Guest Post:Broadband is the silver bullet

September 15th, 2009 at 2:00 pm by David Farrar

A guest post from Internet entrepreneur .

Almost weekly I hear “… but that’s not a silver bullet”. and connecting New Zealand digitally to the rest of the planet IS the biggest silver bullet for turning New Zealand around that I’ve seen in my business career. Let me explain why.

New Zealand is the farthest country from anywhere in the world. Any business that wants to talk to a market size of more than four million needs to send the founder away on planes (often), learn to export, as well as have the funding and governance to be a sophisticated international entity. That’s a tall order. So in general we don’t do it. Instead we build great little businesses that allow us to fund the ‘three B’s’ lifestyle. We do services rather than manufacturing. We invest in property, not business.

Adding digital channels to business reduces international trade barriers. You can have a web site in many languages. You can show video of your product. You can do seminars to thousands of people all over the world from your home office. You can video conference local phone numbers in your markets.

International broadband levels the playing field for the 400,000 New Zealand small businesses, to get amongst it, with minimal upfront costs. Already thousands of New Zealanders are doing this from all over the country. They’ve worked out how to get around the technical obstacles and constraints and are building little export businesses. Ultrafast international broadband mainstreams this opportunity. Any one of our two million working people can participate. While there will be a few high profile businesses that will be successful, getting mainstream small businesses sending invoices every month to the US and beyond, is the productivity step-change that world class international broadband can create.

It’s not just about pushing New Zealand services out. It’s also about attracting investment in. If New Zealand is connected super fast to the US West Coast there are countless opportunities to attract very connected knowledge workers and investment down here. Silicon Valley is an overnight sleep from most places in New Zealand. The same marketing person at $US150k might work in NZ for $NZ120k and be able to go mountain biking after work. Affordable, high performance, international broadband gives us the opportunity to attract substantial inward investment.

How do we pay for all this? Well it’s actually free. International broadband can fund itself – we just have to get organized.

Traditional telco models rely on a big upfront costs and customer fragmentation. There are minimal margin costs for services, so pricing is for revenue maximisation not public benefits. Logically the market has woken up and various schemes are now aggregating demand so that the pool of money for broadband can be used to provide broader benefits to New Zealand. This allows the expensive infrastructure to be funded and paid for on a cost plus, open access model.

Older New Zealand investors got used to augmenting their income with high interest rates in recent years. Where they used to get 8+% on their money they now get 3%. Consquently there’s plenty of demand for higher coupon bonds. Income for those investors is the cost of capital required to connect New Zealand internationally. A billion dollars of investment may only require $80m per annum to fund. This is quite reasonable as Telecom received about that same last year as a dividend from it’s 50% share of Southern Cross – the monopoly international cable provider.

As a rough back of the envelope calculation, that $80m, divided by 2 million users who access the internet via their phone, home account and at work, is about the cost of a cup of coffee a month. So, connecting New Zealand to the rest of the world, and the resulting step-change in opportunity only requires coordination – not cash.

Everyone, even the incumbent telco’s, can win with this model. There has never been such an opportunity to step-change New Zealand’s productivity and connect our many small businesses directly into global markets. Here is a real silver bullet. They don’t come along often. Let’s not waste the opportunity.

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21 Responses to “Guest Post:Broadband is the silver bullet”

  1. ben (2,379 comments) says:

    Rod, you’re legend and someone I look up to. Here is what I do not understand.

    How many New Zealanders need a web site that really hums for international traffic? Higher speed would be nice, but given the $2 billion cost of it what do current speeds stop us from doing now? Where is the value in that extra speed?

    For the businesses that really need a fast connection, there are alternatives that do not require the tremendous expense of rolling out infrastructure to everyone.

    You can host your site on a foreign server that’s near your international customers. I rent a server in Canada, it took me an hour to set up, and costs $90/month. Peanuts.

    If that’s no good, a business can rent high speed dedicated lines. Yes, they cost more – but a lot less than $2 billion.

    I love my broadband – but I can honestly say I don’t (yet) see the benefit of it running faster. I’m on a T1 connection at work and relatively slow ADSL at home (I happen to live far from the switch) but I can’t say my home connection prevents me doing anything that I would do at work. There are no tasks that I save for the faster connection at work.

    Maybe I lack imagination. It’s almost a cliche to say faster broadband is better – but actually that extra speed is costly and I don’t see where the value that justifies it is coming from. Welcome your thoughts.

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  2. getstaffed (9,186 comments) says:

    Rod, Good to see you here. I agree that broadband improvements are, or should be, an essential part of NZ’s future growth strategy.

    For me though fast, high-quality broadband is the easy bit. The really hard bit is ‘re-tooling’ our workforce, and by inference part of our culture, to make the most of a technically-improved environment for global business.

    But we’re just not there. Nowhere near it really.

    We have an economy that is still largely dependent on the udder of a cow despite years of rhetoric about knowledge waves, knowledge economies etc. Don’t get me wrong, we have some great talent, and great potential in technology, biotech and some creative sectors, and they would undoubtedly benefit from better broadband right now.. or yesterday.

    Solution? Well the start of the solution IMO is a cultural shift to endorse enterprise, risk appetite, innovation and seeing more local capital available for funding business growth. Then there are issues like understanding that we do compete in a global marketplace, so any suggestion that commodity manufacturing businesses have a future here need to be put to rest.

    But let’s sort the connectivity issues as a matter of principle.. and trust that the more crunchy issues can be addressed so that value is felt across NZ society.

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  3. RodD (12 comments) says:

    @Ben Any small business should be able to have international phone numbers, reliable QoS for VOIP, do a web demo and desk to desk video conferencing. Innovation comes from your environment. We’re more likely to see applications that trickle data while you’re sleeping than exploit fat connections.

    Even at Xero we have to do web demo’s with staff based overseas – as the experience when hosted from NZ is so poor. That’s less jobs here.

    @Ben Any small business should be able to have international phone numbers, reliable QoS for VOIP, do a web demo and desk to desk video conferencing. Innovation comes from your environment. We’re more likely to see applications that trickle data while you’re sleeping than exploit fat connections.

    We have to do web demo’s with staff based overseas as the experience when served from NZ is so poor.

    I’m constantly surprised by the number of small businesses that export something cool and interesting. Connecting us globally creates an environment for innovation.

    $2B? My suggestion doesn’t cost the taxpayer anything. It’s demand aggregation at a national level to give us the cost model to use the technology.

    @GetStaffed. It’s not hi-tech versus cows. Hi-tech is horizontal and should add value to all exports. (Cowcam anyone?)

    We’re 40 year old men. Innovation will come from things we haven’t even thought about. If we give our kids access to the technology.

    @PaulL Exactly. Southern Cross can even be the provider. This could move them down the price/volume curve and be revenue neutral to them.

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  4. Nigel (514 comments) says:

    Nice post, I work for a NY company in NZ & your model is 100% accurate, even if the salaries are a bit low :).
    I will get put in a position of needing to move if things do not get better soon & personal circumstances will make that easier as well, 1-4Mbit into NY will be an order of magnitude to slow in 2-3 years & is already negatively impacting me, making Australia a better mid-term proposition unless we get better global connectivity.

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  5. adc (595 comments) says:

    we export software here.

    We have a fibre connection, but ISP costs means it’s prohibitively expensive to get uncapped international traffic at even DSL speeds, so we are limited to 2Mbps international, and 16Mbps domestic (great for VPN / remote working in NZ). This costs about 90 times as much as your average broadband plan, which is why I continually poo-poo the fibre-to-the-home initiative. No-one will be able to afford the international traffic rates.

    However there are a few problems that even faster broadband etc won’t solve.

    1. Latency. Ye cannae deny the laws of physics. There’s no way you can get the distance from here to the US down a fibre in under about 120ms. The UK is more like 300ms. That means protocols that use a lot of round-trips perform poorly. Full stop. TCP has been optimised with slow-start and fast ramp-up algorithms (window scaling etc) to improve bulk throughput, but things like VPNs, remote desktop etc perform relatively poorly from NZ, and there’s nothing that can be done about it. So if you’re doing remote desktop to customers, or even just remote gaming to a gaming server overseas, you’re stuck with the relatively poor performance that is associated with high latency. It’s not so bad for things like VOIP or video conferencing since our brains can deal with the latency better.

    We do a lot of remote support using remote desktop, or VNC and the user experience is a lot worse than domestic customers.

    2. international congestion. Until the Kordia fibre to Oz is commissioned, we are stuck with the international bandwidth we have. There’s only so much you can cache on this side of the ditch to speed things up. Any interactive stuff still has to travel the miles and compete for international bandwidth.

    It doesn’t make sense, even if we did have an enormous pipe to overseas to host any popular international sites here. We could have the fastest link in the world, and we would still be seen by the rest of the world as a slow site due to latency.

    So, we are stuck with the reality of hosting in countries that are well-connected to our customers. It’s so cheap it makes no sense to do anything else.

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  6. RodD (12 comments) says:

    We clearly have some work to do on the demand generation side.

    International broadband is more than just hosting websites in New Zealand. We in the IT industry have to paint the picture of what the technology can do. It’s about symmetrical communications opportunities for 400,000+ small businesses and a few larger ones to have rich communication with the outside world.

    It’s about quickly sending large design files and movies back and forward to customers so we can be responsive service providers.

    It’s our kids watching NASA streams in hi-def in the class room while talking to the school next to the launchpad in Florida.

    It’s having a medical specialist guiding an operation in a Dunedin hospital theatre.

    It’s having Google invest in a server farm in Invercargill.

    It’s live streaming farming best practices around the globe.

    It’s being able to backup the movies of your children in case your house burns down.

    It’s attracting Cisco to put 200 engineers in Nelson.

    All this is possible with the technology, but the revenue maximizing toll on international traffic prevents us from exploiting these opportunities. We need a broadband abundant model to change our constrained mindset and encourage innovation and productivity – and just exploit the massive economic opportunity the same as others countries are.

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  7. wreck1080 (3,905 comments) says:

    Anything involving information and communication will be revolutionised in the future.

    Imagine, teams of indian accountants processing NZ tax returns.

    A maths teacher in Gore could be teaching to US children via high definition video conferencing and sharing applications.

    A doctor in auckland could get advice from an english expert regarding a patients MRI scans.

    Medical researchers could have access to libraries of entire genetic profiles. Same with other research fields with huge sets of data (eg, meteorology).

    Businesses can be connected via ‘virtual windows’.

    A few years ago SMS texting was unheard of , now it is huge. Noone predicted it would take off the way it did. The same applies to broadband applications – who knows?”

    The media and entertainment industries will become truly globalised, with distribution costs cancelled.

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  8. Poliwatch (335 comments) says:

    Rod, really great post and following comments.

    With true broadband, we will start to use data communications (not just internet) in ways that we currently do not understand. The thinking in the last two comments is starting to look at those. Much of this will be driven by not just innovation but most likely innovation overseas.

    I don’t see broadband as a silver bullet – it will be a necessity just to keep pace with the rest of the world. We tend to look at this broadband roll out in our normal isolationist manner – in fact just about all modern economies (and some of the less modern) are taking these steps.

    Politically it sounds good that we are taking these big steps. In reality they will only keep us with average performers at best.

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  9. virtualmark (1,523 comments) says:

    Rod, I agree with your central premise that more/cheaper international broadband is A Good Thing. But I’m not so sure about the economics you outline. Let’s say we could build a new cable to the West Coast of the USA for $1 billion. What earnings and revenue would it need to generate to justify that investment?

    Sure, good corporate bonds pay a return of around 8% pa. But they’re backed by relatively low-risk businesses delivering reliable earnings year-on-year, underpinned by long-term customer contracts. A submarine cable doesn’t have those characteristics – it isn’t a bond. So it needs to return a lot more than 8% pa.

    Then, in addition, a submarine cable has to return the investor’s original stake money within a relatively short timeframe, since the assets (the cable) has no disposal or residual value. Again, it’s not like a bond where the investor is repaid their original investment at the end of the bond’s term.

    So if you said a cable cost $1 billion, but had to return a 15% RoI plus recover the $1bn value of the asset within 10 years then you need to return $250 million pa. Even if the assets are owned in a tax haven (like Southern Cross is) the investors probably aren’t domiciled there, so you need to generate $375 million pa of pre-tax earnings to leave investors with that $250 million after they’ve paid their taxes.

    That then leads you to the question of how many customers can you get for this cable. If it was 2 million customers then that’s about $180 each pa, or about $15 each per month.

    But you’d have to figure that Southern Cross will ensure it’s always $1 cheaper than this new cable – they have an existing asset that’s already recovered its build costs, so will always be able to profitably underprice a new cable. So you start thinking about how you can generate $375 million of pre-tax earnings each year, from the 10% of customers who either just refuse to buy from Telecom or who must have full diversity.

    So the economics quickly become more challenging than you outlined. Those economics have stymied all attempts to date to get a second submarine cable off the ground (or should I say “in the water”). New Zealand has too small a population/economy to readily support two competing submarine cables. So either someone has to behave uneconomically (like the Govt is doing with the last mile infrastructure) or we have to accept service will come from a provider who will only raise service levels as and when they’ve fully amortised the value of their last investment increment (ie Southern Cross).

    We like to think that broadband can overcome the tyranny of distance – and technologically speaking it can. But it has its own set of tyranny economics.

    PS. Probably fair also to point out the cost of Southern Cross’s bandwidth has fallen markedly over the last 12-18 months. Most consumers will have seen that come through via increases in their monthly data caps.

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  10. freedom101 (504 comments) says:

    Great posts all round and fantastic that this is being debated.

    Who needs a newspaper these days when you can get much more from well informed bloggers than from the MSM?

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  11. francis (712 comments) says:

    Well done, Rod. Especially in the responses. And can I just say that the economies involved have nothing to do with why we are limited to SC. Rather, whenever additional cables have been proposed, the vested interests have shut them down. But getting the demand up is the first challenge. And that’s cable at home.

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  12. expat (4,050 comments) says:

    Nice idea Rod.

    Get NZTE to stop being anal about giving their online business planning tools out.

    Me: Can I have this please, am in UK wanting to start online business when i return to NZ
    NZTE: NO, your not a NZ GST registered business
    Me: Can you reconsider
    NZTE: No reply.

    Rude arses.

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  13. RodD (12 comments) says:

    @virtualmark Useful analysis, that’s the sort of thinking required to build the (crowd sourced) business case.

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  14. Falafulu Fisi (2,179 comments) says:

    Rod, I can understand the argument you made, but wasn’t the reason of why Motorolla didn’t establish an R&D center here in NZ in the late 1990s, because of lack of skills? Would it be the same scenario here with Cisco ? Do we have the skills that they want to establish here? Or is it the bandwidth the main criteria they’re looking at ?

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  15. RodD (12 comments) says:

    BB is the ticket to the game. Skills is another problem to solve.. I would hope we could make it compelling for experienced workers to relocate here, join our communities allowing us to learn from them and leverage their networks back to their home. NZ is a fantasy destination for many people and many would love to live here – if they can still do their big global jobs.

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  16. adc (595 comments) says:

    My understanding of why Motorola didn’t set up camp here was that they were unable to get any concessions from the government on tax.

    In the US, big businesses often come to some arrangement with the state for tax breaks, where the state government recognises the value of the investment being proposed.

    not here though. We’re so blinded by egalitarianism, we can’t see any room for quid pro quo, so we all suffer instead.

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  17. jhsh (4 comments) says:

    Great post, Rod.

    The skills thing is also a challenge, but it is attitude rather than intelligence. Too often people say “I can’t use computers” or “I don’t understand the Internet”. We need the kids to show their parents all this cool stuff and the parents to have open minds. If it’s useful (you can have an x-ray from your local surgery rather than going to the regional hospital or you can have your Building permit approved without going to see the Council) people will use it. If parents want their child to have a good job and decent salary then we need the Ciscos of the world to open in Nelson. It’s a challenge, but if my 86 year old Mum can video conference me happily on Skype because she can see me and talk as long as she like for free, then we can surely figure out a way.

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  18. GreenGordieNZ (1 comment) says:

    With the announcement of Pacific Fibre yesterday Rod has put his money where his mouth is! Good for Rod – we all need to support his venture. Get you ISP to become a foundation customer for the Pacific Fibre cable.

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