Member log in

Pacific Fibre folds

UPDATE Aug 1:  Pacific Fibre will cease operations, chairman Sam Morgan says.

Latest: Pacific Fibre sunk, attention terms to transtasman contenders

The company was only able to raise half the $400 million required to build a fibre optic cable between Sydney, Auckland and Los Angeles.

The cable would have broken the 50% Telecom-owned, Bermuda-based Southern Cross Cable's monopoly as New Zealand's only fibre optic connection to the outside world.

Mr Morgan told NBR ONLINE yesterday that he and fellow investors – who include Peter Thiel, Rod Drury, Sir Stephen Tindall, Gareth Morgan and David Kirk (see list end of article) – had collectively lost "north of $5 million, perhaps $6 million", on the project.

Pacific Fibre's six staff, led by CEO Mark Rushworth, have been given notice.

Mr Morgan says Pacific Fibre had gone hell for leather in a final push, but "the nature of these projects is that once you start to falter there is a downward spiral".

The capital raising process was always going to be difficult, but it had proved more difficult than anticipated.

$1.35b Crown fibre marooned without cheaper international link
In a statement, fellow Pacific Fibre backer Rod Dury said the high cost of broadband was a case of market failure, not a technical problem.

“We still cannot see how the government’s investment in UFB makes sense until the price of international bandwidth is greatly reduced,” he said.

Southern Cross Cable cuts its pricing and upgraded its service after Pacific Fibre began its quest for funding.

Last week, iiNet – Australia's largest independent ISP and, like Vodafone, an anchor Pacific Fibre customer – signed a deal to triple its business with Southern Cross.

However, Mr Morgan would not be baited into criticising Southern Cross. It was the nature of the business that pricing was continually reduced while volume increased, he said. Pacific Fibre's proposition remained viable despite the Southern Cross price cuts.

Telecom acting CEO Chris Quin told NBR, "While Telecom is obviously a shareholder, we're also a Southern Cross customer."

Like other customers, Telecom wanted more bandwidth at a cheaper price. Beyond its transtasman leg, Southern Cross had to compete in an international, price-competitive market, he said.

InternetNZ: Transtasman cable second-best option
"The main impact of Pacific Fibre's demise is likely going to be a lack of new business models and innovation around supply of international capacity, and we very much hope that a transTasman cable as a second-best path still goes ahead."

Both state-owned Kordia and a joint venture between China's Huawei Marine and Axin have attempted to raise funds for a Transtasman cable, so far without success. Kordia is also angling to manage a Huawei-Axin cable, should it go ahead.

Adams: UFB not dependent on second cable
ICT Minister Amy Adams told NBR, "While a second international cable is seen as beneficial for New Zealand into the future, the success of the UFB programme is not in any way reliant on a second cable.

"Our assessments show the Southern cross cable has sufficient capacity in the medium term. In addition, UFB is likely to use significant amounts of locally cached content reducing its reliance on international bandwidth.

"Planned upgrades of the Southern cross cable will further enhance existing capacity."

Ms Adams noted that the government had supported Pacific Fibre indirectly through government-owned tertiary broadband network operator Reannz, which had committed to a $91 million, multi-year contract with Pacific Fibre.

The dynamics of the market meant it was likely another cable contender would emerge, she said.

Super fund should have stepped in
"This is terrible news for New Zealand’s digital future. Without strong competition on the international leg, all we’re doing is building the world’s fastest intranet," Telecommunications Users' Association chief executive Paul Brislen told NBR.

"I would like to know why the NZ Superannuation fund did not step up and support the network build. It’s one of those long-term investments that clearly appeal to retirement funds around the world.

"The Australia pension fund could see the benefit in it [for the National Broadband Network across the Tasman], so why is there no sign of our own fund getting in behind something that will not only deliver a return on investment but also deliver a brighter economic future for the country as a whole?"

Mr Morgan said he had never had any expectation the Crown would ride to the rescue in the event that the start-up failed to raised sufficient funds.

UPDATE: The Super Fund has responded that Pacific Fibre was too risky.  

More optimistic times last year: TE Subcom CEO David Coughlan, Pacific Fibre boss Mark Rushworth and US Ambassador to Australia Jeff Bleich at a signing ceremony for Pacific Fibre's cable contract with the New Jersey-based submarine cable company.


Pacific Fibre blows funding deadline

June 25: Pacific Fibre has blown its mid-June deadline to fully fund its ambitious trans-Pacific cable.

Founded by Mr Morgan and fellow NBR Rich Listers Sir Stephen Tindall and Rod Drury, the company has been attempting to raise $US400 million to build an undersea cable between Sydney, Auckland and LA – in the processing busting the 50% Telecom-owned Southern Cross Cable's monopoly on New Zealand's internet connection to the outside world.

"We are still engaged with global institutional funds and expect to provide an update on capital raising towards the end of this month. The board and existing shareholders continue to support the business," CEO Mark Rushworth told NBR ONLINE late on Friday.

He said there was no change to Pacific Fibre's target date for a commercial launch (the first quarter of 2014).

It is now just uner a year since Pacific Fibre contracted US company TE Subcom to lay its cable.

On April 10, Pacific Fibre said customer sales had reached $US200 million with the addition of a fifth foundation customer – an un-named US telecommunications company.

A statement from chairman Sam Morgan added, "We have had great engagement with global institutional funds and are now bringing our fundraising to a close. We expect to announce completion in mid-June”.

The company has been seeking to raise funds through a mix of equity, debt and anchor customer contracts.

Mr Morgan made his April 10 statement in reaction to an AFR report alleging "failed funding and delays.

Mr Rushworth said on March 13 that Pacific Fibre had secured $US170 million in anchor customer contracts, indicating the US deal announced this morning could be worth $US30 million. 

Pacific Fibre's funding so far includes a $91 million commitment from government-owned broadband network operator Reannz, plus 10-year contracts with Vodafone NZ and iiNet (the largest independent ISP in Australia). The start-up has also secured a debt funding facility with ANZ.

Up to 45% of the project could be funded by debt, Mr Rushworth has previously told NBR.

Mr Rushworth told NBR on March 13 that Pacific Fibre is on track for a commercial launch in the first quarter of 2014.

Mr Morgan is the largest shareholder in Pacific Fibre with a 17.5% stake.

Mr Drury holds 15.09%.

A syndicate including John Humphrey – the one-time Telecom network executive who serviced as technical advisor during Pacific Fibre's formative stages – holds 11.05%.

Lance and Glen Wiggs hold 10.87%.

Sir Stephen holds 9.66%.

Mr Rushworth and his partner hold 6%.

A syndicate including Gareth Morgan holds 4.23%.

Other shareholders include NBR Rich Lister John Holdsworth (4.23%), David Kirk (2.54%) and the Peter Thiel-backed Valar Ventures (2.42%).

More by Chris Keall

Comments and questions
52

This really, really, really sucks.

The worst tech news I've heard all year. NZ is now doomed to remain a backwater, a stagnant eddy isolated from the major content and user centres on the Internet. Telecom and its offshore sock puppet must be laughing hysterically now and planning the next round of rent-seeking on our international traffic.

Massive, incredible suckage. I think I'll start training some long-distance seabirds to carry messages...gonna need them someday if this keeps up.

I wonder if Vodafone buying TelstraClear had anything to do with Pacific Fibre folding. Voda bought into Pacific Fibre, but telstraclear does own an old nz-au fibre cable iirc that might be upgradeable.

Unlikely. Telstraclear is a major Southerm Cross customer.

Different Board & Chair.. different outcome !!

Bugger.

It's kind of sad that all this tax payer money is going into UFB which is not only available to only some NZ'ers, and is difficult to install, but won't fix our severely limited internet due to the cost of international bandwidth.

I wasn't as clear as I should be - UFB will deteriorate existing connections, and lead to a lower quality of internet experience for everyone.

This is a real shame, and I hope something more comes of it!

If it was such a good investment why didn't Peter Thiel, Rod Drury, Stephen Tindall, Sam Morgan and others fund it themselves?

Based on their apparent net worth they should have been able to easily raise the required funding or at least a very big chunk of it.

Remember team - it's not about how many times you get knocked down - it's about how many times you get up!

Bad news.

Mark Rushworth put his heart and soul into this. He is a good guy and will bounce back. Nobody could have worked harder in what was a great cause and this is a very disappointing outcome. Losing $6m isn't a big deal for the backers but it has serious implications for NZ.

To #26 - it is absurd to expect a few wealthy guys to fund the whole thing. It needed big institutional investors and Paul Brislen's comments re NZ Super are absolutely spot on.

rushworth is an empty suit - well out of his depth with absolutely no knowledge and contributed little

Was very very cheeky - an "other people's money" project - some rich tech people putting a few chips on black and hoping.

But good on them very having a crack and I'm sure the team - Rushworth and Co - put in an Olympic effort of make it happen (and more).

Its not often you see something so ambitious hatched in NZ by NZers.

Yeah cos telecom with its base in NZ and it's 7000 NZ employees does count right.

ok - I meant entrepreneurs (a dozen people) versus a large corporate (7000 salary men) Anyway XT counted as a disaster right? And those 7000 people - have they created anything the rest of the world would pay for or be interested in? do they own any valuable IP? just a branded bill right?

The majority of Telecom shareholders are Americans, like the telco Ameritech.

These guys failed - bring in Tex Edwards he will make it happen.

Priceless
Rod and Sam were entering dangerous territory by moving from a hype driven beauty contest into a grown ups game of infrastructure.

Anyone could have told you that SX had capacity and their only rationale response was price competition. The pipe dream was just that

What's more interesting to me. Didn't tax payers give Theil et al some of our money to do this? Do we get it back now?

NZ Venture Investment Fund invested with Thiel, I assume some went into this project also. Perhpas it was a smart way of Thiel cutting his losses - selling to a DUMB investor.

Bud Fox - so you're tex edwards?

nope - but I love the guy. Anyone who can create a third cel phone network from nothing, surely could get a simple cable company up and running?

lets see who would invest in a cable that was going to drop the porice of international data and its own profitability in the process? No wonder no one wanted to invest

I agree wtih #26. It is wonderful listening to Rod talking about the great things he can do, with other peoples money.

If you are totally passionate about something and really think it will work then go forward anyway. At least the # of shareholders won't be as high and you can reap higher rewards.

Just do it.

Purely from a selfish consumers viewpoint desperate to compete in our so called back yard (pacific rim) when I find Korea and the Phillipines for goodness sake have better IT services and pricing than us, I find this news gutting. I feel lil ol NooZealand is closer to Gt Barrier Island with pigeon post than anything brighter near us.

I think your comment is a little bit racist and ignorant. Do you know that Samsung is made in Korea?

You lose marks for comprehension - Because you didn't get it 1st time....Yes doing business in Korea is a delight due to their superior IT and in fact Phillipines has also the most business fiendly tech services including price.

Surely, if Southern X was a rort - Pacific Fibre would have had no issues getting investors. SX NZ pricing is tied to what it gets in Australia, which is much more competitive market - therefore while it is a monopoly the pricing should be relatively fair. And I'm sure that the CommComm would get involved if it deemed it to be completely ripping us off. Am I missing something?

We want the benefits that come with competition, but don't want to pay the piper when he comes a callin'.

Where is the government, Vodafone, Orcon, Crown Fibre, Stephen Joyce or whomever? There is absolutely NO DOUBT we need an alternate provider if we are to have genuine competition and a "Plan B" should the other cable ever go down.

Anyone remember what happened to Auckland in 1999 when Mercury Energy lost all it's main power cables into Auckland and the city shut down for weeks on end? We need competition, we need redundancy and we need forethought from Kiwis from a change. But - no - like almost any ambitious enterprise in NZ, its cut down and put on the back-burner!

I think we can draw an analogy to the Auckland Harbour bridge. It was built with like 4 lines by some small minded, short term thinking group of imbeciles, then years later we needed the "Clip-ons" & within a few more years we needed another harbour crossing! That was 25 years ago and councils and government are still doing "Feasibility studies"!!!

What do we all think is going to happen when there is still one incoming international link in another year or two and the local UFB increases usage and uptake and everyone wants to watch cable TV et al? Oh - that's right .... monopoly, decreased service and increased price. Poor idiot Kiwis!! OMG - where are the TRUE business entrepreneurs?

Good points, but its a bit different with technology isn't it.
How expensive would it to buy a 1 Terrabyte hard drive 20 years ago vs today?

Great (not) to see NZ's "Tall Poppy Syndrome" rear its ugly head again. Stop thinking about the indviduals involved on focus on the encomic value they have already created for this country. How does a monolpoly deliver a more efficient market?

Economic value? Really? I witnessed Rod pitching this at the Cisco Breakfast event last year. All I could ascertain the advantages of Fibre we’re the ability to Skype and watching streaming video. That’s it. Total benefit for my business xero (excuse the pun). Total benefit for the multitude of small business in NZ, xero.

One hears these boys have been a little too greedy during capital raising

I guess Sam Morgan has no one to copy in this venture.

With Trade Me, he has eBay and Amazon as clear models to duplicate in a local isolated market called nz. In terms of features (read PayPal protection) and ease of communication with ANY seller, eBay *owns* Trade Me. Hands down.

Once Sam gets into a grown up's game of infrastructure with his cheerleading fans, he finds that a good idea is just not enough.You need big capital for infrastructure. You just can't sprinkle all this 'great idea', overhype it and wait for someone else's money to make it happen.

Think about it. Sam Morgan, Peter Thiel, Rod Drury, Sir Stephen Tindall, Gareth Morgan and David Kirk had COLLECTIVELY lost only $6 million on the project.

If they really believed in the project, they would have put more of their own money into it. These guys have the cash.

Clearly, they knew there's a good chance this venture will not fly. This was a 'feel good' venture for them. Nothing more.

$6 million (and not forgetting all the time invested, and opportunity cost) is a lot more than feel good money.

A $US400 million investment was always going to require serious anchor customer commitment, and heavyweight industry or institutional investor backing.

Rod Drury is dead right - this is not good news for the UFB project.
More concerning for New Zealanders is our reliance on a single solution. Even though it has a redundant alternate path, the maths says that we can still expect a total outage about once every 15 years. Frightening when you consider our newfound reliance on broadband and the fact that a break can take up to three weeks to repair. Oh and that outage could happen tomorrow...

To #23 - no, you are not missing anything. SX benchmarks NZ prices to Aus, and benchmarks Aus prices to the Hawaii-US prices (where it faces real competition) in order to "be fair" (and thereby forestall antitrust investigations).

the real problem is with only 4.5 million of us (ad not a lot more Australians), the unlit capacity on WSX is more than enough to service both countries for the foreseeable future. So the absence of a business case is not a 'market failure' - its simply the reality of small scale, large distance and an economic model where the receivers of asymmetric content flows have no means of extracting revenue from the foreigners who create the data that Aus and NZ individuals overwhelmingly want to download (in preference to local content, that we will be able to exchange with each other at the speed of light).

Maybe the entrepreneurs could now put the money they have left into buying the rights for (static entertainment) content, building the servers to host it here and then enabling its distribution within NZ. That requires taking on the current foreign content owners with market power (Sky and TVNZ) and ironically is much more in Sam Morgan's bailiwick than owning infrastructure. That would really make a difference to the UFB, as content is much more relevant for providing the incentives to get people to buy a UFB connection rather than continuing to rely on copper.

The Southern Cross monopoly will be bypassed one day.Not this time unfortunately.

They should have tied customers up quietly upfront.Then arranged the financing on the back of a certain cashflow,and then built it.They went public too soon and allowed the incumbant monopoly to react by lowering prices and contracting major customers.

Quiet action is the key,not public pronouncements.

I applaud the notion of bringing competition into the market, but this business case just didn't come close to stacking up. This is not an area of expertise for any of the guys behind it, and it showed.

Even now they are citing lack of funding as the reason for failure, when in fact they were not able to put together a credible plan for a viable business.

They wanted speculators, but pitched to investors. Their 'plan' was more suited to an IPO. That may have worked, eventually, if the shareholders had very deep pockets and nothing to lose. More likely it would have flopped, and been picked up for not much by a canny investor when everyone else has been scared out of the sector.

It's sad that this didn't take off at this time however that's life and it'll be back on the agenda again. Next time it might have the this history to define it better and compel the "affected" to act

I hope someone at MED or Commerce Commission explains to Amy Adams the market realities.
This is in no way criticism of Southern Cross, but
a) they are currently the ony supplier
b) they have virtually unlimited capacity
c) their product is in huge demand
What is the likelihood of them dropping the price because they are nice people?
Reality check Amy - the price should come down, but only if the extra bandwidth sold more than offsets the lower price. The UFB project is expecting ISP's to allocate 1,500,000 bits per second per customer, compared to Chorus's current 45,000 bits per second on the copper network.
Not going to happen without competition to drive down the price.

Where are the promotors of capital gains taxes. A taste of risk and the possibility of Tax refunds on the losses have made things strangely quiet.

Had the government worked with Kim.com rather than throw him to the sharks, I would have thought his massively growing global file sharing network would have been a prime candidate for investment in Fibre Pacific.

Instead Dropbox gets to own that space now.

Kim.com's "massively growing global file sharing network" was hosted in the USA. So it has nothing to do with our little connection to the world. Hosting here is more expensive because of the price of bandwidth. Cheaper and faster for the end user to host in the USA.

Well this goes to show that Southern Cross is not charging too much. If they were then it would have been easy for PF to demonstrate to investors that it could make a profit. A lot of posters seem to automatically assume that because it's the only mjor supplier and because it's linked to Telecom it must be bad when this is simply not the case. Google "return on investment".

S-X capacity price points between Aus and the US or NZ and the US are more than 10x similar price points on similar trans-Pacific routes such as North Asia (Japan) and the US - check out their website pricing for a 10G IRU (Japan - US circa US$ 700k)

And you say they are not scalping NZ?

Why can they charge that? Even an idiot would know its lack of COMPETITION!

Look globally and wake up!!

For better or worse one has to believe in the market, and the market, i.e. investors have spoken and found the Pacific Fibre deal lacking.

The Sam Morgan-Rod Drury-Peter Thiel team would like to blame the market for this failure, but pragmatically the blame must lie at some level 100% within Pacific Fibre.

The market should probably take note that this is the same team drumming up Xero as god's gift to investment just as Pacific Fibre was promoted.

A dark day for NZ's digital future. Good on Pacific Fibre for giving it a crack. I bet the Government will eat their words and have to step in in the future and spend 2-3 times as much!

Rod and his dream team are exactly that. Dreaming. They really never had a business case that made sense with Pacific Fibre. In fact zero is about the same. Zero has lost 50 odd million to date, and only being funded due to the ponzy scheme. Pacific fibre was always going down the same track. Good ridance.

Sorry but you are an uneducated idiot - certainly obvious you know nothing about this industry let alone business cases that pertain to submarine cables

Suggest if you wish to slag off a company - at least get the name correct

Zero???

Sarah Connor? Come with me if you wanna live!