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Telecom, Vodafone, Telstra coinvest in Auckland-Sydney cable

UPDATE: Scroll to end of story for conference call comments by Telecom CEO Simon Moutter, Vodafone NZ CEO Russell Stanners

Telecom, Vodafone and Telstra have signed a memorandum of understanding to build a submarine fibre optic cable between Auckland and Sydney.

The cable will become New Zealand's second major broadband link with the outside world, breaking the 50% Telecom-owned Southern Cross Cable's monopoly.

The "Tasman Global Access" cable will cost "less than $US60 million and be completed by mid to late 2014, Telecom said in a statement this morning.

Lost opportunity
Rod Drury, co-founder of Pacific Fibre, told NBR ONLINE he had mixed feelings about the news.

"The sad thing is that if NZ Inc [government and private enteprise] could have got together, we could have done a step change. This is good, but it's not the vision were were hoping for. It's a lost opportunity."

In an ideal world, he would have preferred a public-private-partnership that saw a new Sydney-Auckland-LA cable running across the Pacific as well as the Tasman, which would have led to what he calls a "real step change."

But a new transtasman cable was still a welcome development for business and home internet users, Mr Drury says.

Not cheaper but faster
Mr Drury did not expect it to lead to cheaper broadband, but he did expect higher data caps for the same money, and better performance.

True competition?
NZ Institute of IT Professionals CEO Paul Matthews also welcomed the news.

"It's excellent to hear of the new NZ-Australia cable. It's essential New Zealand has competition in international connectivity and this will certainly help secure the future," he told NBR ONLINE.

"The only slight hesitation we have is whether it will represent true competition, given Telecom's partial ownership of both cable options - Southern Cross and this one). But if so, this is very good news indeed."

Telecommunications Users Association head Paul Brislen also welcomed the news, but shared Mr Matthews' partial reservation about Telecom's role as an investor in both cables out of NZ: "We'd like to know how that's going to be handled." 

Mr Brislen will keep a sharp eye on pricing - but don't look for any formal monitoring. Southern Cross Cable (50% owned by Telecom, 40% by Singtel-Optus and 10% by Verizon) is incorporated in Bermuda. Expect this new joint venture to also be registered in a locale that's safely beyond the Commerce Commission's clutches.

Heading off competition?
Pacific Fibre folded its tent in August last year, having failed in its bid to raise $400 million of a Sydney-Auckland-LA cable.

Following its failure, Mr Dury formally wrote to ICT Minister Amy Adams outlining a public-private partnership for a Pacific cable. Ms Adams gave him a polite but non-committal response

Pacific Fibre's collapse also saw Kordia reanimate its plan for a possible Auckland-Sydney cable. Kordia's logic has always been that if a second cable can be laid to Sydney, the problem of competition will be solved as their are a half dozen cables from Australia up to Asia and the US.

Huawei and Axin have also talked up a transtasman link, while the French-backed Hawaiki put plans back on the table for a cable that would link NZ and Australia with the US via Tahiti.

And of course Kim Dotcom had his own cable dream.

None have got beyond the drawing board. Now, they'll probably be stuck there permanently.

"It's a very smart move by [Telecom CEO Simon] Moutter and the other players which now makes it essentially impossible to justify another cable," Pacific Fibre co-founder Lance Wiggs told NBR.

For price and performance, Mr Wiggs would still like to see a cable laid directly from NZ to the US, where most of the world's websites and services are hosted.

Minister: more content hosted in Austrlia
“The new cable will provide an important step in New Zealand’s connectivity, and it also provides the market solution that the government always expected would happen," Information, Communications and Technology Minister Amy Adams said in a statement.

“It is estimated [by Telecom and Vodafone; see RAW DATA below] that about 40% of New Zealand’s international traffic is on the transtasman route and this volume is growing more rapidly than traffic on the trans-Pacific route to the US, due to an increasing amount of content being hosted on servers in Australia and Asia.”

Moutter: important for redundancy
On a conference call, Telecom CEO Simon Moutter said a second cable made business sense, and was "important for redundancy" (an argument that will bring a wry smile for some, given Telecom has always maintained the Southern Cross Cable.

Ownership, incorporation details ... coming
Mr Moutter said the ownership structure of the joint venture had yet to be finalised but broadly speaking he expected Telecom, Telstra and Vodafone would hold equal shares.

On the same call, Vodafone CEO, Mr Stanners said it had yet to be decided where the joint venture would be incorporated.

Mr Stanners noted Vodafone had recently bought fibre company and network operator Cable & Wireless - however, the new cable would go out to tender after a management team was appointed for the joint venture.

Consents were not seen as a problem. Telecom and Vodafone already had landing sites in NZ, while Telstra could use existing landing sites in Australia.

Mr Stanners told NBR ONLINE, "This didn't exist when Pacific Fibre ended; it's not a fallback," he said. Talks had occured over the past few months.

The Vodafone CEO said he expected cheaper wholesale broadband prices across the Tasman. 

"You need two players in the market to be competitive," Mr Stanners said.

Asked if there were wholsale competition issues, given Telecom also owned 50% of Southern Cross, Mr Moutter replied, "No, not at all." Cables are typically owned in what he called a "club arrangements" between telecommunications companies. "This is a very normal arrangement," he said.

Will other ISPs get access?
After the conference call, NBR relayed a reader question Would there be a layer of wholesalers, as with the Southern Cross Cable? Or would ISPs outside Telecom and Vodafone/TelstraClear be otherwise able to buy bandwidth access on the new cable?

A Telecom rep replied:

"Another cable just makes the market more competitive but it's too early to say exactly how that will play out in terms of wholesale arrangements."

Orcon, CallPlus etc are likely to find that a little chilling.

Telecom shares [NZX:TEL] were up 0.67% in early trading.

ckeall@nbr.co.nz


RAW DATA:  Telecom-Vodafone-Telstra statement

TELECOM, VODAFONE AND TELSTRA INTEND TO CO-INVEST IN NEW AUCKLAND-SYDNEY TELECOMMUNICATIONS CABLE
CABLE WILL SIGNIFICANTLY IMPROVE NEW ZEALAND’S CONNECTIVITY WITH AUSTRALIA AND LINKING INTO INTERNATIONAL CABLE SYSTEMS

Telecom, Vodafone and Telstra announced today they have signed a non-binding memorandum of understanding (MoU) to co-invest in the construction of a new submarine cable between Auckland and Sydney.

The new cable, tentatively titled the Tasman Global Access (TGA) Cable, will significantly improve New Zealand’s international telecommunications connectivity as well as strengthen links into fast-growing Asian markets.

The total cost of the TGA cable is expected to be less than US$60 million. The cable will incorporate three fibre pairs with a current design capacity of 30 terabits per second – approximately 300 times the current internet data demand out of New Zealand.

The TGA partners expect to finalise the design within the next few months, with a likely completion date of mid to late 2014.

Telecom chief executive Simon Moutter and Vodafone New Zealand CEO Russell Stanners jointly commented: “The business case for a new cable between New Zealand and Australia is compelling, providing greater capacity and global redundancy capability. It also reflects the growing importance of trans-Tasman internet traffic: for example, around 40% of both Telecom and Vodafone’s international internet traffic is now Australia to New Zealand, versus just 10% in 2000.

“We are seeing increased data content being provided from Australia-based servers by global companies and being accessed by New Zealand internet users. An additional cable connection with Australia will strengthen the business case for international data servers to be located in New Zealand.

“The Tasman Global Access cable will also enable New Zealand to better leverage the four additional international cable systems currently serving Australia (with several more proposed or in development),  providing important redundancy for New Zealand.  Australia also enjoys good connectivity with Asia, which is achieving strong internet traffic growth in line with global economic shifts.”

Martijn Blanken, Managing Director, Telstra Global remarked, “The partnership is a great outcome for Telstra as the high capacity, low latency Tasman Global Access Cable will supply greater resilience and redundancies for carriers as well as enterprises that are located in Australia and looking for connectivity to New Zealand as well as stronger international connectivity. This cable will enable New Zealand to better leverage Australia’s much stronger internet connectivity.  It will also achieve significant international connectivity benefits for New Zealand to link with Australia, and also onwards to the USA and into Asia.

The TGA cable will achieve significant international connectivity benefits for New Zealand at a fraction of the build cost of another, much longer trans-Pacific cable, the consortium partners said.

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Comments and questions
38

Wow, the future's bleaker for smaller ISP... less than reliable connectivity will kill them all if not within 5 definitely 10 years...

Great move boys ;
Kills the potential competition business cases
Sets up NZ Telecommunications as a duopoly
Nothing the CC can do about it
Can’t wait to see the price increases

Exactly, with the new Telecom/Chorus split the govt has less power to regulate Telecom.

Great. Another international cable partially owned by Telecom. Anybody else see where this falls over?

Sorry but that's the free market principle working its way to the inevitable Oligopoly. .

Australia (I believe) would become the new content providers in the future. Better links to them mean better content for us.

New Zealanders set to benefit from an additional submarine cable. Very smart move by the big three telcos.

Yahoo !!
Telecom cuddles competitors and we all win.
....Yeah right

Agree with Rod, better but not the best. Telecom ownership on both cables is hardly competition and another cable to Sydney is not quite what NZ needs. So an improvement but definitely a missed opportunity.

Although Telecom will have a stake in both cables, its interesting that the JV partners don't. You'd expect them to push/compete against each other - Vodafone will want to direct its contect through its cable, leaving the Southern Cross cable out of pocket, etc. So I think there will be a certain degree of new competition etc.

Nonetheless, I've always been one to point out that the Southern Cross data charges on a $80-$100/month consumer broadband plan are a handful of dollars per month, ie. $5, which doesn't explain why the plan costs 4x what it costs in Europe, etc.

On the competitive aspect, I've always wondered why the govt didn't lean on Telecom to allocate its Southern Cross share to Chorus during the split.

As a largely wholesale operation, it was a more natural fit for Chorus.

Telecom needs the cable to provide regular income and allow it to cross-subsidise to prop up its competitive areas. Just as both Voda and Geni do with cellular service right now.

Herfindahl index is non-existent in this part of the world, of course. If we were to shaft Telecom, then perhaps many arguably "natural monopolies" would come under further scrutiny by overseas competition, to put it bluntly.

I would imagine that Vodafone will not suddenly stop using the Southern Cross cable. They would likely have an IRU for a long period of time, which makes sense to continue to use if they have paid for it.

They still need to get to US. I suspect they don't have an IRU tied up as they were anchor tennents for Pacific fibre and have a deal inplace with Vocus for international capacity. (Newly listed Aussie company Vocus has won a NZ$11.3 million deal with Vodafone New Zealand for international capacity - ZDNet 2010)

Four times the cost of Europe?

BT 10GB and free local calls GBP 23.75 per month (NZD 43.45)
NZ Telecom 30GB and free local calling NZD 75 per month.

Someone can't do maths!

Why not build from an alternative landing station to Auckland - i.e., Levin?

Yes, actually that's a very good point. Aside from being a more natural fit, it would have separated the common ownership of the dominant ISP and monopoly supplier. Hmmm!

Still with this new cable, I hope that Singtel/Optus and Verizon will still want revenue streams from their investment, while Vodafone and Telstra will want their data running through their partly owned new cable. This should create a market for data. It may not be fab, but it will be better than before. Smaller ISPs will get to choose between the two. Also, I hope that Telecom has less than 50% control of the new cable, too.

I would like to know how much ownership percentage each Telco has in this newly proposed cable.

Chris Keall - Answers?

At MoU stage I guess they won't have even discussed that.

My preference is that no single owner has a majority stake (unlike SX) and that the cable is run as a standalone entity with the owners influencing at board level but contracting as customers the same as everyone else.

Arms length and transparent.

No single owner has a majority stake in SX - you can tell from looking in Telecom's accounts where it is equity accounted (so at a very maximum 50% and most likely under that - maybe by 1 share). If Telecom controlled SX it would be proportionally consolidated, which it isn't.

No German fraudsters or government cash needed. Sounds good to me.

Twit.

And will they be wholesaling this to other ISPs not involved?

Good question. I asked if there would be a layer of wholesalers, as with the Southern Cross Cable, or if ISPs outside Telecom and Vodafone otherwise buy bandwidth access on the new cable.

A Telecom rep replied:

"Another cable just makes the market more competitive but it's too early to say exactly how that will play out in terms of wholesale arrangements."

Orcon, CallPlus etc are likely to find that a little chilling.

So a cable that will effectively be removed from regulation will be put in place. What bugs me is why Telecom, 2degrees and Vodafone donlt do a shared LTE build? This whole exercise reeks of advanced bullsh*ttery.

They are only doing this to keep the big banks happy as they require diverse connectivity and the old Tasman 2 cable is end of life. Don't kid yourself that it's got anything to do with lowering internet prices for the NZ consumer.

Yeah - it's the feds all over. Keep building your bunker hillbilly!

I don't for one minute think we'll see cheaper prices for consumers, these big businesses have scaled to operate at the current level based on cash flow coming in. Taking say a 20% on cash flow would sink most businesses. What I think we'll see are better speeds, and larger data caps, but no great shift in price. Either way, its good to see some progress being made.

The new cable is good news and, as the shareholders note, it's good for redundancy.
System capacity has not been an issue in the past but having a second (or 3rd counting Tas 2) cable will provide more security and more capacity.
Ownership isn't an issue - the rules of the SX cable mean shareholders don't get any special discount. I would be surprised if the same rules didn't apply to a new cable. All major users share their data requirements across multiple cables for safety.

Pricing is set by the second-tier wholesalers like Vocus, which has driven prices down a huge amount in NZ - not by cable companies as their impact is minor.
Rod Drury is still making no sense. He and his rich mates could have built a new cable to the US but, thankfully, the banks did better research than him and saw it was a dog.
Brislin should know better, too - if he represents the industry he should at least know how it works. If Telecom want a shareholding in 10 cables they can do that - just as anyone can build a new one.

One would hope Mr Brislen is representing users, and not the industry, seeing as he's the CEO of the Telecommunications Users Association of New Zealand (TUANZ). The industry is represented by David Stone of the Telecommunications Carriers Forum (TCF).

Welcome to the new Telecom-Vodafone duopoly. It's like the Telecom monopoly, only with extra hangers on.

But, seriously, is there a risk this will make it even more difficult for the smaller players to challenge Vodafone and Telecom?

So if there is a business case for a cheaper cable to Australia that delivers most of the benefits of a much more expensive cable to the USA, it begs the question why didn't Pacific Fibre go with a trans-Tasman option? At the very least it should have been their Plan B, but you have to wonder why it wasn't Plan A in the first place.

Pacific Fibre would have a return on their investment and there would have been genuine competition.

Pacific Fibre always argued most of our internet traffic is on the NZ-US leg, so there needed to be competition there for any real movement on international pricing.

1) Pac Fibre failed ... miserably by all accounts "not even close" is what one insider said.
2) Any small amount of investigative reporting (hint, Chris) would reveal that the proportions of data is shifting away from the US slowly.
3) The haters here fail to understand how SX works, and that NZ benefits from the AU buying power.
4) Read the comments, the SX capacity makes up only a small portion of the cost of BB. Do some research and find where the true costs lie.
5) Telecom is still the only company to pony up and actually invest in connecting NZ to the world yet it gets vilified for wanting a return on that investment. Wake up NZ, most of you own some portion of Telecom shares thru Kiwisaver investments. You are losing here, too.

Welcome to the new Telecom-Vodafone duopoly. It's like the Telecom monopoly, only with extra hangers on.

This is nonsense. Any customer can buy capacity on the Southern Cross cable. Shareholders get no discount. If the new cable is set up the same way, then it's not a duopoly.
Kiwibrew - I don't care who Brislin represents, he needs to be accurate and he isn't
Kevin - you are wrong. No shareholder in Southern Cross has a majority. Their website notes all big decisions must be unanimous as well. I am keen to see what the shareholding split is.
Chris - I am glad you asked the question about the wholesaler layer. They set prices and it's the Vocus's of the system that have given Kiwis cheaper broadband.

Latest rumour.

They all own a third and they each get a third of the capacity to do what they want with. They can use it exclusively for themselves, wholesale, whatever.

I presume there will be an operating company where they all share equally in the costs.

So potentially it adds nothing to international cable competition or all three could compete aggressively to monetise their investment.

As mentioned above the primary issue is link redundancy not pricing.

90+% of SX capacity goes into Oz so it's that market that sets pricing with four cables competing. SX are on record saying NZ-US pricing is no greater than AU-US pricing so you can take that at face value or not.

Unfortunately the majority of posters on this blog don't care about return on investment because they dont invest their own money. The industry (Telecom, voda, chorus, Telstra, 2D etc.) has invested around 5,000 million into NZ over the last five years for no extra revenue. Pacific Fibre wasn't bankable because the return on investment sucked.