Ihug has "cash and a plan"

Ihug's managing director Nick Wood talks about being left at the altar again, and about Ihug's e-commerce initiatives, profitability and prospects in a comprehensive interview.

When Ihug's partnership with Sky TV didn't pan out last year it looked like bad luck. When a backdoor listing via Force Corporation was blown away by tech-stock nerves this year some people felt the ISP's reputation was tarnished.

Not as far as managing director Nick Wood is concerned. Ihug has moved onwards and upwards from the Force deal - which wasn't all that important anyway, he says. Wood talks about Ihug's real strategy with Russell Brown

So the Force deal is over, you don't have a listing - where are you at now?

We've got a fair amount of cash and a strategic plan and we're not really going to waste a lot of time focusing on those sort of things for the rest of this year. We have options - people ring us all the time wanting to be part of the game.

One motivation for trying the backdoor listing through Force was to make it easier for other investors to come in, wasn't it?

Exactly. What's annoying is that there are about 15 million Force shares, which is about half their tradeable flow sitting there, bought by people who are effectively Ihug supporters who've jumped on the bandwagon and they're going to get a bomb dropped on them. And that may mean that later on they're less inclined to come back and be investors in us. I was in the same boat - I bought some Force shares.

The deal's not completely dead but it's dead enough that it's over, and unless they come back with something pretty robust, we're moving on down the road. The focus was the backdoor listing but if you looked at what Force had as a company it was less significant than the Video Ezy transaction we've done.

When did you first start looking at buying Video Ezy?

About four months ago.

We you thinking about kosmo.com at the time?

I've been thinking about it for three years. It's an idea that I've been developing for almost as long as kosmo's been doing it. Unfortunately we didn't do it as fast as I would have liked because we were busy doing a lot of other things. I started seriously putting it into play last August and went to a few friends who own video stores to work out how to put it all together.

I could see that the Internet shopping environment needed to have that reliability and speed of delivery so that retailers could actually sell their products at a normal price. So you have convenience and reliability rather than discounting to get the business.

And I thought video was the ideal way to promote that, because it was an exciting, sexy product that was a pain in the arse to get and to take back to the store. So by creating a business around that you could filter in all the other products and services.

I was quite interested by the response in the Ihug newsgroups when your marketing department emailed all the customers to tell them about e-mmediate. I thought they'd all be complaining about being spammed by Ihug marketing - but it seemed to hit a sweet spot. People were talking about Video Ezy.

There were a couple of people that got annoyed, as you'd expect, but we felt it was important to tell the customers. It was spam, I suppose, but it was more a matter of "hey, we think this is really cool and that it'll be really useful for you", rather than annoying people with some new product.

It's going pretty well so far. It's trialling through The Source store because Dave Fermargh of The Source and myself put the project together. The Source stores will be blended into Video Ezy if they fit the picture.

We've got lots of other big franchises who are keen to climb aboard. The aim is to have the e-mmediate site be effectively like your local neighbourhood. When you log in it shows you all of the resources in your neighbourhood that you can buy and have delivered in 30 to 60 minutes.

I get the feeling it's this year that everyone's going to have to make their play in the fulfilment market.

I think so. But this will still take some time. We've got it running in one store. In about two months' time it'll trial in 10 to 15 Video Ezy stores in Auckland and we'll go nationwide through the rest of the year. The main issue is the cost of distribution being shared across the board. It's better to have a whole lot of companies sharing distribution and having multiple pick-ups to one destination - and making it cashless, so the customer doesn't have to hand money over left, right and centre.

You'll have a combination of things going on - daily deliveries versus real-time deliveries. When you think about television and the interactivity coming through our digital TV network, and the ability to order through advertising for the products, you'll have have people ordering TVs and fridges and even maybe cars through the Net and having them delivered the next day.

You don't have that interactive TV capability now, though. Is that waiting on a set-top box that can actually do the business?

It's waiting for the technology to get to the right point. It's kind of like a PC - the life of a PC's about three years if you get it right. We don't want to put out a box that's going to have to be binned within 12 months. It's more important to get the service right, with the right hardware, than just stick it out there in the marketplace.

There are more and more people signing up to the existing product, using separate devices. Our existing customer base has a PC already and is Internet literate. They're happy to have the set-top box plugged into their TV and the Internet plugged into their PC.

Whereas the 70% of people that don't have Sky or us are looking for solution that's cost effective and won't crash if they type the wrong thing. That's what the box is destined to be used for and that'll probably change the face of Internet.

The next thing for us is to take the customer base out of the analog world into the digital world. So we're not really too interested in the whole palaver about free Internet. We think it's time to step past that and move on with more realistic products.

At least in the short term it would seem to be a scary time to be a retail ISP, wouldn't it?

Not really. It's pretty clear that the free guys have got a lifespan of a few months. They won't get past the end of this year unless they can sell a lot of advertising. This arbitrage thing is short lived. Telecom will not renegotiate an interconnect agreement with Clear that allows them to take more money out the door than Telecom earns in providing the service. Neither will the ministerial inquiry.

Have you looked at either launching a free ISP or latching on to your own arbitrage arrangement?

It's not something that New Zealand can sustain as a country. It's an insanity. Anyone's who's done the simple maths knows that someone could sit online all day and earn Clear $800 a month. Clear could pay them $400 a month to do it. That would be the end of the telecommunications industry. Telecom wouldn't sit there - they'd launch their own free service. Then everyone else would go out of business and we'd be back to one carrier.

If the Kiwi Share was removed and we all paid per minute for our calls, then we'd have free Internet. It was a publicity stunt on behalf of Clear. Notice how quickly they stepped over i4free and launched their own service, with all the ads ready-made? The moment the injunction was successful they were there - and I'm sure i4free got a big damn fright.

They have no future and it's kind of damaging to the industry - like those idiots in Australia that launched a $200 per year all-you-can-eat service and then went out of business three months after launching it. i4free says "free Internet forever", but no one's been able to make an advertising model work. You just can't generate enough revenue to cover the service cost.

On the other hand, if you do pay two or three cents a minute, why should you pay for Internet access? It's kind of like dialling an 0900 number. It's logical. The loophole that Clear used wasn't logical and it effectively made Clear a dominant player. They were sitting there with the same agreement as Telecom, roughly speaking, but Telecom has all of the local loop to maintain and Clear has none.

Hopefully someone will come along and say, right, we're going to regulate interconnection and it's going to be this many cents per minute and it's going to be capped to the length of the average voice call.

All we ever wanted was an interconnect regime for voice which allowed us to have the ability for free local calling if we built a local loop, without having to pay Telecom per minute for ever and a day - while they could sit there and charge nothing for it, on a network that's already been paid for by the taxpayer.

The only reason we ever arbitraged, for a very short period of time, was to try and get that interconnection agreement that we wanted. We thought we could scare Telecom into actually renegotiating the interconnect agreements properly. It wasn't about making money out of it.

But in the end it was Clear that scared Telecom into it ...

Yeah. But if there was an independent body they could have made this mess go away two or three years ago. It's funny, Telecom is the dominant player, but lots of ISPs have proliferated and everyone's grown and got market share - and it's affected Telecom's business, but they've still grown.

They've been an incumbent that's tried to hold on to a monopoly position but at the same time have still worked with the other players to actually assist them in growing their businesses. So it's been a kind of love-hate relationship, where you still want to kick their arse, but they're being nice enough to at least not kill you off straight away.

Yet Clear got their first taste of real control out of an anomaly on their interconnect agreement and what did they want to do? Kill everybody. Launch a free service and nail everyone else to the wall. So who's the bad guy?

Even without the free ISPs, it's become a harder market for you hasn't it? You weren't profitable last year.

That was primarily because we did a lot of spending on growth. We built a television network, which cost about $5 million by the time you add it all up, we spent two or three million on building our phone network, we spent much more an advertising than we ever have and we also doubled our staff, from 150 to 300-odd.

The biggest reason we didn't make money was that we had to buy 60 to 70Mbit/s of capacity last year, to get us through to the end of this year. We haven't even used it all up yet, but if we hadn't bought it then it wouldn't be available now.

We hate not being profitable, but we had to plan for the future. We had to continue to grow and diversify. Our focus was also to find a business partner this year. We knew the Force deal could be a maybe-or-maybe-not, and we'd had a relationship with Tappenden pre-Sky and we consummated that anyway. We knew we had to have someone on board if the Force thing fell over.

So Tappenden were our back-up plan - and they were key to where we felt we were going. This year I would expect us to be profitable. We've started to used up the bandwidth to cover those costs, and we're not spending any more money on building those other things. We could technically continue to burn cash if we wanted to but there's no real reason to.

I think we'll seek investment options in the next while if we need money rather than just burn it up for no good reason.

In the Force memorandum you described yourselves as a "media company". What's that mean? What exactly are your plans in TV and music?

I don't know that we're going to be in the business of providing music per se. Our focus is pretty simply to focus on our 18-39 market demographic and say "What do these guys want? What do they do with their money? What kinds of benefits might they want to earn by spending on various things?" They'll want Internet, they'll want a phone service, they'll want videos, they go to the moves and they buy music, clothes, lots of other things.

So if we can create an online ordering system with all these products and services in it where they can earn value and cross-buy and get benefits from having them all together, then it's almost like a club. A powerful group of services that doesn't just relate to Internet access. We don't plan to be the providers of all these products but we're building relationships with other companies that do provide them, so we have a suite of offerings for our demographic.

Then obviously the digital television combo and high-speed Internet will be the next platform for advertising those products and services as well. We'll provide a finance facility with the online ordering system so it's like a virtual credit card to a certain value.

The focus has been on distribution as well. If you look at the Video Ezy thing, that's the distribution end of video. The Force thing was the distribution end of movies. The Internet is the distribution end of that content. We felt if we would be the pipe you go through to those products, then you've got a business that has some power.

Our whole Web site is also being redesigned to have a whole lot more information in it that provides our customers with useful stuff that they would use on a regular basis that they would se on a regular basis - news, weather, sports, move information, music reviews, that sort of stuff. We're not going to go mental and become a 50,000-page portal site but we want to go to the point we have a convenient place for users to get information.

We're also trialling software that allows people to rent games and so forth over the Net on our broadband network. It was designed in Israel and we're trialling it at the moment, looking to provide a service where you download a 500Kb thin client onto your PC and when you start playing a game from a Web site it starts playing a game immediately on your screen and it's sending you the information as a cached file, all the time at 256Kbit/s.

So it's like you have the game in your CD drive, without having to download hundreds of megabytes of files. And when you when finish playing it, it disappears. You keep certain bits of it, so the next time you play it it's faster, but it's in a format you can't hack into. You can play say 20 games for a $10 monthly fee. You can do the same thing with office software - any product can be converted to use this way. So you can have a suite of products that people can lease, like an ASP application.

We've also got the multicast stuff - and you're on a Mac, aren't you?

Guilty.

Good news. We've not got a little stand-alone box that you plug into your Ethernet card. You need a $90 piece of software for your Mac to make an Ethernet and modem connection work that the same time, but it means Mac users can just plug and play. It comes in a a blue and clear plastic box. We get the first thousand of those in June. So our focus is just to get on with the game.

From all of what you've been saying I get the impression that at some time the marketing will stop saying "Ihug equals Internet" - so what will it say then? Ihug equals lifestyle?

I think so. Tim's focus is that there's more to life than just the Net. The funny thing is that people who use it a lot are starting to use it less rather than more, because they've got a defined routine. It's a tool that useful to you in your daily life. I use it all the time now to buy movie tickets. I book videos from here and they're delivered by the time I get home. So that's what we see the Internet becoming for people - a lifestyle component that helps you organise your busy life.

The funny thing I saw in America is that there's actually not a convergence going on, there's a divergence. The guys who currently control the universe, the media moguls, don't want there to be a convergence.

They want interactive TV but they don't want Internet, because they want to keep the TV screen on all the time so the advertisers' ads will always be seen. They don't want you to go off to some other Web page and look at someone else's content. They want to keep you where their advertising is and where they earn their advertising dollars.

A lot of the interactive stuff we saw at the NAB show this year was based on platforms that were juiced-up TV but not Internet. Because Internet is stealing the eyeballs from TV - more and more people are sitting for three hours in front of their computer instead of the box. Which is why I guess Sky's going for interactive TV rather than Internet, with OpenTV.

It'll be a matter of whether the guys who own the content want to see it change. The good thing is they don't usually care who they sell the content to, so long as they get their money.

So what are you in it for then?

I guess we feel a bit misunderstood. All people see is the Herald saying these guys are millionaires and they've made all this money, but we're not - it's all on paper. Maybe we might be one day if we ever get anything done or if we ever sell any of our company, but but we're not in a hurry to do that.

We started this thing because we were into the technology. Tim and I set up this business with no knowledge of where it would end up, because we really enjoyed it. That's what everybody here is like. What annoys me is all these carpetbaggers like i4free saying they're here to save the world but all they're doing is ripping off the country to get a customer base they think they can sell for something.

There's all these different people out there focused on the money side. A lot of these free guys want to shove pages at you that you don't want and take your personal information and send it off to other people - which is anti the Internet.

The whole idea of the Internet was freedom and choice and to get around and do things. It was kind of like the final frontier for all of us - the last little world you could go to and explore without having someone shoving something in your face all the time.

Advertising started and that wasn't too bad because it was just a banner and you didn't have to go look at it, but now it's moving to these new cacheing tools that send you to one site when you want to go to another. Or they strip out the banner ads at sites you visit and replace them with their own.

That's the stuff that annoys us the most - because you'll turn people away from the Internet. I still think people can spend the 20 or 30 bucks it costs for an Internet account and still have the privacy and have people working solutions to give them the future that they want - rather than some guy who's only in it for the dollars.

Ultimately everybody has to survive and if you make a bit of money, you do. I'm certainly not unhappy about the fact that I earn a reasonable salary every year for doing what I do.

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