Seven years ago, 2degrees launched. It started as a mobile-only carrier. There were cellular towers in just four centres, but even then the company had big ambitions. For the last two years, 2degrees has been a full-service telco. Earlier this year, it delivered its first profit. Bill Bennett interviewed chief executive Stewart Sherriff to find out what makes 2degrees tick

Today, 2degrees’ cellular towers cover almost every place in New Zealand where we spend time. The company is now New Zealand’s third largest telecommunications retailer. Its revenue makes it about one fifth the size of Spark and a quarter the size of Vodafone.  

While 2degrees is small, it plays an important role in underpinning market competition. As CEO Stewart Sherriff points out, the company has already done a lot to change the way New Zealanders buy and use mobile phone services. Now it plans to do the same with fixed-line services.  

2degrees launched with a bang in 2009. Its high-profile advertising campaign shook the market. It offered pre-paid mobile plans and sold voice calls at about half the going rate. Within three years, it had signed a million customers.  

The company’s launch set the scene for what Sherriff says is the kind of innovation that can only happen when a market is competitive. He says before 2degrees the mobile market was neither competitive nor innovative.  

“When I first came to New Zealand, in 2006, there were only two mobile carriers. Customers paid 89 cents for a minute voice call and 44 cents for a text. There were no bundles, no innovation whatsoever. There were no carry-over minutes, no shared accounts.  

“There was nothing innovative in the market. There were two cosy monopolies. There was no need for anyone to risk innovation.”  

Sheriff says the catalyst for change was the review of the Telecommunications Act, which took place that year. At the time, many aspects of the Act were changed. Crucially for 2degrees, Sherriff says changes to the Act made it more possible for a third mobile operator to succeed. 

Sherriff’s first contact with what we now know as 2degrees was earlier still, in 2003. At that time, the company was still known as NZ Communications and was a long way from running a network. Sherriff was CEO of Meteor, Ireland’s third largest mobile carrier.

Meteor had recently signed one of the world’s first roaming agreements. This is a commercial deal that allows customers of one mobile phone network to make calls using another phone network. It means a new mobile carrier can grow its business faster than if it had to build everything from scratch.  

Tex Edwards, who was at NZ Communications, heard about Meteor’s roaming deal and wanted to learn more. Specifically, he wanted to pick someone’s brains, to learn how Meteor got the deal and how it worked in practice. Edwards said there was no money to pay for advice but he could fly Andrew Kelly, who was then Meteor’s regulatory expert, to New Zealand and drum up two tickets to the Lions–All Blacks rugby test match.  

Kelly came. He returned to Ireland convinced that New Zealand’s regulatory framework at the time meant it would be impossible to get a third mobile carrier off the ground. The 2006 Telecommunications Act review changed that. 

Sherriff’s direct involvement with 2degrees started when his then employer, Trilogy International Partners, invested in the company. Today, Trilogy is the company’s largest shareholder.  

In 2013 Sherriff was working in Chicago as chief technology officer for Trilogy when 2degrees’ then-CEO Eric Hertz died in a plane crash. Sherriff was also chairman of the 2degrees board at the time. He stepped in as interim CEO, then decided to make the

move permanent.

Sherriff says Trilogy was willing to invest in the start-up carrier when banks and others wouldn’t go near the business. 

“People just didn’t believe it could work, but we had confidence in the business model. When I look back at that original model, it’s clear that we’ve pretty much followed it dollar for dollar all the way through until now,” he says.   

“Things change in the competitive landscape all the time. I’m not going to complain about competition. We like to say we invented competition in New Zealand, and we’re one of the biggest advocates of it. It’s that competition that has brought innovation to the market.” 

When people talk about phone business innovation, they often mean the switch from 2G to 3G, to 4G networks, or the arrival of the Apple iPhone. But innovation isn’t just about technology, it can be about marketing and ways of doing business. This is where 2degrees has had its biggest impact.  

Being small and a relative newcomer meant 2degrees had to focus. It couldn’t be all things to all people from Day One. In the early days, its network only covered Auckland, Wellington, Christchurch and Queenstown. There were just 500 base stations.  

Sherriff says that even with the limitations it faced, 2degrees was innovative with its marketing. 

“We stuck to our knitting with pre-paid and nothing else. Meanwhile, we continued to roll out our network. We innovated by doing bundles and a bunch of other stuff the other carriers weren’t doing. When it was time to launch our pay monthly plan we transferred a lot of the innovation from the pre-pay market. It was well accepted,” he says.

“But innovation isn't just about technology, it can be about marketing and ways of doing business. This is where 2degrees has had its biggest impact.”

Stewart Sherriff, CEO, 2degrees

At that stage, 2degrees was still a consumer-focused operation, and a constrained one at that. Sherriff says that unlike its rivals 2degrees didn’t have a single own-brand store. It couldn’t get into stores like Harvey-Norman or Noel Leeming. 

“Nobody thought we were going to stick around. They thought we would be a waste of time. We did deals with 3,800 dairies, convenience stores and petrol stations. They became our distribution network, along with our online sales.”   

The plan was always to evolve towards becoming a full-service telco. It’s not hard to see why. The New Zealand telecommunications market is worth around $5.2 billion a year. This is split almost 50-50 between mobile and fixed-line. There are huge economies of scale to be had if your business is big enough. At the same time, entering the fixed-line market gave 2degrees access to a larger slice of the pie.  

Sherriff says moving from consumer-only to the small business sector was a struggle. “We thought our consumer product would be

well accepted by small business. It wasn’t.” 

When the company went to business customers to understand why, it found that while businesses liked 2degrees’ offering they didn’t want to deal with more than a single telco.

At this point, 2degrees was at a crossroads. It needed to offer fixed-line services to win business accounts. Sherriff says the dilemma was a question of: “do we build, buy or partner with an ISP to get fixed-line capability?” 

He says there was already a relationship with South Island-based Snap. The two had worked together on joint bids. This worked up to a point, but Sherriff says business customers would still get two bills and have to deal with two companies.

It took a couple of years for 2degrees to acquire Snap. Sherriff worked with Snap owner Mark Petrie on the deal.  

Adding a broadband operation to a mobile carrier could have been a shock to the system. 

The two lines of business are distinct. Sherriff says that when 2degrees acquired Snap, it didn’t just buy the business, it also took the people and their skills. This included Petrie, who has since announced his departure from 2degrees, after two years with the company.  

Snap was successful, and having the people who had made that happen eased the transition. 

“Mark had created a very good environment. The team knew what they were doing, they just had to do more of it and do it quicker. They managed that. After we took them on, we rapidly accelerated the growth in that area,” says Sheriff.  

In places, 2degrees left Snap’s teams intact. In others, it wrapped operations together. For instance, there is now only a single transmission team. One of the first steps was consolidating backhaul. Likewise, there are economies of scale with administration functions like HR and finance, also with billing. At the time of writing, the customer care functions are going through the same consolidation process.  

“There was nothing innovative in the market. There were two cosy monopolies. There was no need for anyone to risk innovation.”

Stewart Sherriff, CEO, 2degrees

Sherriff says: “We’ve cross-pollinated as far as we can. We have ex-Snap people in Christchurch doing mobile; we have 2degrees people here in Auckland doing broadband. It takes time to train people, but anywhere we can find a synergy we grab the opportunity.” 

He says the Snap acquisition has been a very successful integration. “I like to think we now have total telco credibility. We still serve those pre-pay mobile customers, but we now have customers at the other extreme. Our largest customer is the Ministry of Primary Industries.”  

The ministry has 2800 employees, who work at 120 locations throughout New Zealand. 2degrees provides the ministry with all its communication requirements. Other big customers include Waikato University, Victoria University, MIT and Hawkins

Construction.

While many areas of the telecommunications sector are intensely competitive, Sherriff says selling telecommunications services to business is less competitive than consumer sales and the market is overdue for a shake-up.  

One area where that might work is with bundling together mobile and fixed-line services into a single unified suite. Sherriff says this is something customers want to see. 

“I don’t think anyone has managed to hit that goal yet. We spend a lot of time thinking about how it might work. The goal is a unified communications suite, with a seamless experience from fixed to mobile, to whatever.” 

This happens elsewhere in the world. The

idea is that you can pick up your mobile phone anywhere and get coverage. This could be at home, where the phone is picked up by a domestic wi-fi router and calls are sent through the fixed-line connection. Making the same call away from home, you might use the cellular network, or perhaps a wi-fi hotspot. Sherriff says some US carriers transport as much as 50 percent of their mobile phone traffic via wi-fi.  

Technology aside, Sherriff is determined to disrupt the business telecommunications sector. 

“We still only have a single-digit market share in the business. It could do with more competition,” he says. For Sherriff, this means more of the business innovation that served 2degrees so well when it first entered the mobile sector.