Laying it on the line

MIKE O'DONNELL
Last updated 05:00 31/05/2014

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OPINION: Two weeks ago, Queenstown-based Remi Galasso, a seasoned French telecommunications player, announced his intention to lay a US$300 million (NZ$353m) fibre optic cable across the Pacific to New Zealand.

His company, Hawaiki Cable, plans to have the cable travel from Northern Oregon to Oahu in Hawaii, then down past Samoa and Fiji to a point just north of Norfolk Island. There it will fork to Whangarei and Sydney respectively.

That's 13,127 kilometres of submarine cable to lay, but, comparatively speaking, that's the easy part: you call up a supplier of undersea communications systems and services such as TE SubCom and tell it where you want the cable.

The harder part is pulling together the investment monies, regulatory backing for landing rights and bandwidth-buying customers that allow you make that call (and for TE SubCom to take it seriously).

Four years ago, three of New Zealand's leading businessmen of the entrepreneurial persuasion had a decent lash at the same thing.

Stephen Tindall, Rod Drury and Sam Morgan are not short of a bob when it comes to investing in new opportunities.

They are not short of brain cells either and share a native distrust of monopolistic incumbents. In this case it was Southern Cross Cable, currently the only provider of a cable from New Zealand to the mainland United States.

Southern Cross is owned by Telecom (50 per cent), SingTel Optus (40 per cent) and Verizon (10 per cent). And it's often seen by local participants as a reason why New Zealand internet tends to be slower and more expensive than offshore options.

Despite deep pockets and canny minds, the Pacific Fibre trio failed to pull it off, citing market failure as a reason for why they raised only half of the US$300m. So the question is, "What will be different about this latest attempt?"

Unlike the local heroes, Galasso has done it before. After founding a telecommunications firm in Noumea, he was involved in two smaller submarine cables: Noumea to Sydney in 2008, and Tahiti to Hawaii in 2009.

Theoretically, this means he is well-versed in the operational and regulatory requirements around securing landing rights. However, he still faces the same challenges around customer contract and investment monies.

Getting customer contracts is not as easy it sounds - not when the cable is still years and hundreds of millions of dollars away. It's also politically weird when the biggest customers are big telecommunications companies such as Telecom, Telstra and Optus and they all own hunks of existing cables. And if the pundits are right that they are using the limited supply to increase demand and margin, then it's not really in their interest to reduce that margin.

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Yet it will be customer commitment that investment partners look for. Unless they are confident the asset will be well used on good commercial terms, they might not be keen to buy a slice of the asset or underwrite its operation.

And so it comes back to money.

Let's say Galasso is able to tip in US$50m of startup equity. That means he will need to be able to table something close to US$100m of customer-contracted revenue, seek another US$150m of investment, and then take on US$100m of debt for the remainder.

A couple of days ago it emerged that Todd Corporation, the energy-centric investment vehicle of the Todd family, may have provided such investment. Whether the final sum is closer to NZ$100m or NZ$200m is unknown, but Todd recently exited Sky TV with NZ$218m in its back pocket, so it probably isn't struggling for liquidity.

There is a strong theme of self-fulfilling prophecy here. Customers are reluctant to commit to an unfunded provider (and often will be in direct competition to them). However, once a provider is definitely going ahead, all customers (including those with their own cable) are heavily incentivised to sign up to diversify their single cable risk. None of this will matter to consumers. All they want is faster, cheaper internet access.

Galasso has been quoted as saying his cable will be ready to roll by March 2016 - still two years away. However, with a bit of luck, consumers will see the benefits well before then as Southern Cross starts to re-examine its margin in the light of impeding competition.

And while Kiwi consumers may well have preferred to see the project birthed by local heroes such as Drury and Tindall, if Galasso gets the project off the ground (and under the sea) he's very likely to be "cyber hero of the decade". Mike "MOD" O'Donnell is an ecommerce manager and professional director. His Twitter handle is @modsta and he has trouble cabling his stereo.

- Stuff

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