Kordia's 'OptiKor' transtasman cable still progressing

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webwat

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#85424 18-Jun-2011 17:18

Kordia internet cable 'on track'
News in the herald: Kordia has no intentions of working with rivals Pacific Fibre and says plans for its own transtasman internet cable are progressing...

Sounds like we might end up with 3 main networks out of NZ pretty soon.

Time to find a new industry!

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#482631 18-Jun-2011 17:45

Thats gotta be good for consumers - right?

Although not good for the government as they have investment in both - Kordia as an SOE and Pacific Fibre through REANZ

hellonearthisman

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#482636 18-Jun-2011 18:18

That OP link is dead.

webwat

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#482689 18-Jun-2011 22:13

Fixed the link, thanks for that.

I think overall its good for NZ to have more links anyway...

Time to find a new industry!

tdgeek

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#482712 18-Jun-2011 23:51

Who will pay for it? The number of users is static, so therefore the revenue for international traffic will need to go three ways, hardly a recipe for price reductions.

hellonearthisman

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#482715 19-Jun-2011 01:00

Any cable would pay for it's self in time. At the moment we pay about $1 per gigabyte of data. So you can see how easy it would be to recover $400 million or less if they are only connecting to Australia.
Pacific Fiber will have 320 Gigabytes / second of available.
If they used all the capacity and sold it at $1 per GB they would pay for the cable around 2 weeks.
If they where looking at paying for the cable in a year, it could be less than 4c GB

This ignores the costs related to connecting to other networks but shows that the costs could be way less than what we are currently be milked for.

Ragnor

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#482785 19-Jun-2011 13:43

Who's going to pay for it? People said the same thing about PPC...

The fact of the matter is that demand for capacity is not increasing linearly it's growing exponentially.

There is a definite need for more cables and more competition. If both Pacific Fibre and Optikor go ahead it's very good news for ISP's and consumers..

Perhaps not so good news for Southern Cross shareholders who've enjoyed oligopoly supernormal profits for years.

nickb800

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#482791 19-Jun-2011 14:08

tdgeek: Who will pay for it? The number of users is static, so therefore the revenue for international traffic will need to go three ways, hardly a recipe for price reductions.

But if there are multiple players in the market then they will compete for the business, therefore bidding the price down.

hellonearthisman: Any cable would pay for it's self in time. At the moment we pay about $1 per gigabyte of data. So you can see how easy it would be to recover $400 million or less if they are only connecting to Australia.
Pacific Fiber will have 320 Gigabytes / second of available.
If they used all the capacity and sold it at $1 per GB they would pay for the cable around 2 weeks.
If they where looking at paying for the cable in a year, it could be less than 4c GB

This ignores the costs related to connecting to other networks but shows that the costs could be way less than what we are currently be milked for.

The price you quote is retail, includes the ISP's cut, the revenue going to the fibre co would be a fraction of that. ISPs buy a pipe of x size, rather than z data transfer as consumers do, and they have to buy a large pipe for peak hours, despite the pipe being underutilised for most of the day. I.e. not 320 Gb/s isnt being used 24/7

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Zeon

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#482817 19-Jun-2011 15:40

nickb800:
tdgeek: Who will pay for it? The number of users is static, so therefore the revenue for international traffic will need to go three ways, hardly a recipe for price reductions.

But if there are multiple players in the market then they will compete for the business, therefore bidding the price down.

hellonearthisman: Any cable would pay for it's self in time. At the moment we pay about $1 per gigabyte of data. So you can see how easy it would be to recover $400 million or less if they are only connecting to Australia.
Pacific Fiber will have 320 Gigabytes / second of available.
If they used all the capacity and sold it at $1 per GB they would pay for the cable around 2 weeks.
If they where looking at paying for the cable in a year, it could be less than 4c GB

This ignores the costs related to connecting to other networks but shows that the costs could be way less than what we are currently be milked for.

The price you quote is retail, includes the ISP's cut, the revenue going to the fibre co would be a fraction of that. ISPs buy a pipe of x size, rather than z data transfer as consumers do, and they have to buy a large pipe for peak hours, despite the pipe being underutilised for most of the day. I.e. not 320 Gb/s isnt being used 24/7

Firstly no one buys "per GB" on the Southern cross, its XXMbps/Gbps. Secodnly few ISPs actually buy connectivity themselves but go through wholesalers such as Pacnet or AT&T. Some do have their own capacity such as Telecom/Telstra/Orcon.

Buying for peak requirements is another big problem. ISPs need to work on flatening their demand through things like differential peak/off peak pricing etc.

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tdgeek

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#482836 19-Jun-2011 17:09

---tdgeek: Who will pay for it? The number of users is static---

I will rephrase. Note I'm not supporting or not supporting anything, just doing the math.

1. In NZ we have a fixed number of users. (I am aware that there are other users too, Aust and network sharing)

2. These users currently pay for their service, a portion of which covers the international bandwidth costs.

3. SXC isnt a cash cow, it makes a typical IRR

4. The rate of demand or preferred demand for data is not that relevant. The cost is paid by Mr Person not Mr Data

5. Now, if you had 2 more players, that is two more capex payments, two more sets of admin costs, R+M costs. Future upgrade investments. These costs can be recovered if normal revenue is asked for the service.

But the customer numbers are the same, so if I assume that all 3 players shared the customer volume, then if prices did not change, SXC's revenue would drop by 66%. The two new players would achieve revenue 66% lower than SX achieves. Assuming SXC does not make massive profits over any industry average, then there is an issue of revenue being low, for all players. That will limit expansion, limit price descreases you would expect.

A good analogy is that you own a dairy. It provides a acceptable income. This income is worth it based upon what you have invested into the dairy, and allows for more money to be spent adding more capacity. Two more open up across the street, now you share the same number of customers between you. If you retain the prices, your revenue is down by 66%.

The fault with these cables/dairies, is that you are adding businesses to a model where the customer revenue is not increasing, so there is no room to add more "shops" if the "customers" remain static. There certainly appears to be less room for price reductions which was the whole point.

But what I read is that there is a general consensus that competition will drive prices down. It will, if there is oversupply of the customers, relative to the providers. Room to move. Its classic supply and demand. If we had many and growing customers, you expect shops to increase over time, as there is a viable opportunity.

But, sadly, I expect replies to my theories to be aggressive, as many just plain want
everything free or cheaper. Forget internet, plans, ISP's, etc, just look at it from a plain, boring, financial angle.

My theory will however, be completely incorrect if most customers are prepared to pay more for broadband.

nickb800

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#482842 19-Jun-2011 17:21

tdgeek: ---tdgeek: Who will pay for it? The number of users is static---

I will rephrase. Note I'm not supporting or not supporting anything, just doing the math.

1. In NZ we have a fixed number of users. (I am aware that there are other users too, Aust and network sharing)

2. These users currently pay for their service, a portion of which covers the international bandwidth costs.

3. SXC isnt a cash cow, it makes a typical IRR

4. The rate of demand or preferred demand for data is not that relevant. The cost is paid by Mr Person not Mr Data

5. Now, if you had 2 more players, that is two more capex payments, two more sets of admin costs, R+M costs. Future upgrade investments. These costs can be recovered if normal revenue is asked for the service.

But the customer numbers are the same, so if I assume that all 3 players shared the customer volume, then if prices did not change, SXC's revenue would drop by 66%. The two new players would achieve revenue 66% lower than SX achieves. Assuming SXC does not make massive profits over any industry average, then there is an issue of revenue being low, for all players. That will limit expansion, limit price descreases you would expect.

A good analogy is that you own a dairy. It provides a acceptable income. This income is worth it based upon what you have invested into the dairy, and allows for more money to be spent adding more capacity. Two more open up across the street, now you share the same number of customers between you. If you retain the prices, your revenue is down by 66%.

The fault with these cables/dairies, is that you are adding businesses to a model where the customer revenue is not increasing, so there is no room to add more "shops" if the "customers" remain static. There certainly appears to be less room for price reductions which was the whole point.

But what I read is that there is a general consensus that competition will drive prices down. It will, if there is oversupply of the customers, relative to the providers. Room to move. Its classic supply and demand. If we had many and growing customers, you expect shops to increase over time, as there is a viable opportunity.

But, sadly, I expect replies to my theories to be aggressive, as many just plain want
everything free or cheaper. Forget internet, plans, ISP's, etc, just look at it from a plain, boring, financial angle.

My theory will however, be completely incorrect if most customers are prepared to pay more for broadband.

Where did you find the IRR for sxc? I would totally agree with you if SxC was making a normal level of profit (i.e no economic rent/supernormal profit) but intuitively find it hard to believe that a firm in such a strong monopoly position isnt.

Ragnor

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#482967 19-Jun-2011 23:00

tdgeek:

3. SXC isnt a cash cow, it makes a typical IRR

SXC cost ~1 billion USD and was completed in 2001, it had completely repaid all bank debt to finance the build by 2005.

In the previous financial year: Southern Cross dividend to Telecom was $39 million for the half-year, $83 million for full year; $186 million for the entire company.. I believe that's in NZD from Telecom's financial reports.

That sure smells like monopoly rent to me!

Note: Telecom owns 50.1% of SXC, Singtel/Optus 38.99% and Verizon ~10%.

International bandwidth here is expensive, six times the price in Japan, which has several competing cables and is roughly the same distance from the US.

SXC terms are also inflexible, to buy direct you have to buy minimum STM-16 on a multi year contract, most NZ ISP's do not have the scale to purchase at these terms and are forced to buy from resellers (Vocus, Pacnet etc).

webwat

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#483257 20-Jun-2011 16:30

Ragnor:
tdgeek:

3. SXC isnt a cash cow, it makes a typical IRR

SXC cost ~1 billion USD and was completed in 2001, it had completely repaid all bank debt to finance the build by 2005.

In the previous financial year: Southern Cross dividend to Telecom was $39 million for the half-year, $83 million for full year; $186 million for the entire company.. I believe that's in NZD from Telecom's financial reports.

That sure smells like monopoly rent to me!

Note: Telecom owns 50.1% of SXC, Singtel/Optus 38.99% and Verizon ~10%.

International bandwidth here is expensive, six times the price in Japan, which has several competing cables and is roughly the same distance from the US.

SXC terms are also inflexible, to buy direct you have to buy minimum STM-16 on a multi year contract, most NZ ISP's do not have the scale to purchase at these terms and are forced to buy from resellers (Vocus, Pacnet etc).

SXC still made losses for a while, but its not ideal to be relying on a single network provider to deliver a whole nation's connectivity regardless of excessive profits or lack of. I think part of the reason for the STM-16 (2.5Gbit/s) requirement could be that its multiplexed into STM64 channels instead of 10G ethernet. I worked out that SXC's STM-256 (40Gbit/s) upgrade next year must cover 150 wavelengths to get the claimed 6Tb/s. Wonder how that will be setup, might be able to sell Gigabit then.

Time to find a new industry!

samsam

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#483281 20-Jun-2011 17:11

Ragnor:

tdgeek:

3. SXC isnt a cash cow, it makes a typical IRR

SXC cost ~1 billion USD and was completed in 2001, it had completely repaid all bank debt to finance the build by 2005.

In the previous financial year: Southern Cross dividend to Telecom was $39 million for the half-year, $83 million for full year; $186 million for the entire company.. I believe that's in NZD from Telecom's financial reports.

That sure smells like monopoly rent to me!

Note: Telecom owns 50.1% of SXC, Singtel/Optus 38.99% and Verizon ~10%.

If SXC took its 1 billion USD and invested it at a bank they would have ~1.7 billion USD now (assuming risk free return - return if put money in bank) of ~3% over the past 10 years. Now SXC have made 186 million NZD which is about 150 million USD. which is a return of about 8% on there investment (0.15/1.7) which to me seems like a perfectly reasonable return, given the risk and other options they would have available.

The fact that they have paid off the bank load shouldn't be a factor as they still have the money sunk in the cable (if they didn't build the cable they would have 1.7 billion USD).

Zeon

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#483286 20-Jun-2011 17:22

Also remember Southern Cross is a far more comprehensive cable system than Optikor or Pacific Fibre. With fully protected capacity and multiple landing points it can offer things that these new potential competitors can't.

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Screeb

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#483290 20-Jun-2011 17:30

samsam:
If SXC took its 1 billion USD and invested it at a bank they would have ~1.7 billion USD now (assuming risk free return - return if put money in bank) of ~3% over the past 10 years. Now SXC have made 186 million NZD which is about 150 million USD. which is a return of about 8% on there investment (0.15/1.7) which to me seems like a perfectly reasonable return, given the risk and other options they would have available.

The fact that they have paid off the bank load shouldn't be a factor as they still have the money sunk in the cable (if they didn't build the cable they would have 1.7 billion USD).

$186 million is the amount SXC paid out in dividends for the last single year, not their profit over the last 10 years...

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