The need for broadband speed

What impressed me most when I attended February’s Technology Entertainment and Design Conference in California was the presentation by the founder of KhanAcademy.com.

Salman Khan started producing mathe­matics tutorials on YouTube for his cousins in 2006. Now millions download his 2100-plus video tutorials every month, and anyone can learn quadratic equations or what caused the French Revolution from a world-class tutor – all for free.

Another presenter showed off the Google Art Project (googleartproject.com) and demonstrated how those with a web browser and adequate bandwidth can walk through the world’s top galleries and zoom deep into famous paintings until they can see the brushstrokes.

Between sessions at the conference, I met some executives from Netflix, which recently launched an internet movies-on-demand service for US consumers. Pick from almost every movie ever made and watch as many as you can, all for US$7.99 a month. Already, 24 million people have signed up.

These days, my various businesses store all their email, project planning, board documents, accounting systems, files, calendars and almost everything else “in the cloud” with Google, Xero, Dropbox and others. Much of the best business productivity software is now available only as an online service. The Christchurch earthquake highlighted one of the benefits: companies in the red-zone with their business applications and data hosted online were up and running as soon as they found a working web browser.

Like increasing numbers of Kiwis, I connect to the internet from multiple devices. At home my TV is connected to the internet, there’s an iPad on the coffee table, an iPhone in my pocket and a couple of computers about the house. My girls, four and six, already buy music on iTunes and can navigate YouTube. They will recall DVDs as I recall my dad’s LPs – as a clumsy way to ship data around. They already take Skype for granted and are disappointed if the video is not smooth. They have access to extra­ordinary online educational resources and creative opportunities.

Some still argue that more bandwidth simply delivers trivial entertainment or, heaven forbid, porn. This is a Luddite argument and echoes the arguments of those who thought electric lighting or a television in every home would destroy society.

The internet is the greatest platform for economic progress we’ve had for generations. Five years after the sale of Trade Me, data consumption is growing faster than ever – driven by more devices, more applications, more video and more time spent online. Business will never be the same again – and neither will software, how we buy stuff and how we educate and entertain ourselves.

New Zealand needs to get serious about competing with the rest of the world, about attracting the world’s best talent and their families to live and do business here. Otherwise we will fall quickly behind. If we are serious about growing high-paying digital businesses here – software, entertainment, science – then we need to commit to getting New Zealand hyper-connected.

Why a transpacific cable is the critical piece

Apple, Google, Facebook, YouTube, Microsoft, your email provider (Hotmail, Yahoo, Gmail), the big US universities, the movie studios, Khan Academy, homegrown (but globally minded) Xero – and just about every­thing else – are hosted in data ­centres some 11,000km away in the United States. Over 80% of the internet content Kiwis consume resides on servers in the US – the epicentre of the English-speaking internet.

New Zealand is connected to the US by a single provider of international bandwidth – the Southern Cross cable. The cable itself is good enough. Unfortunately, a single cable provider has resulted in a predictable market failure. As the only provider, Southern Cross sets the price of international bandwidth in New Zealand. Surprise, surprise, international bandwidth here is expensive – about six times the price in Japan, which has several competing cables.

The Bermuda-based company behind our US connection, Southern Cross Cables, is half-owned by Telecom New Zealand. Last year Telecom and the other two owners received $186 million of dividends. Monopolies are great businesses.

The companies that provide you with your internet access buy international bandwidth on Southern Cross in bulk. The internet service provider (ISP) for your home connection and your mobile phone company are both big buyers. Mobile internet has been booming since the launch of the iPhone.

Because international bandwidth is expensive, your ISP buys just enough to ensure you don’t switch providers or call them too often and complain. If you switch ISPs, you won’t be much better off – every ISP buys its international bandwidth from the same provider.

To fit as many customers as possible into the pricey international bandwidth your ISP has bought, it limits your monthly data consumption by imposing a data cap. Typically this cap is 10 gigabytes a month, which would almost fit on two standard DVDs and is just a fifth of what a dual-layer Blu-ray disc can hold.

Exceed your data allowance and your ISP is likely to throttle you back to dial-up speed. Plus at peak times – 6.00pm-10.00pm – every­one’s internet connection slows down as individual households overload the ISP’s fixed international capacity. New Zealand’s internet problem is not just about connection speeds – it’s mostly about the data caps imposed by ISPs as a response to managing the expense of international bandwidth.

Why fibre to every home is not enough

The Government’s $1.35 billion Ultra Fast Broadband (UFB) initiative to get a fibre-optic connection to your house is destined to fail unless we see changes in the cost of international bandwidth.

UFB will make your internet connection much faster. Trade Me taught me that when websites are twice as fast, consumers – who have little tolerance for waiting – spend more time online and consume twice as much data. That’s why we spent so much time making Trade Me fast – it kept customers online longer.

High-definition videos consume exponentially more data than standard ones. If you can click and instantly watch that full-screen movie trailer, then you do – and you burn through your data cap much faster.

So, let’s say the Government spends the money and UFB makes your internet connection 10 times faster. If you previously consumed your allocated 10GB in 20 days, post-UFB you can look forward to exhausting your allowance in just two days as you Skype the grandparents in full HD resolution, back up your music and email photos of the kids. Then you get throttled back to dial-up speeds.

The UFB project does not address the cost of international data and, therefore, you will see no change to data caps. So, you will either have a super-fast connection and exhaust your data cap in something like two days or, more likely, you will not have a materially faster internet connection.

UFB’s success relies on customers opting to pay more for a faster connection, but they’ll expect higher data caps. The Government thinks it will get three-quarters of households onto fibre within 10 years. But with data caps and effective connection speeds likely to be much the same, consumers will simply not pay for it and adoption rates will be low.

UFB depends on solving the data-cap problem – and that’s all to do with the cost of international bandwidth. Getting competition into this market is therefore critical to UFB’s success.

The digital future

The bulk of the economic benefits of broadband will be realised in our cities. This is where our digital businesses are, where the digital talent lives, where our universities are. Most CBD buildings already have several fibre-optic options. However, the cost of international bandwidth remains a significant expense for companies, too, so they buy limited amounts, throttle the connection speeds of their workforce and enforce limiting “fair-use” policies for staff. We could supercharge connectivity in our offices tomorrow if we unleashed the international component. No new infrastructure required, just cheaper international bandwidth.

If we have our way, New Zealand’s future will see our businesses able to video­conference their international customers just as smoothly as their European or American competitors can. Our leading-edge businesses will attract global talent for both New Zealand’s intrinsic qualities and our hyper-connectedness. Talent likes talent – so perhaps New Zealand will start business clusters in various digital industries.

I see a future where our companies operate without borders and are as connected as if they were in San Francisco. We can have a future where we’re ­creating more highly paid jobs. With competition in the international bandwidth market, our movie industry and scientists will be able to send huge amounts of data across the world much faster and cheaper than putting discs on planes. And New Zealand consumers will get the benefit of the competition in global digital entertainment platforms and telephony services. Is it going too far to think Google might build a big1 data centre and research lab here in New Zealand?

We’ve been hearing for years how New Zealand is getting poorer relative to other developed countries, that we’re not keeping up when it comes to broadband. This is why a group of us founded Pacific Fibre – to introduce competition into the international leg of our connectivity and drive cheaper and more abundant bandwidth for consumers and businesses. A second cable provider will make New Zealand’s connection to the world less fragile and we will have a brighter future for our kids and ourselves.


Trade Me founder Sam Morgan is a director of Pacific Fibre, which plans to build a US$400 million, 13,000km submarine fibre-optic cable connecting New Zealand and Australia to the US.