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Southern Cross Cable 20% price cut not nearly enough - Kordia boss

Southern Cross Cable Network has cut its capacity prices by 20% - the latest in a series of reductions (see RAW DATA below).

The Bermuda-incorporated company, 50% owned by Telecom, operates New Zealand's only major broadband connection with the outside world.

Scott Bartlett, CEO of Kordia NZ (the new Kordia division that includes ISP Orcon) told NBR he welcomed any price reduction - but also explained why it was not nearly enough.

"A 20% decline in prices is a long way from offsetting the growth in bandwidth demand, which tends to double every 18 months," Mr Bartlett said.

"Our recent experience with launching an unlimited plan shows that current bandwidth growth is artificially constrained.

"Our unlimited customers use five times the capacity compared with data-cap plans."

CallPlus chairman Malcolm Dick struck a similar note.

"It is always great to see the price of IRU’s (Indefeasible Rights of Use) dropping, as that will filter through to the wholesale market," he told NBR.

"However this masks the fact that bandwidth costs per user are still actually increasing.

ABOVE: The cost of capacity on the Southern Cross Cable is dropping, but the amount of data - much of it from international sites and services - used by the average NZ customer is rising steeply. This means ISPs have to buy more and more capacity from Southern Cross, increasing their bill overall. The above graph shows usage trends for Slingshot, CallPlus' residential brand.

"The average consumption of a Slingshot residential customer has increased from 6GB per month in 2009, to 38GB per month in 2012.

"That’s an almost doubling of capacity every year.  So the effect of the Southern Cross 20% price reduction is merely to slightly slow the relentless increases in International capacity that New Zealand ISPs are paying.  It is worth noting that this trend is continuing internationally, and there is no reason to assume this will not continue in New Zealand as well

"We can understand that Southern Cross will keep dropping the headline rates while consumption continues to accelerate.  Given that their cost is largely a sunk cost, they can continue to increase their profits by doing so."

Potential new competitors circle
Last year, Pacific Fibre threw in the towel with its effort to fund a second cable. Despite a $91 million anchor customer commitment from the government, and major contracts from Vodafone and iiNet, it got less than half way to raising the $400 million needed for a Sydney-Auckland-LA cable.

Since then, Pacific Fibre alumnus Rod Drury has pitched the idea of a public-private cable to ICT Minister Amy Adams (who was politely non-committal), Kim Dotcom has floated the idea that his new file sharing service, launching January 20, could become an anchor customer for a second cable; French Polynesian contender Hawaiki has rebooted its plan for a Pacific cable; and Kordia (conspicuously absent from Pacific Fibre's anchor customer list) has made noises about reanimating its plans for a transtasman cable (possibly in partnership with Axin, a joint venture involving Huawei - whose relationship with the Australian government remains challenging).

The various second cable plans are all very much at the conceptual stage, however.

"What New Zealand needs is extremely low cost bandwidth to the rest of the world. It's great to see Southern Cross lowering prices, but the simply reality is we're unlikely to see sustainable/low pricing until we have competition," Mr Bartlett said.


RAW DATA: Southern Cross Cable press release

Southern Cross prices have again fallen and the company continues to expand its international capacity as it continues to upgrade the network.

“We have reduced our capacity prices by another 20%”, said Sales and Marketing Director Ross Pfeffer. “This will be our 10th major price reduction since 2000 and over the period our
price decline has averaged more than 22% per year.

“It’s been pleasing to see big increases in data caps and declines in retail data cost for internet users in both Australia and New Zealand over the last year. Our continued initiatives to increase supply and reduce price are designed to encourage this process and to support the needs of Australia's NBN and New Zealand's UFB” Pfeffer noted.

The Southern Cross Network provides uninterrupted hi-speed connectivity to US based internet content. Constructed as a protected twin cable network of 28,500 kilometres of
undersea cable the Southern Cross cable network has become a major regional asset for reliable high-speed broadband.

The latest price decline marks the second stage of the eighth major capacity expansion programme since 2001 and it is due for completion in February. This Stage is based on
Ciena’s 40Gbps transmission equipment and takes total lit capacity on the Southern Cross Network to 2 Tbps.

The third stage of the current expansion programme is being implemented concurrently and it is based on Ciena's 100 Gbps transmission equipment. 100G technology is already installed on some network segments and will take lit capacity to 2.6 Tbps by June 2013.

Ross Pfeffer commented that, “the increasing simplicity of equipment upgrades provides

Southern Cross with the ability to frequently and rapidly expand capacity. We currently ave the potential to go to at least 7 Terabits per second, about 30 times higher than our original design capability.”

“Our capacity potential will increase dramatically over the next few years when transmission equipment speeds are expected to quadruple. With ongoing and dramatic advances in technology Southern Cross has the ability to stay well ahead of demand over the longer term”.

While continuing to reduce cost and to expand supply, Southern Cross remains dedicated to continuous circuit availability. “Our protected circuits continue to provide 100% availability and the performance of the six fibre pairs and 500 repeaters on the diverse cable network is better today than when constructed more than 10 years ago” he noted.

More by Chris Keall

Comments and questions
13

Cut TO 20% would be closer to the real value.
But hey, Telecom has the monopoly so we all must pay for that privilege.

What monopoly? Southern Cross charges NZ the same rate as Oz, which has a number of competing cables. So NZ's prices are, one assumes, non-monopolistic and competitive. Which explains why another cable can't get the funding required - as there isn't enough cream to share around.

I'm a free-marketeer and don't like monopolistic power, but from what I understand (and somebody please correct me if I'm wrong), the Southern Cross component on your average 50 or 100GB plan works out to be in the handful of cents per month. Something like ... 20-30c. Less than a dollar, for sure, from memory.

If this is true, it does not explain why our broadband costs $80/month and not $20/month. It's a very simple game... Protect your prices by always blaming your giant, foreign-owned monopolistic supplier and never face any scrutiny yourself. Convince your customers of this and they'll fork over money hand over fist and will also give you their sympathy!

The current actual cost is more like 20-30c per GB per month, based on a typical ISP customer usage profile. So even ISPs with very light average customer usage are paying many dollars per month per customer.

In the case of Slingshot's heaviest users (on our unlimited plan) the average cost is around $30 per month per customer, and even with per-megabit prices dropping by 20% per annum, the cost is going up because of the higher usage and, inevitably, all ISPs are going to face pressure to pass this on to consumers.

It is worth noting that internet consumption in the US is nearly double the NZ average, and this has been led by Netflix, who offer a movie and TV streaming service which now consumes 50% of all US internet capacity in the peak period (and 30% overall). Fortunately for ISPs, this service is not available in New Zealand as rights holders have blocked streaming content to prop up their traditional business models.

We need to see a 10x reduction in international capacity prices over the next few years if we are to have any chance of catching up with the rest of the world, and to make our investment in fibre-to-the-homes worthwhile.

GregTheWestie's comment only serves to reinforce the comment I wrote a few minutes ago that the Southern Cross component on an average broadband plan works out to be in the handful of cents per month....

Right, so a quick Google shows the new price to be $0.06/gb (http://www.stuff.co.nz/dominion-post/business/6268401/Rivalry-prompts-web-traffic-cost-drop)

Yet ISPs regularly charge $2/gb for metered usage. If I have a 50gb plan, and use half of it, the SC charge to my ISPs charge is an eye-wattering $1.50. What about your average family using 10 or so GB? Well, $0.60.

Again, this does not explain why that family is paying is $50/month for their broadband and not $20/month. Let's have some critical thinking to see who is ripping off who in NZ, and not just blame the people everybody tells you to blame.

No, ISPs charge by the gigabyte, but Southern Cross (or its wholesalers) sell by capacity.

That is, Southern Cross charges ISPs for a certain size of hose pipe, not how much data flows through it.

CallPlus chairman Malcolm Dick says Southern Cross charges 100x as much for international capacity as cable operators in competitive markets.

IIRC (from a slide deck at some point in the last year) the cost differential between transit a similar sized cable (US West Coast to Japan) and Southern Cross was 9x. Nothing like the 100x Malcolm Dick cites. He can come up with that number if he compares trans-Atlantic capacity.

It's still a pile of money for Southern Cross, but honestly SCC is not the reason that broadband in New Zealand is expensive. John Key is the reason broadband in New Zealand is expensive. His own Commerce Commission has made a recommendation to lower pricing of a key component by $12/month and he won't have any of it.

When I made that comment, large ISPs in USA and in Europe were paying around 60c per Mbit for internet traffic, compared to around $60 per Mbit in NZ (at that time).

I haven't done a recent comparison but I bet the ratio has not changed.

Dick, It's now about $25/mbit prior to any drops from this announcement for 1-3gbit, I'm guessing you're getting $0.60 from a tier 2 in the USA because people like cogent and TINet are still at their floor of about $0.80-1.20/mbit.

Ratio's getting smaller since the US and other countries have already hit their price floor.

Chris,

Talk about cherry picking the stats, For a start it's 10-30x the cost in sub-10gbit buys which is what NZ Carriers buy in - Last Kordia NZ upgrade was below 3gbit. Also worth noting that Kordia NZ dont buy from SCCN, I doubt whoever they buy from is making 0% profit on that tho, Perhaps Kordia NZ should buy direct before throwing stones?

Those market's Dick referencing also consuming much, much more. Take the USA, A couple with a child is averaging 100-120gb, A couple with no kids is 75-100gb, A couple with 2 teenages shoots this upto 300-400gb. Some will argue this is because of cheaper transit but it's really a chicken and egg problem, What we see here is usage trending up and consumption trending up, I'm on the side that says as demand is increasing price is dropping rather than price is dropping so demand is increasing but it's an argument for academics

Yes SCCN did double capacity but it did so not with fairy dust but with money, Hence the normal (Done every year for 5 years now) 20% drop over a 50% drop.

P.S I find it funny that Kordia NZ are complaining about transit prices when they state that unlimited clients are using 5 times the data - They did this with last years transit costs, Perhaps the plans are losing them money?

P.S That traffic usage table doesn't show whats National (National sites plus the ISP's caching nodes like Google Global Cache which save them massive amount of bandwidth) and International, Even then International should be split from AU and USA as the major content hubs come out of Sydney these days and transit to Sydney is cheaper than transit from Auckland to Wellington

Malcolm Dick is incorrect.
An international 1Gbps pipe trans-Pacific would be on the order of $30K/month. With Southern Cross wholesale pricing dropping, the price point in NZ is $30/Mbps/month or roughly equivalent to the $30K/month elsewhere.
The price of around $30/Mbps/month in volume is not a major constraint on a high-volume ISP. Most of their cost will come from the high level of interconnect costs at the wholesale level (ADSL terminations), helpdesk support and agreements with content providers.