Years ago when I first held and subsequently sold (at a loss) Telecom New Zealand (OTC:NZTCY) I vowed that I would stick to commodities and the emerging markets. Then in February of this year I heard the siren call of the trade that cost me so much years prior. Now as 2012 comes to a close I find myself yet again looking at the land of the Long White Cloud and in particular the changing landscape of telecom.
A few weeks ago New Zealand regulators gave British firm Vodafone (VOD) the go-ahead to purchase TelstraClear, the floundering Kiwi arm of Australian parent company Telstra (TLSYY.PK). With the acquisition the mobile landscape of New Zealand is changed drastically. The new Vodafone-Telstra unit gains a significant 30% of the domestic NZ market.
Telecom New Zealand still holds a commanding market share of over half of all fixed-line and broadband services. However, fixed-line is not where this battle will be fought. Rather, look to the mobile space in New Zealand to be the front of this war between these two companies. Mobile phone growth, and in particular smartphone adoption is exploding worldwide.
A study published by IDC New Zealand in May of this year reported that smartphone ownership jumped from 13% in 2011 to 44% in 2012. Additionally, Telecom New Zealand reported earlier this year that a full 25% of its customers use smartphones, up from 20% in a six-month period. It's easy for us in the United States to lose sight of the significant shifts happening in mobile because of a saturated market place. However, when investors look abroad at this space it is hard to miss the massive potential for growth.
If New Zealanders follow the trend that we have seen here in the United States, people abandoning their fixed-line services, this war between Telecom New Zealand and Vodafone-Telstra will be fought in the mobile space. In that scenario, Telecom is currently much better positioned to take advantage of this shift.
Telecom New Zealand reported in its annual filing this year that mobile subcribers fell from 2MM to approximately 1.6MM. Sometimes losing customers in the mobile space isn't a bad thing. Telecom reported that the majority of these lost subscribers were "low-value" (read: feature phone users on the CDMA network). Telecom this year shut-down its less-profitable CDMA network, opting to go all-in on GSM/4G.
What's key in all of this is that of the 1.6MM subscribers that Telecom has in the pre-paid mobile space, the average revenue per customer is rising: $35 per month - up from $29 per month. This means that more pre-paid subscribers are upgrading from feature phones to smartphones and more importantly using more data.
By some accounts Vodafone holds a greater market share of the NZ mobile space: 48% to 32%. However, we have seen in the past that when Telecom New Zealand is pushed with its back against the wall it is able to leverage all of its assets in order to beat analyst expectations.
The importance of mobile is clear, visit Vodafone New Zealand and Telecom New Zealand and what you will immediately see are each companies' respective mobile and specifically, smartphone offering front-and-center. I believe that Telecom has greater upside in its price because it seems like, with the closure of its CDMA network, it has found the right formula for revenue generation. And in mobile revenue can speak louder than subscribers.