31 July 2006


The $US1.3 billion subsea cable that carries internet traffic and phone calls to and from New Zealand, Australia and the US is set to undergo major surgery that may see its capacity more than quadrupled at a cost of hundreds of millions of dollars.

Southern Cross Cable Network will decide next year whether to lay a new stretch of cable that could carry terabits of data a second either direct from New Zealand and Australia to the US or via a hub in Asia.

A lower-cost alternative would see the joint venture spend tens of millions of dollars upgrading the land-based infrastructure of the existing cable, either in one go or over a couple of years. This could double the total capacity of the cable to 480 gigabits per second.

Southern Cross Cable Network is half owned by Telecom, with Singtel Optus holding 40 per cent and US carrier Verizon 10 per cent and is headquartered in Bermuda.

Wellington-based sales and marketing manager Ross Pfeffer says the joint venture has begun researching the upgrade options and a decision is likely during the second half of next year. Though only 40 per cent of the cable’s capacity is used at present, more has been sold and demand for bandwidth is expected to grow steadily as broadband becomes more prevalent.

“Our choice and the speed of implementation will depend on our assessment of broadband growth and return, longer term market potential, and opportunities to further improve the range of services offered by the network,” Mr Pfeffer says.

“We can upgrade the land-based equipment to drive the existing network harder, but at the same time you have to think whether it is the best way to handle the future opportunities.”

Southern Cross’ existing dual-lane fibre-optic cable carries 75-80 per cent of all internet traffic to and from Australasia and the US and almost all of New Zealand’s international communications traffic.

The Internet Service Providers Association and government-backed business Reannz, which is setting up a high-speed Internet network to link New Zealand universities and research institutes, have labelled the Southern Cross Cable a virtual monopoly.

Ispanz spokesman David Diprose says the $1-$2 cost of carrying a gigabyte of Internet traffic to and from New Zealand across the cable means data caps on broadband plans will remain a fact of life. Reannz chief executive Donald Clark has called for the Government to consider providing financial support for a competing cable to drive down prices.

Southern Cross denies profiteering, saying in a statement that while the future of the business is thought to be positive, this is “set against the background of rapidly reducing capacity prices” as well as the likely cost of the forthcoming upgrade.

It says it is setting its prices with regard to the health of the wider telecommunications market. Mr Pfeffer says ISPs could cache more international Internet content on servers in New Zealand and cut back on their usage of the Southern Cross Cable if its prices were set too high.

Southern Cross says customers have agreed to pay $US1.82 billion ($NZ2.93 billion) for capacity on the existing cable, almost all of it bought on 15-year contracts.

The receipts have been sufficient to pay off the joint venture’s bank debt, while $US115 million of outstanding shareholder loans should be repaid within the next two years.

The cable operator is now cash-flow positive. As revenue from capacity sales is recognised on a straight-line basis, it is “just starting to report profits after seven years of accounting losses”.

Though a seemingly sure-fire investment, the company’s backers can point to evidence of the risks they took financing Australasia’s Internet lifeline.

The cable was completed in November 2000 and Southern Cross quickly sold $US1.6 billion of its capacity under contracts that ran to November 2015.

However, the company had trouble collecting from some customers after the market downturn that followed the dotcom crash. Bad debts from customers forced it to restructure its own bank debt and obtain additional loans from its shareholders, including Telecom.

It firmed up the original capacity sales by 2005. Since then Southern Cross Cable Network has dropped prices 70 per cent and sold a further $US218 million of capacity, with more sales now under way.