Decoding Southern Cross Cable’s price cuts

Just a whiff of competition has seen our only internet connection with the outside world up its capacity, and slash its rates - but will it have any effect on what businesses or consumers pay for broadband, or the real-life speed of their connections?

On the face of it, Southern Cross Cables’ Friday announcement looked like good news:

The Bermuda-incorporated cable operator (50% owned by Telecom NZ, 40% by Singtel and 10% by Verizon) price cuts:

Prices for circuits to the US, from both Australia and New Zealand, have just been reduced by 15% bringing reductions over the last 18 months to more than 50%.

The new Southern Cross price for 5Gbit/s of restored capacity represents around US$0.28 per gigabyte downloaded from the US. This has reduced by 86%, from US$ 1.95 per gigabyte, in December 2003.

And a capacity upgrade:

“By March next year lit capacity will grow to 620 gigabit/s per cable, taking total lit capacity to 1.24Terabit/s growing by more than 50%. There can be no doubt that both Australia and New Zealand will continue to have sufficient Southern Cross Capacity to support Government initiatives for high speed broadband adoption in both Australia and New Zealand.”

Price cuts will flow through
Southern Cross Cable doesn’t usually sell capacity directly to ISPs and telcos, who instead by chunks of bandwidth from middlemen - the most active in our market being Pacnet, Telecom Wholesale and Verizon Wireless (the latter two are of course intertwined with the cable’s owners, but forbidden by voluntary corporate rules from offering a sweetheart rate to, say, Telecom Broadband).

A spokeswoman for Telecom Wholesale told NBR that “When Telecom next buys capacity from Southern Cross, the cost reductions will naturally be reflected in our prices and will flow through into the market.”

And I think they will. The political heat would be too much if they didn’t. The cost of international data - and our monthly broadband bills - will continue to fall, or we’ll at least get higher data caps for our money.

But not enough for all-you-can-eat data plans
I’d still like to see further price cuts though, to the point - and this is the crucial bit - that all ISPs feel commercially confident to offer uncapped data plans.

New Zealand is one of the few countries, by the OECD’s measure, where all-you-can-eat data plans are not the norm. Our relatively high pricey international data is blamed for us being literally bottom of the heap.

Telecom’s recently introduced Big Time plan was a good start, but I suspect a 15% price cut won’t be enough to see others follow.

The financial, and physical, bottlenecks at home
Epitiro, benchmarking for the Commerce Commission, has found the average international website loads at less than 1Mbit/s (that is, you could increase it by a factor of 100 without putting a dent in Southern Cross’s Cable’s current capacity, let alone its upgrade). I’m more dubious about whether end-users will see any jump in raw speed. Just because more international bandwidth is on hand doesn’t mean that ISPs will find it commercially viable to buy it. Epitiro also identified domestic network bottlenecks that slow down the data after it lands in NZ anyway.

Faux competition
To make sure the price cuts keep flowing, we need competition - either a change in the way data is resold over the Southern Cross Cable, or a physical second cable.

Recently, Spin (South Pacific Island Networks), backed by the French government, has made noises about building a cable from Auckland to Noumea, and a second from Auckland to Sydney. The project is set to cost $300 million, and either TelstraClear or Vodafone is rumoured to have signed on as a foundation customer (Vodafone being Telecom Wholesale’s single biggest customer for international data). If it does push ahead, Spin says it could have the cables completed within two years.

And Kordia is still doggedly pursing its plan to build a cable in partnership with Australia’s Pipe Networks.

Pipe is already building a cable from Sydney to the US (via Guam), which will become the seventh cable system linking Australia with North America. As part of the project, a spur has being built out of Sydney Harbour, ready for a second cable to Auckland.

Plus ça change
Both projects are still very much at a drawing board phase. But they're already having a pleasing effect on Southern Cross’ rates. So far it's only virtual competition, but it provides a strong indicator of what we can expect from the real-thing.