK-based 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.
Telecom'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 restraint is likely to be reinforced when Telecom's new CEO, Simon Moutter, takes up his position in September this year.
Gaining Tasman scale
TelstraClear operates a small cable network in New Zealand and wholesales Vodafone's mobile service to approximately 50,000 customers.
The company needs scale but despite having sufficient mobile spectrum stocks of its own, acquisition of a competitor is a more logical path forward than building a mobile network from scratch.
The good news for TelstraClear is that Telstra expects to have excess cash flow of $2-3 billion over the next three years. Having ruled out share buybacks, this money is partly 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.
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, Telecom 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.
The only other player, 2degrees, is unlikely to suffer from market consolidation to the same extent, having gained a market share of 16 percent since it entered the market in 2009.
In fact, 2degrees' value pricing could strike a chord with the 650,000 customers that are yet to churn from Telecom'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.
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 700 MHz band for LTE than either of its larger competitors.