Pacific Fibre's decision to pull the plug on plans to build a new international fibre optic cable is a "crying shame", says a consumer advocate.
"I think it's tragic news for the New Zealand market," said Telecommunications Users Association CEO Paul Brislen.
"We're left with a monopoly and no matter how benign or how well run it is, it's still a monopoly - and I had high hopes Pacific Fibre would be able to break that hold and help deliver the some of the digital economy future we've been talking about for so long."
Pacific Fibre, backed by big-name entrepreneurs including Sam Morgan, Stephen Tindall and Rod Drury, launched in March 2010 aiming to build a 13,000km high-speed fibre-optic cable connecting New Zealand and Australia to California.
The service would have provided a competitive alternative to the existing cable owned by Southern Cross, a consortium of Telecom, SingTel Optus and Verizon.
But this afternoon, chairman Sam Morgan said Pacific Fibre had failed to raise the required US$400 million ($490 million).
It was an "audacious thing to try and do" and the global economic environment had not helped, Morgan said.
"We've spent millions of shareholder funds trying to get this done and despite getting some good investor support we have not been able to find the level of investment required in New Zealand initially and more broadly offshore."
Chief executive Rod Drury said he could not see how the Government's $1.35 billion investment in ultrafast broadband made sense unless the cost of international bandwidth was greatly reduced.
Drury said broadband was expensive in New Zealand, "and it is this market failure, not a technical failure, that we tried hard to solve.
"We still cannot see how the government's investment in UFB makes sense until the price of international bandwidth is greatly reduced," he said.
Brislen said the question was why the New Zealand Super Fund had not invested in the project.
"Because the Aussie pension fund was willing to put money in, clearly they could see the upside to it ... I would have thought it was ideal [for the Super Fund] - long term, stable projection, lots of growth. Lots of money up front but a good steady return over a 20-year period."
Responding to a query from Business Day, a Super Fund spokeswoman said the fund had undertaken extensive due diligence on Pacific Fibre.
"Ultimately we were unable to gain enough confidence in the opportunity, for our purposes," she said.
"Any investment we make needs to generate sufficient returns for the risk we have to take on, relative to other investment opportunities both domestically and internationally."
Vikram Kumar, chief executive of internet users organisation InternetNZ, said news of Pacific Fibre's exit was disappointing.
"We were a strong supporter of their initiative, given the importance of additional international telecommunications links in ensuring the robustness of New Zealand's connectivity to the rest of the world.
"While it was not to be, we congratulate and commend Pacific Fibre's shareholders for making such a valiant effort these past few years.
"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 Trans-Tasman cable as a second-best path still goes ahead."
IDC research analyst Peter Wise said although lack of competition would be the main concern, the existing Southern Cross cable had plenty of capacity to meet demand in the immediate future.
"They've just extended the useful life for another five years, but thereafter there may be a business case for a replacement."
While funding was cited as the main obstacle, it is likely that Pacific Fibre suffered from a chicken and egg problem, needing customers to commit to buying services before financiers would commit to provide funding.
One of the customers to sign up, Vodafone NZ, said it was disappointed the project had failed.
"We are still in favour of a second international cable to help break down the digital divide between New Zealand and the rest of the world," said CEO Russell Stanners. But "for now we will continue with our current international bandwidth arrangements".