News that Telstra has retained Alcatel-Lucent to deploy another trans-Pacific data cable must have been met with gritted teeth by Verizon/MCI and Optus/Singtel management, but more so by Telecom. The two former US and and Singaporean companies own a tenth and two-fifths of the nicely profitable Southern Cross Cable respectively, with Telecom having a half-share.
Over 30,000km in length, the SCC is our main internet connection to the US and Australia and, if you like, our main digital trade lane.
While the SCC was a risky investment, costing some US$1.1 billion (NZ$1.5 billion) to complete in the new millennium, it wasn’t a victim of the capacity glut that saw companies like Global Crossing hit the rocks at the same time. Instead, the SCC was described by Telecom CFO Marko Bogoievski as “one of the more promising parts of our business” in 2005, and as a “hero” by outgoing CEO Theresa Gattung.
Sources close to Telecom say that the management had the opportunity to buy out the shares of both Singtel and MCI, then in Chapter 11 bankruptcy protection and unable to guarantee loans needed for the SCC, around 2003, but declined to do so.
Telecom is now apparently in hindsight “kicking itself” for not having bought out the two smaller partners, given the excellent results the SCC has reaped since then. As late as February this year, the SCC announced sales of US$310 million in the last half of 2006.
At that time, an upgrade from the present half-utilised 240Gbit/s to 1.2Tbit/s was announced, which would bring the capacity of the SCC up to the same level as Telstra’s cable.
Capacity buyers are now are asking what will happen to the New Zealand end of the SCC, however. Somehow, the SCC has to make up for the loss of at least some of Telstra’s business — estimates are that between half and three-quarters of the revenue currently comes from the Australian incumbent.
The first question on everyone’s mind is: will the SCC go ahead with the capacity upgrade? If a huge chunk of utilisation will disappear from the cable in 2008, there’s not much point in upgrading to 1.2Tbit/s. Increased demand in New Zealand won’t make up the shortfall.
There are also concerns now that SCC may up its prices in New Zealand, simply because it can. Ours is, by and large, a captive market for SCC, and will remain so until another cable is built. This scenario depends on the length of contracts Telstra has signed with the SCC: if they’re the shorter seven-year ones, they will expire in 2008, right in time for the Telstra cable going online.
Telstra may also look at building a Tasman “spur” to service TelstraClear and grab wholesale business off Telecom; if that doesn’t happen, however, the SCC may be forced to increase trans-Tasman prices to stop customers putting traffic that way onto the new Telstra cable.
That the SCC is profitable is, of course, a good thing. However, should the SCC decide to increase its prices, it will affect New Zealand business across the board.
We need some sort of buffer against sudden price hikes on the SCC until a new cable is built. The government should perhaps consider investing in the SCC, maybe by buying out MCI’s 10% stake — it’d be a profitable investment as well. Failing that, now’s the time to consider a high-capacity trans-Tasman cable to join up with the new Telstra one in 2008.