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Will Australian player's cut-price mobile gamble in NZ pay off?

Ruslan Kogan. Photo/Kogan Technologies/Wikimedia Commons

Australian entrepreneur Ruslan Kogan’s spectacular rise bears more than a little resemblance to that of our own retailing king, Sir Stephen Tindall.

In 1982, Tindall saw a gap in the market for a no-frills retailer with bargain-basement prices to undercut the existing batch of bricks and mortar retailers who were lumbered with high import tariffs at the time.

He set up his first The Warehouse store and stacked it full of cheap products, cutting out the operating costs typical retailers faced. He didn’t underestimate the Kiwi appetite for a sharp deal. As he expanded his network of stores, Tindall focused on building an efficient supply chain, which allowed The Warehouse to become one of the country’s most successful companies and made Tindall a fortune, much of which he has plowed back into philanthropy and tech investments.

A quarter of a century later in 2006, Kogan had the same idea after shopping around for a fancy new TV. He didn’t want to pay the $5,000 Aussie retailers were looking for, so he called the Asian manufacturer that made the brand of TV, posing as a retailer.

From cheap TVs to prepay phones

He said he was interested in buying 100,000 of the TVs if they sent him a sample model for $1,000. The manufacturer made a counteroffer – to sell Kogan 100,000 TVs at $1,000 each. Living and studying in Melbourne at the time, Kogan had been offered the deal of a lifetime. He couldn’t raise the money to buy all of them but managed to get 1,000 at a discount. He then set up Kogan.com from his parents’ garage and began selling the cheap TVs online, bearing the Kogan brand name.

Like Tindall, he kept costs low and leveraged technology to expand his online empire. Now Kogan.com is one of Australia’s biggest ASX-listed online retailers and the Kogan brand spans everything from life insurance and broadband to the Dick Smith brand he has revived online and pre-paid mobile services.

This week, Kogan was in Auckland to launch his mobile brand in New Zealand. He has partnered with Vodafone in what is known as a MVNO (mobile virtual network operator) deal that will see Kogan customers use the Vodafone network to make calls, send texts and surf the web.

It means that Kogan doesn’t have to invest in building network infrastructure here. Instead, it will pay Vodafone for access to its network, using the technology that underpins its virtual mobile service in Australia to deliver online-only billing and customer service for users.

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Buying in bulk

As such, it lives and breathes the low-cost, no-frills Kogan mantra. The pre-pay market in New Zealand is already quite competitive, but Kogan could well drive prices down even further. The cheapest deal starts at $17.90 a month ($4.90 for the first 30 days if bought before the end of September) with unlimited calls and texts in New Zealand and Australia and 1.5GB of mobile data.

At the high end, its 32GB Extra Large monthly plan with unlimited calling and texting is $69.99 ($4.90 for the first 30 days if bought before the end of September). But it is offering big discounts to hook people into paying for six months or a year upfront. That Extra Large plan costs $424.62 if you pay for a year, a saving of 40 per cent.

The closest entry-level deal from Skinny, Spark’s prepay provider, costs $16 a month with 200 roll-over calling minutes, unlimited texts and 1.25GB of data. 2Degrees has pretty much the same deal for $19. Vodafone’s nearest Flex Prepay deal is a little harder to compare, but you can get 200 minutes, unlimited texts and 1.25GB of data for $19 a month too. Spark’s own entry-level prepay plan is $19 for roll-over 1.25GB, 200 minutes NZ and unlimited texts.

As such, Kogan isn’t substantially undercutting existing low-end prepay plans, unless you are buying 90 days or a year’s access upfront and getting a big discount as a result. That’s an option that really appeals to me. Being able to get the billing out of the way in one go is an attractive option and that Extra Large Kogan deal looks competitive compared to the $46 a month Skinny prepay plan I am on, which doesn’t have any discount for buying in bulk.

There are other things to consider in Kogan’s cheap deals. Roaming costs are high, so if you are travelling a lot, you may want to look at alternatives. The lack of phone support will frustrate some. The service can be activated through buying a $2 SIM card on the Kogan website.

Also, many of the prepay mobile players offer unlimited calls to other phones with the same provider, which you will want to consider if you have friends and family loyal to the same company.

A tough market

Why is Vodafone letting a competing brand ride on its coattails? If Kogan is a hit, Vodafone cashes in too and the brand is probably more likely to hit Skinny and 2Degrees than Vodafone’s prepay business.

But the reality is that the MVNO model hasn’t really worked in New Zealand. It accounts for around one per cent of the market, with the Slingshot and Orcon mobile services accounting for most of that.

The Commerce Commission is keeping a close eye on the MVNO market, which is tiny compared to Australia where there are dozens of virtual operators, including Kogan which has two per cent of the local market.

But the Commission says that regulating wholesale access to mobile networks for virtual operators could have adverse consequences for those players who have invested to build their own networks.

“An MNO (mobile network operator] may be discouraged from investing in coverage or new

technology if it were to be mandated to offer wholesale access to a downstream competitor. Any such impact would need to be considered along with the potential benefits from regulating MVNO access,” it noted in a report last year on the mobile market.

The Commission hasn’t pushed the MVNO issue as it was hard enough to get a third player, 2Degrees, into the market and building its own network. The rival to Spark and Vodafone recently celebrated its 10th birthday but continues to face an uphill battle here.

Kogan who?

Does Kogan have a chance? It isn’t looking good in the current environment. In Australia, it has the brand recognition and economies of scale that goes with having such a large online presence across different types of products. Here, it is largely invisible, though the Kogan marketplace has its own New Zealand website.

Kogan will need to be willing to dig deep when it comes to marketing to match the existing players who heavily advertise their services to steal market share from each other. Whether Kogan will get to piggyback on Vodafone’s 5G network that will go live in main centres at the end of the year is also unclear.

But if Ruslan Kogan’s instincts are as good as they were when he started selling cut-price LCD TVs in 2006, he’ll have something up his sleeve to give him an edge and urge mobile users to hunt out his online deals.

A game-changer would be to do away with roaming charges between New Zealand and Australia, letting the same flat-rate fees apply when you go to Australia. With Kiwis crossing the ditch so regularly that would be a popular deal, but is one that relies on the economics of roaming access number network players and is something our own telcos have so far resisted.

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