(The following is an extended version of my Technology column from the March 6 print edition. See "Earthquake hits Southern Cross Cable" at the end of this article for more on the international pricing row. - CK)

The twin submarine strands of the Southern Cross Cable describes a figure 8 between Australia, New Zealand, Hawaii and the mainland US. Bar a smattering of expensive satellite capacity, it’s our only connection to the internet at large.

In the great broadband debate, that makes the pipe’s owner, Southern Cross Cable Networks, everyone’s favourite whipping boy.

I asked director of sales and marketing Ross Pfeffer to defend his company against the charges circulating against his company in the court of public opinion.

1. SCC’s monopoly allows it to price-gouge
Mr Pfeffer responds that while the Southern Cross Cable (SCC) is the only link between New Zealand to Australia, four submarine cable operators run lines between Australia and the US: Southern Cross, Telstra (with its Endeavour cable), the AJC consortium, and SeeWeMe-3 (part of a globe-spanning fibre optic cable network owned by India’s Tata Communications). Pipe Networks is already in the process of building a fifth cable (PCC1) to the US, via Guam.

And to keep local pricing competitive, Southern Cross always keeps its NZ-to-US pricing the same as its Australia-to-US rate.

One catch: Australian telecommunications analyst Paul Budde does not consider his country that competitive.

“If you compare intercontinental capacity cost, then traffic between Australia/NZ is often ten times more expensive than traffic between Europe and America”, says Mr Budde, who labels the high cost of international bandwidth one of our most critical issues. “If we don’t solve it then will never have access to affordable international video based content.”

Mr Pfeffer acknowleges that Northern Hemisphere cable rates are often cheaper, due to overbuilding. On Atlantic routes, the boot is on the other foot, with cable operators often selling at cost or - Mr Pfeffer maintains - even at a loss to keep a customer onside.

In terms of the SCC itself, Matt Crockett, head of Telecom Wholesale - who also sits on SCC’s board - highlights that Australasia is further from Europe than the US. In fact, at 25,000km, the looping SCC is easily the longest cable connecting two continents, and the world’s second longest full stop after SeeWeMe, and traverses the deepest, most earthquake-prone ocean in the world.

There’s also the issue of scale. When Telecom Wholesale (or another SCC reseller) buys domestic backhaul in the US - necessary to complete the loop between where the SCC lands in Seattle and a peering centre in San Jose - it’s not in a strong bargaining position compared to telcos from countries with much higher populations.

Further, Mr Pfeffer points out that SCC cut its rates by 44% late last year, and that as more capacity is added (a third major upgrade since the cable’s 2000 launch saw total capacity boosted to 720Gbit/s last year).

Regardless, Mr Budde points out that people in a country of origin (that is, say, a US user accessing a New Zealand website) pay two or three times less for their data than we do, using the same cable.

2. Telecom is not in charge of SCC’s destiny
Telecom owns the largest stake in Southern Cross Cable: 50%; Singapore’s Singtel owns 40%; US carrier Verizon 10%.

But the composition of the board does not reflect the companies’ financial stakes; rather, each company has a third of the seats, and neither Singtel nor Verizon has to front up to any political heat.

In fact, neither does Telecom itself; at least in relation to this venture; Southern Cross is incorporated in Bermuda, and as an international joint venture is safe from the regulatory cross-winds that buffet its domestic operations.

So what’s to stop Southern Cross simply reneging on its pledge to peg its NZ pricing to that of the more competitive Australian market?

Mr Pfeffer bristles that the company’s public pledge, which it has followed for a decade, could be doubted. On a less boy-scout level, he points out that if SCC jacked up its rates, it would invite commercial competition, or indirect government interference, such as Kordia being subsidised to build a second cable (as indeed Kordia is scheming; seeking $200 million to build a second transtasman cable in partnership with Pipe Networks, which would be known as PCC2).

More, Mr Pfeffer points out that New Zealand accounts for less than 20% of SCC’s business. Most of the $80 million in dividends its sending Telecom this year were earned from off-shore customers.

3. Southern Cross’ sells data on terms that overwhelm smaller ISPs
Mr Pfeffer says Southern Cross will sell direct to any customer, however large or small.

But check out his price list. The company’s standard product is 5Gbit/s of protected bandwidth (consisting of two 2.5Gbit/s circuits) until 2020. This multi-year deal costs $US16 million, payable up-front.

Of course, 2.5Gbit/s might not look so flash in, say, the world of 2015 or 2018. Extra capacity can be purchased at margin.

The director acknowledges that this deal does not sit well with the cash flow requirements of the average New Zealand ISP.

Therefore, last year, a second deal was introduced: the same 2.5Gbit/s x 2.5Gbit/s of capacity, but purchased on a monthly lease, at $US300,000 per month.

Unsurprisingly, while a chump change deal by global standards, that sort of outlay is still dizzyingly beyond most New Zealand ISP’s means.

But Mr Pfeffer says a number of companies buy chunks of wholesale data from Southern Cross, then retail it at rates that smaller players can accommodate, including pay-by-the-megabyte “IP transit” deals.

He wouldn’t comment on who is reselling Southern Cross bandwidth, but it’s common knowledge in the industry that the major players are Australian company Pacnet, Telecom International (whose general now reports to Telecom Wholesale head Matt Crockett), Verizon Business (again, a division of one of Southern Cross’ owners) and Telstra.

Mr Pfeffer says it costs about 50 cents to download 1GB of data from the US to New Zealand.

Paul Clarkin, chief technology officer and 50% owner of mid-tier ISP WorldXChange, buys his SCC access indirectly, through wholesalers including Telecom International. He says he sells data to his customers at $1 a gigabyte (GB) and “there’s very little margin in that”.

It’s a rough science trying to estimate costs, since SCC, and at many times its resellers, sell bandwidth by capacity (that is, you buy, say a 5Gbit/s or 10Gbit/s connection, with the price inclusive of all the data that gets hurled down it). So the more data an ISP’s retail customers buy, cheaper its cost on a per-gigabyte basis.

Telecom Wholesale’s Matt Crockett also points out that the SCC only sells raw capacity. Telecom International - and Pacnet and other SCC resellers - are also providing US and New Zealand domestic backhaul to reach the “wet cable”.

Mr Pfeffer says the competitive retail market keeps pricing honest. And that on Telecom’s most popular broadband plan - Go, capped at 3GB - even by Mr Clarkin’s pricing it only works out to $3 a month of a $40 a month broadband bill.

While video and other bandwidth-intensive apps will see caps of 20GB or more increasingly popular, Mr Pfeffer says each SCC capacity upgrade sees more bandwidth available at lower cost. Late last year, for example, SCC cuts it pricing by 44% in concert with a capacity upgrade to 720Gbit/s.

4. We need a second cable to drive down pricing
Two years ago, SCC became debt-free (its original cable and upgrades cost $US1.5 billion), will deliver $80 million in dividends to Telecom this year, but mostly from outside New Zealand.

But Mr Pfeffer says it has been a hard road, with SCC being bailed out by its owners on a couple of occasions. He says the company’s pricing is lean, with NZ-to-Australia traffic (“a very small part of our business”) pegged at 25% of its NZ-to-US rate, which is in turn pegged to the Australia-to-US rate. As such, he reckons it would be hard for a second cable operator to compete commercially

The catch, is that not all critics see a second capable running on as a straight commercial venture

Xero chief executive Rod Drury, a long-time second cable agitator, is among a group of entrepreneurs who have no problem with public funds being used to buy or lay cable that would be be resold on a cost-plus basis; the socialised fibre helping New Zealand businesses get closer to their markets.

However, IT and Communications Minister Steven Joyce told NBR he wants state-owned Kordia to build a business case; the government’s $1.5 billion broadband fund is strictly for domestic upgrades (tellingly, Mr Joyce was aware, without prodding, of Southern Cross’s recent price cut and spare capacity).

If Kordia can find the whole of the estimated $200 million to build PCC2 between Auckland and Sydney, its quid pro quo will be access to PCC1 running up to the US.

Mr Pfeffer questions why anyone would want to build a cable across what is, relatively speaking, such a thinly-trafficked route. Companies buying bandwidth tend to be thinking in worldwide terms, or at have ambitions that extend as far as the US.

But Kordia GM of strategic development Susie Stone says that’s a secondary benefit. PCC2 will be a bridge across the Tasman for New Zealand ISPs, allowing them to tap the more competitive Australian wholesale market to negotiate a better international cable deal to the US or, importantly, up into Asia – a broadband route not served by Southern Cross.

5. Fibre-to-the-home would overwhelm the SCC
Once we have fibre-to-the home, our thirst for bandwidth could increase exponentially. Video-on-demand; high-def videoconferencing; it’ll all be on the table, making today’s volume of data to the US look like a trickle.
Mr Pfeffer responds that today the four providers linking Australasia to the US have a combined 1.3 terabit/s of capacity, but that we’re only actually using 0.5Tbit/s.

Constant capacity upgrades could see that capacity increase by a factor of 10 during the leisurely ten-year time frame the government has put forward for its $1.5 billion fibre-to-the-premises.

Under its current business plan, SCC itself plans lay a strand of cable laid in 2015.