Getting cable: The Pros and Cons

While the fighting over a domestic fibre network continues, the high cost of international fibre access has turned into a hot topic with the announcement that wealthy entrepreneurs Sam Morgan and Rod Drury have a $900 million plan to install a new direct link between Auckland and Los Angeles.

The idea is to compete with the Southern Cross Cable, owned by Telecom, SingTel Optus and Verizon, and bring down international data costs – currently 10 times the norm in Europe and the US.

Morgan and Drury's company, Pacific Fibre, is not alone. State-owned Kordia has been working on a $150-$200m trans-Tasman cable build for the same reason and is further down the path.

What are their chances of success?

Kordia's scheme would connect New Zealand to Australia and thence to the US and Asia through other companies' cables. It needs to sign up customers before it can raise finance, and has so far fallen short.

Its CEO Geoff Hunt says the global financial crisis didn't help, but "a number of large offshore organisations" are now in talks. "In the last quarter of this year we hope to be in a position to complete – probably the end of the last quarter."

Talks with investors had been ongoing for six months he said, and "there's a fair bit of interest in other parties wanting a share in the Optikor project".

Pacific Fibre thinks there's not enough business trans-Tasman. "The key learning from Kordia is you've got to try and control more of the value chain," says CEO Mark Rushworth. "That means going all the way to the US. And you need to work with the 20 milion people in Australia to give you the scale to link up with the US."

The cost is greater, but the idea is to get a speed advantage by going direct, bypassing Hawaii. "You end up 7 milliseconds faster than anything out of Sydney to the US and 4ms faster than Southern Cross out of Auckland. That will provide a real competitive advantage."

On the downside, while Australia has a bigger market (New Zealand provides just 10% of Southern Cross's revenue, by some estimates) it also already has three cable links to America – Southern Cross, Telstra's Endeavour and Pipe Networks.

Some also question the benefit of saving a few milliseconds. And Southern Cross has capacity to spare and can easily compete on price.

Alan Mauldin, a submarine cable analyst with US consultancy Telegeography, said another cable would be good, but the business case was tough.

"I admire the vision of the Pacific Fibre guys but there are lots of risks," he says. "I understand the interest in trying to lower prices but this is somewhat contradictory with the goal of building a new submarine cable. Backers of this project would want the system to be profitable so it's odd to be cheering for a collapse in prices – at least not until you've recovered the cost of investment."

International bandwidth prices for NZ customers are high relative to elsewhere in the world, but this is to be expected, argues Mauldin. "It is tempting to compare price across regions and assert that NZ needs to have prices that are similar to what other countries pay; but for island nations like New Zealand that are reliant on submarine cables for international connectivity and have relatively small population, the unit cost of capacity is naturally going to be far higher since the cost of building, upgrading and maintaining cables is spread across fewer customers."

- © Fairfax NZ News