Chapter 17 - Bitstream Boundaries - Sorting out Speed Bumps

From NetHistory

Until a critical mass of New Zealanders use broadband on a daily basis, and experience firsthand how it can enhance their lives – convergence will just be a lot of hot air … From now on, our focus will be on providing content and services tailored for the broadband environment in an integrated way, enriching customers’ experience on Telecom’s next generation Internet protocol network. Simon Moutter, Telecom chief operating officer, April 2003.1

In the early days of the communications revolution the mantra was one of decentralisation where new digital highways would encourage regional and rural development, empower small businesses, and stem migration to the cities. The hope was revealed as hype when telecommunications competition became focused on wealthier suburbs, industrial parks, and the CBDs of major cities.

Post offices, banks, government departments, and businesses continued to withdraw from the provinces leaving ghost towns in their wake. We were the first nation in the world to fully deregulate telecommunications, but our carriers squandered their global edge squabbling with each other over who had rights to what, more interested in pleasing shareholders than closing the digital divide. They were still arguing over interconnection costs, equitable access to Telecom’s last mile and number portability 15 years later.

Attempts by government to speed things up had rarely produced results. Communications Minister Paul Swain promised outlying communities would have access to “the same kind of two-way, high-speed Internet available to those in major cities” by the end of 2003. His predictions of early 2002 were revised to the end of 2004 and continued to slip away.2

Farming remained the backbone – the engine room for the New Zealand economy – but was clearly disadvantaged without speedier access to the growing number of on-line services that supported that industry. An OECD report from December 2002 suggested the dairy industry might achieve productivity gains of up to $280 million if the right applications and tools were available to farmers over the Internet. An AC Nielsen survey found 63 percent of farmers with a gross income of more than $100,000 had access to the Internet; with dairy farmers it was closer to 80 percent. It was estimated about 300,000 users visited an agricultural web site each month. Their enthusiasm for the Internet was, however, understandably curbed by a copper wire infrastructure that operated at a less than optimum 9.6kbit/sec for their dial-up connections. Telecom had committed to upgrade its network to 14.4kbit/sec across most of the country, however, that was still considered traction engine speed for Web access.

The government-led Project Probe (Provincial Broadband Extension) offered about $100 million in state funding to subsidise additional infrastructure for schools, and ultimately remote communities, to help close the divide. Having equivalent broadband access to their city cousins would open the way for a new level of services such as interactive learning, videoconferencing, moving X-rays between health services, and more rapid access to essential market services for the farming community.

Swain was certainly eager to put some legs under his promise of broadband for everyone and continued to place TVNZ-owned Broadcast Communications Limited (BCL) in the front line, insisting it provide all carriers with access to its nationwide wireless network. BCL had the ability to extend its ‘last mile’ capability (256kbit/sec for inbound traffic and 128kbit/sec outbound) to the majority of the country, where copper was incompetent and satellite unsatisfactory. However BCL, which provided transmission capabilities for every major radio and TV channel, said it needed a good business case before it acted.

It had invested $100 million in upgrading its data network to a fully digital microwave backbone, capable of 155Mbit/sec, and a bidirectional wireless local loop access platform from Airspan. It formed several arrangements to deliver voice and data services to 14 outlying regions as part of Project Probe, but the ideal business partner was Telecom. The initial focus was on 2700 schools, with a view to leveraging this access to deliver better quality voice and data services to 200,000 rural customers who were struggling with sub standard communications.

DIY BROADBAND Walker Wireless (soon to become Woosh) was keen to get a slice of this business, and in conjunction with Vodafone was testing technology to deliver speeds of up to 3Mbit/sec over a range of 30km from base stations. During 2002 a number of regional councils and community trusts gained support to attract broadband suppliers. High-speed access was delivered to a dozen Otago towns and every secondary school. Electricity suppliers such as Counties Power were promising 25,000 residents and businesses on the outskirts of Auckland would have independent broadband access.3

While consortiums of wireless and wired carriers continued to bid to provide broadband to schools and remote communities as part of Project Probe, several local authorities, community trusts and private groups, including those in Northland, Wairarapa, Taranaki, and Southland, had made independent headway. Venture Southland, for example, was born from sheer frustration when the region was bypassed by Telecom’s DSL roll-out, often leaving the rural sector with speeds as slow as 500bit/sec or 2–3kbit/sec – hardly enough to maintain an Internet connection.

Southland produced ‘Blazing a Trail for the Information Highway,’ a regional assessment with insights into consumer needs, to help commercial players going to tender. Walker Wireless and Vodafone won the contract to deploy 128kbit/sec or faster services to 95 percent of the population for an undisclosed investment. That independent move kicked Telecom into gear. It rapidly deployed JetStream and BCL’s wireless technology throughout Southland, with promises it would reach 80 percent of rural New Zealand households by June 2004.

Venture Southland special projects development manager Steve Canny was in no doubt the alternative solution forced Telecom’s hand. Venture Southland was swamped by inquiries from other regions wanting to know how it got its way. “Community leaders have a key role to play in the area of telecommunications. Bandwidth is critical to economic development. Unless you have a competitive environment you will always suffer from a lack of effective communications and reinvestment in existing networks.” The pricing of bandwidth, he said, was a huge obstacle to the traditional telco model and there was a need to move to open access type networks where users paid for access, not megabits.4

Paul Swain initially suggested he might require government departments, local authorities, and schools to bundle their communications needs to attract the best deal. However Project Probe director Tony van Horick explained no one could actually be forced to sign up. While schools were keen to embrace faster networks, to use the Ministry of Education’s management information records (MIR) for example, they still got to choose which network provider they went with. The Ministry of Health was willing to be involved in the wider roll-out of broadband, but it and other government agencies and local authorities could remain with existing suppliers or find new carriers based on their own criteria.

New Telecommunications Commissioner Douglas Webb took up his five-year appointment in March 2002, with the job of smoothing the way for more equitable competition. In his first determination he stated the cost of providing free connections to all homes must be shared by all carriers. Of course Telecom was delighted and had already pre-empted that decision by contacting CallPlus, Compass Communications, Global One, Ihug, TeamTalk, TelstraClear, Vodafone, and World+Change in December 2001, attempting to recoup ‘losses’ it had allegedly made, complying with its telecommunications service obligations (TSO) or Kiwi Share arrangement.

However in the backhander, Telecom was ordered to more than halve the interconnection rate it had been charging other carriers for access to its network. In November 2002 Webb set the rate at 1.13c per minute, less than half the 2.6c Telecom had been charging, and ordered Telecom to pay TelstraClear $14 million to cover the difference between the two rates during the five months it first lodged its application.

Telecom was still bringing in about 75 percent of its revenues from the retail market but reported a net loss of NZ$188 million for the year ended 30 June 2002, after a partial write-down of its investment in Australia’s AAPT. It also claimed $471,000 for difficult-to-maintain residential customers, including those in the rural community, which it said were costing it $400 each a year. Hundreds of jobs were axed as it attempted to streamline its operation and recoup some of its losses. In the wake of the Clear Communications acquisition, TelstraSaturn divested itself of 650 staff. Sky TV meanwhile began to supply services in an exclusive agreement to TelstraClear’s 26,000 pay TV subscribers, making it the only pay TV provider of any significant size.

DON’T DROP THE BUNDLE Calls for Telecom to unbundle the copper and give everyone a chance to compete for the provision of higher-speed Internet connections into home and business had been growing since deregulation. In fact the realisation Telecom owned the copper into every home as well as the customer’s telephone number had come as a shock to some. The dilemma was that any competitor had to go through Telecom and pay the fees it determined or be excluded from the market. It was far too costly for anyone to replicate the Telecom network, and with the arrival of DSL technology it was obvious Telecom could again control the game.

Unbundling had been dropped from the Telecommunications Bill before it went to parliament but there had been pressure to put it back on the agenda ever since. On a visit to New Zealand in October 2001, Allan Fischer-Madsen, chairman of the International Telecommunications Users Group (INTUG), insisted unbundling was essential if New Zealand didn’t want to fall even further behind Europe and the United States. While governments across Europe were initially hesitant to unbundling, they had begun falling behind in getting high speed services out to everyone, and were now moving quickly to catch up. In fact the European Parliament had passed legislation to allow competing companies access to the last mile. “If you want to move and have competition in telecommunications you need to do something specific to create that competition,” he said.27

In April 2003 Telecom set bold new targets claiming it would get broadband into 100,000 New Zealand households by the end of 2004. It would radically reshape its services and introduce a new range of competitively priced broadband packages; catering for those who only wanted New Zealand content, through to heavy downloaders and gamers. The announcement was part of its ‘convergence’ strategy, which it claimed would let customers access any telecommunications service, anywhere, at any time. Was this a battle strategy to catch up with market demands, and plan for the inevitable future of pervasive broadband, or just another distraction?

“The 100,000 target – almost three times the approximately 36,000 households who are currently broadband connected – is more than just a number. It represents the sort of critical mass needed to make convergence a reality,” said Telecom chief operating officer Simon Moutter. “It is quite simple, really – until a critical mass of New Zealanders use broadband on a daily basis, and experience firsthand how it can enhance their lives, convergence will just be a lot of hot air … From now on our focus will be on providing content and services tailored for the broadband environment in an integrated way, enriching customers’ experience on Telecom’s next generation Internet protocol network.”28

However, such ambitious targets would not make the slightest dent in the problems New Zealand faced, unless the real barriers were removed, said TUANZ chief executive Ernie Newman. He believed broadband would continue to languish until price, competition, and the effects of the Kiwi Share were addressed. “That New Zealand is 25th in the OECD for broadband uptake and sinking fast is an economic disaster that must be addressed … As a small and isolated trading nation, we have to be the first to pick up technologies that remove the disadvantages of distance, not the last.”

Although the cost of JetStream was only slightly more than Sky Digital ($55.54 a month) and cheaper than a daily coffee, Newman contended the first barrier to a massive consumer shift to broadband was still price. At $69 a month with a usage cap, he said Telecom was being ‘too greedy’ and it must drop the price and remove the cap, to get more users on board, positioning JetStream as a mass-market product, not a niche one.

At Telecom HQ in Wellington, rural solutions manager Seager Mason sounded a little war weary when discussing the pricing of JetStream. One reason people weren’t signing up for the service was they didn’t know it had arrived in their region yet, although he admitted high price was a factor. So why was that an issue, when in 2003 dial-up Internet access prices here were rated as the cheapest in the world? Xtra was charging NZ$27.95 for unlimited dial-up when Australian ISP Telstra Big Pond was charging about NZ$45 and in the US, access to giant ISP America On-line cost approximately NZ$42. Well, Mason said, the free ISP services of a couple of years ago were a clever manipulation of the interconnection deal between Telecom and Clear, and while unsustainable they had driven access pricing down.

Even where JetStream was available, only about 5 percent of subscribers were signing up. The rest were reluctant to make the jump from inexpensive unlimited dial-up access to around $65 per month for JetStream. So what did this mean for nationwide high-speed Internet access? Simply that Telecom needed to see that an area was financially viable before it would install the service. Mason said the numbers required to make the business case weren’t huge. Three or four businesses, or 27 home users signing up, was enough for Telecom to put JetStream into an area. “We had a situation recently where a guy wanted JetStream at his bach … We told him what the story was, so he went door knocking and got enough people in his area to commit to it, for us to put the service in.”29

WHOSE CAKE IS IT? The entry-level carrier market, which now included more than a handful of ISPs looking for the main chance, was continually redefining itself, specifically with the rapid roll-out of full IP-based networks which allowed delivery of carrier-grade voice services alongside Internet and data. Margins in the voice and ISP market had been savaged in recent years and while many ISPs and second tier carriers were reselling Telecom’s DSL, this was only because there were few if any alternatives.

Telecommunications Commissioner Douglas Webb was under increasing pressure to promote a greater level of competition through fairer interconnection fees, wholesaling, and local loop unbundling. The smaller carriers were hoping he would give the market a shake-up, and offer them a fairer share of the $6 billion cake. The cake was still largely owned by Telecom, TelstraClear, and Vodafone, and those in the next tier of carriers were covetous for anything left that had icing on it. Early in 2003 there were only around 19 players remaining in this middle ground, who aspired to become full-service telecommunications providers or operate as wholesalers, reselling bandwidth, tolls, or Internet services.

Despite attempts at cracking the local market, second tier carriers had made little impression. Telecom’s share of the contestable fixed voice market had only slipped from an estimated 85.4 percent in 1997 to 78.8 percent by 2002 with a further 1.2 percent drop expected in 2003. It was a similar story in the data market, where the high price of leased lines and the cost of terminating circuits or tails was a source of regular complaints from businesses, needing to move growing volumes of data about the country.

Murray Young, telecommunications specialist with TeleConsultants, believed second tier carriers were in for a hard time as they sought interconnection deals similar to that struck between Telecom and TelstraClear. In the early days of deregulation there had been plenty of second tier players offering discounted tolls; the survivors had built a robust business in particular market segments, become ISPs or partnered with others. “Some may be driven out of the market; others will change form and need to work hard to maintain their position. Those with their own bandwidth may be more viable.”

The lack of competition had spawned a number of community-based networks where universities and research institutions teamed up with industry to create their own city-wide or campus-wide connectivity. Some wireless players were finding a growing interest in their offerings to get around the local loop. United Networks and Counties Power entered the market, alongside independent companies such as Wellington-based CityLink which was pouring cash into CBD fibre. It had more than 50km of fibre-optic cable above and below the streets of Wellington’s CBD with more than 500 connections to 250 buildings. It also had a ‘modest’ network in central Auckland.

“No longer is bandwidth doled out in expensive multiples of 28kbit/sec in Wellington; it is liberally supplied at ten, 100 or even 1000Mbit/sec at cost-effective rates. Companies don’t have to tolerate point-to-point circuits with expensive tails at each end, and a cost for each new link, they simply take a connection to PublicLAN and VPN to any other CityLink customers,” said CityLink managing director Neil De Wit. The biggest challenge was sourcing sufficient investment to grow the network and expand the types of connectivity available, including voice services and its CafeNet wireless broadband business.

POWER TO THE PEOPLE Power company United Networks had merged with telecommunications subsidiary Tangent, and both were acquired by another power and gas company, Vector, in 2002. Vector was looking at ways to merge the underground fibre-optic networks. It had more than 600,000 customers connected to its electricity network in Auckland and Wellington; its combined telecommunications assets included 950 square kilometres of fibre in the Auckland CBD and running parallel to the Vector line network out to Manukau and Papakura. The focus was mainly in the B2B market but it was also supplying wholesale bandwidth to ISPs and carriers.

Wired Country, a division of community-owned electricity network Counties Power, was not only providing wholesale bandwidth to parts of the Franklin and Papakura districts for voice and data; it was also moving into high-speed wireless coverage. Chief executive Neil Simmonds was keen to see what each community did once it got hold of the service. “We don’t want to eat other people’s lunch. We want our customers to be able to access services from any telco or ISP across our network.” One major obstacle to growth was the lack of practical number portability – in other words the ability to take on customers from other networks and have them retain their original numbers.

Management changes at Auckland-based Walker Wireless had brought a tightened focus on extending its unlicensed national fixed wireless network, and gearing up for a major roll-out of a more flexible and affordable technology. The company was given a $20 million cash injection in 2002, $6 million of which was invested in a year-long trial of the new-generation wide-band CDMA network technology. Customers were “hanging out for alternative broadband options,” said the company.

Another challenger in the wireless market was Compass Communications, which had invested millions to build its national and international network. It had its own ISP, tolls offerings and, through its acquisition of wireless provider Radionet, a national presence from Whangarei to Queenstown. CallPlus was earning $30 million as a tolls provider but claimed it could earn triple that if Telecom allowed it access to its network. It was still trying to sue Telecom for anti-competitive behaviour dating back three years.30

While over 83 percent of the country now had access to DSL, there were questions about whether it was being marketed sufficiently well and priced enticingly enough to convince the majority of dial-up users to migrate. An always-on Internet connection and phone on the same copper cable was an attractive proposition, especially when you could share that bandwidth within a home or business through Ethernet cards in other computers or via a wireless network set-up. Speeds of 2–8Mbit/sec were available from the full-speed DSL service or 128–256kbit/sec at the low end, with access plans now ranging from $40–$80 per month. Complaints about the wholesale price of Telecom’s JetStream continued, but most rival carriers and ISPs were reselling it under their own brands, often at a loss because of the low margin.

In August 2003 Telecom was accused of overstating its JetStream numbers and attempting to redefine ‘broadband’ to suit its purposes. There were reports only 13,000 residential customers had signed up for JetStream since its launch in 1999. Spokesperson Kerry Lamont insisted it had 44,000, but would not confirm how many of those were using the low-end starter package which ran at 128kbit/sec and was not considered broadband.

SO WHAT’S ALL THE FUSS? Telecom’s Xtra marketing manager Chris Thompson said all the talk about different levels of service were simply “nuances and words”: it was all DSL broadband. Ernie Newman of TUANZ said if in fact a high proportion of users were on 128kbit/sec, it was an “appalling revelation” and meant New Zealand had probably been over-reporting its broadband use, and we could be even worse off than the current 21st placing out of 28 countries in the OECD broadband ratings. Telecom had promised 100,000 broadband connections and that should mean 256kbit/sec and upwardss, he said. “The debates that fudge the definition of broadband and try to tell us we’re doing okay by world standards when we are patently not give us a sense of complacency.”31

Ironically Telecom was still suggesting there was no real demand for higher speed services, and most customers were happy with their dial-up connections, claiming even those who migrate to DSL mainly used it for Web browsing and email. Thompson quipped, “Many customers haven’t found anything they can’t do with dial-up.” He said prices would come down but this was gated by the worldwide cost of equipment and ‘down the line’ technology costs for cards and DSL modems, which were only coming down about 5 percent a year. “It’s not the order of magnitude people were hoping for. We don’t see any radical changes in our line cost structure.”

Thompson said heavy downloads and accessing rich content was not a big driver, and most New Zealanders still needed educating about the benefits of DSL. “While people who have tried it would never go back, most are still not sure why they need it, and why they should pay more. As it is, almost half of JetStream Starter customers use less than 500Mb a month and more than three quarters use less than 2Gb a month.”

There was uncertainty over what would actually drive people from their 56k modems to DSL. Would it be downloading CD-quality music, games, voice over IP, accessing educational, medical and government information, or telecommuting? Some analysts had predicted up to 500 million people worldwide would be using the technology to receive video-on-demand, videoconferencing and other multimedia, and e-commerce applications by the end of 2004.

Worldwide the DSL market was expanding rapidly. At the end of 2002 DSL lines grew by 15.3 percent from 35.9 million to 41.4 million by the first quarter of 2003. And according to UK-based DSL research firm Point Topic, actual installations grew by 90 percent in the year to March 2003. Asia-Pacific was by far the biggest growth region. By the end of June 2003, Telecom’s broadband penetration was 62 percent in medium enterprises and 12 percent in small enterprises. Its business and domestic DSL subscribers jumped 10,000 between March and June 2003 to 72,000.32

The Commerce Commission won approval for its recommendation to open up Telecom’s copper line network in September, and while there was a sigh of relief across the industry, by the next breath the old ‘we’ll believe it when we see it’ cynicism had set in. Competitors were betting it would be at least 2005 before unbundling had any tangible benefits, or even before they felt confident investing in equipment they could install at Telecom’s exchanges to create their own DSL networks.

The commission was overtly stating that unbundling could result in $204 million in benefits over a five-year period as consumers took advantage of lower prices for fast Internet products. The draft decision was seen as a starting point to get New Zealand’s abysmal broadband uptake beyond the 2 percent mark where it languished. “Eighteen months ago the United Kingdom had 3 percent broadband penetration, now it has 23 percent. The only reason is that Tony Blair got angry and shamed British Telecom in to changing,” said analyst Paul Budde.33

Budde claimed New Zealand was missing out on a $2 billion growth opportunity through its failure to fully embrace broadband. An ITU study, which saw New Zealand drop from 12th to 21st among 178 economies in access to ICT, was clear evidence existing strategies weren’t working. The ITU’s digital access index measured affordability and education, as well as the traditional focus on telecommunication infrastructure, such as mobile phones and fixed telephone lines. “The government’s heart is in the right place but it does not have the strategies to move forward.” IT Minister David Cunliffe blamed the Asian tiger economies for pushing the country back in the ratings, saying there was no cause for panic.

“New Zealand business people seem to stick to old models rather than look to new opportunities. That is reflected in the fact 60 percent of managers in the United States and Europe have broadband at home, compared with only 10 percent in New Zealand,” said Budde. Another factor was that Telecom was not showing leadership in making sure people took up broadband. While the rest of the world had moved on, New Zealand was stuck. The infrastructure build out was far too slow, through lack of competition, and it could take years for the telecommunications commissioner to create a competitive environment. “I don’t think we have that time – if you want to close the gap you must run faster, or the gap will get bigger.” Only affordable, high speed, unlimited access would attract broadband customers, and while Telecom’s JetStream might be affordable, the service was substandard, and a fraction of what people got in other parts of the world, Budde said.

DSL RESALE INADEQUATE Most of the $30 million or so the government intended to spend on Project Probe to get broadband to the regions would be wasted – either because it would go to Telecom or because it would be uneconomical. Rather than supporting companies such as Telecom, the government needed to promote grassroots efforts to bring broadband to communities. An action plan should be national, rather than just regional or provincial, because metropolitan areas also had broadband access problems.

Budde said countries that adopted broadband early were starting to reap the benefits. “You see this incredible spin-off once you get this digital economy going – businesses create new revenue from extra services on broadband, and health care and education are more efficient.” In New Zealand, that could lead to an increase of 2–3 percent in GDP, worth around $2 billion a year, he said.34

By November Telecom was claiming 50,000 residential connections but allegations remained that possibly only 13,000 of those users were subscribing to 2Mbit/sec plus connections. This further inflamed those who didn’t agree with Telecom’s definition of broadband. The critics insisted 128–256kbit/sec customers didn’t qualify. According to many international experts, broadband was any reliable connection able to deliver real-time video, defined as 2Mbit/sec and beyond. Anything below that benchmark might be considered narrowband.35

As the industry awaited a decision on LLU, based on the recommendations of Telecommunications Commissioner Douglas Webb and public submissions, a radical repositioning was occurring among Telecom’s competitors. TelstraClear, already providing a cable modem service in Wellington and Christchurch and reselling Telecom’s DSL as On-Net from 2003, had launched its own DSL service. It still believed the lack of broadband was costing New Zealand about $4 billion a year or around 3 percent of GDP. If it had local loop access it could provide its own DSL variant at sharper prices. “We could connect our state-of-the-art IPNetwork and deliver high-quality broadband to small and medium businesses, home offices and households with a choice of brand, price, service and billing options. Telecom will benefit because they will be paid for the additional traffic running over their network,” said TelstraClear’s corporate communications manager Ralph Little. Telecom was obliged to provide a 16 percent discount on DSL resale but TelstraClear insisted this was still conservative by world standards.

Meanwhile Ericsson’s new mini digital subscriber line access multiplexers (DSLAMs) were being fitted in Telecom cabinets across the country for a ‘business only’ service, with a residential offering planned. Also gearing up, where DSL was unavailable or unaffordable, was Woosh, in conjunction with Vodafone and BCL. The consortium finally began delivering fast Internet, voice over IP and switched voice through the eXtend network from November 2003.36

Then two days before Christmas 2003 the Commerce Commission did an about-face on the proposal it had approved earlier in the year. It rejected LLU in favour of a dumbed-down approach. Instead of opening up Telecom’s network for competitors to install their own equipment and establish independent network access, the Commission elected for a ‘wholesaling option.’ It told Communications Minister Paul Swain it did not “recommend the specification or designation of unbundling of local loops.” It wasn’t satisfied the overall benefits of LLU justified its introduction and favoured Telecom wholesaling high-speed data services to its competitors.

Telecom would essentially rent the loop to its competitors at speeds and pricing to be determined by the commission. “The experience of a range of other countries with regulated local loop unbundling does not lend weight to the case for New Zealand to follow suit.” It wanted Telecom to provide competitors with what it termed a ‘bitstream’ service which they could then on-sell. The announcement raised eyebrows, not only locally but around the world.

Late in the process, Telecom had indicated it was willing to introduce a form of bitstream service, which would allow competitors to extend their network reach and better serve the corporate sector and other large users. “Because of the presence of that offer from Telecom we decided it was important to give every reasonable opportunity for a market solution to emerge in preference to a regulatory solution.” If Telecom’s offer did not provide a satisfactory solution, the commission would further reconsider unbundling within six months.37

The challenge to Telecom’s control of the ‘last mile,’ between the exchange and homes and businesses, was never going to be taken lightly. It had owned and controlled the DSL market for five years and was unhappy about the prospect of the proposed sharing arrangement, claiming it removed any incentive for continued investment in its infrastructure, its broadband products or to lower prices. Its targeted lobbying of government, and threats to stop investing in the local infrastructure, were clearly a factor in the government’s failure to follow through on unbundling promises. This only addes to the widespread criticism of New Zealand’s failure to rise to the broadband challenge.

STILL BOTTOM FEEDERS Our slackening performance in the broadband stakes showed up again when the 2003 figures were published, with growth less than half the average rate achieved by other similar OECD countries. The Point Topic Broadband Growth Index for 2003 rated New Zealand in the bottom five, just ahead of the Czech Republic and Latvia. Our 22 percent growth was one of the lowest of 35 countries, with only 1.74 out of every 100 Kiwis connected at broadband speeds. The June 2004 OECD figures further underlined our abysmal broadband uptake, positioning us in the bottom ten of developed nations, alongside Hungary and ahead of only Ireland, Poland, the Czech and Slovak republics, Mexico, Turkey, and Greece. New Zealand had about three broadband connections per 100 inhabitants. The OECD average was 7.5 per 100 households.38

A further indication of just how far behind we were came in August 2004, when the United States announced it had reached 51 percent broadband penetration and Australia had rocketed up to 34 percent. Mark Ottaway, managing director of Nielsen NetRatings, conceded New Zealand had done well to move up from 4.7 percent in 2003 to 10.9 percent of all Internet-connected homes, but still had a long way to go. According to the MED, 75 percent of us were regular Internet users. The majority, however, had 56kbit/sec dial-up or less, and most higher speed users were still on 128kbit/sec DSL.39

New Zealand needed a cohesive vision not only to guide it towards a converged future but to ensure it got there, advised TelstraClear chief executive Rosemary Howard. She told attendees at the Telecommunications Summit in June 2004 that a hard line was necessary because so many balls were in one court. “I would ask Telecom to stop using all the things they won’t let the rest of us use, so they can see what it feels like. Maybe we’d then be able co-operate better, but until that happens we need a government and regulator with testicular fortitude. Information and communications technology were key enablers to drive up incomes, as we moved away from an agricultural- and tourism-based economy, but we were dragging the chain. You have to add value when you are one of the most distant countries in the world and we’re not on that road yet.”

New Zealand businesses across the board had one of the lowest levels of efficiency and productivity in the developed world. “Businesses spend about 3 percent of their gross domestic product (GDP) on telecommunications and that’s about three times too small if we’re going to be a knowledge economy.”

New Zealand had one of the worst broadband uptakes in the world, and only 7 percent of voice minutes on mobiles because it was so expensive to use, an issue the Commerce Commission was now investigating. Howard said the country was seriously lagging in a number of areas including number portability and anti-spam legislation, and without a forward-looking telecommunications policy, remained in an incremental catch-up position. While the European Union had all the layers of a visionary strategy, including broadcasting, New Zealand lacked a forward-looking, proactive, convergent policy.40

Meanwhile Telecom was looking at new and emerging technologies and working out how best to get them into the market. On average its investment in the overall access network had been around $110 million a year, although in 2002–2003 it invested $131 million in growth, rural upgrades, and renewal. It dropped prices for its existing Home JetStream plans by $10 a month, and introduced a new 256kbit/sec offering for $50 a month with a 500Mb data cap and 1Gb and 2Gb variations. Modem rental, exclusively from Telecom, cost $30 a month ($360 a year) but the market was now opening up and users could purchase their own modems for around $200–$300, depending on how many computers you wanted to hook up, or if you wanted wireless access.

Telecom also shifted the goalposts by revising its promise to achieve 100,000 broadband customers by the end of 2004, confirming a new target of 250,000 by the end of 2005. This time around there would be no confusion about what constituted broadband, with Telecom CEO Theresa Gattung publicly admitting this was now viewed as 256kbit/sec and above, not the lower-speed services it had included in the in the past. She said Telecom had a million customers on dial-up and 100,000 on broadband “of one sort or another.” The immediate challenge, she said, was to convert the million on dial-up to broadband. The gap between broadband and dial-up was now as little as $10 per month and ‘close to the tipping point where customers see value in making the move.’

Motivation for the more proactive stance being taken by Telecom may have come in part from the grand targets set by the government’s Digital Strategy, which the industry had been making submissions on. It specified the ability to deliver high-end services including video-on-demand, in the foreseeable future. The positioning statement set vague benchmarks for carriers to deliver ‘pervasive high speed broadband to support voice over IP and video.’

The goal was to have 85 percent of residential and SME customers in towns and provincial centres with Internet access speeds of up to 10Mbit/sec and beyond – possibly even 50–100Mbit/sec by 2010, using either copper or wireless technologies. We were told the industry “will need to replace all copper lines to exchanges and cabinets with fibre, and provide major users in cities with fibre connections on demand.” That was the kind of access necessary for video-on-demand and other multimedia and entertainment businesses to become successful. At the time of that bold statement, even with Telecom’s new account options, downloading half a dozen short movies or listening to Internet radio for any length of time would max out a 2Gb data cap, and speeds lower than 2Mbit/sec were frustrating gamers who wanted to use the new Xbox and PlayStation on-line services.41

INVESTMENT DIVERSION Telecom, which had been reluctant to broaden DSL coverage in the past, now announced it would try to push this out to 92 percent coverage. Theresa Gattung claimed Telecom was committed to the next generation of DSL services, including VDSL, but wouldn’t confirm whether this would be deployed beyond CDB exchanges. “We’re looking at Europe and how video over DSL stacks up as a business case and what are people prepared to pay for. We are looking at a once-in-a-decade decision to move to a next generation network (NGN) including renewing our switches, investigating the economics of fibre to the home and delivery of the kinds of services envisaged in the Digital Strategy document.”

Telecom was partnering with Alcatel and EDS to deliver a full IPNetwork. “Fibre to the cabinets is not the most important part of this change, we are currently engaged in a complete revamp of our PSTN switches, billing and customer support systems. We have a big investment programme over the next few years to completely reshape the interface between telcos and customers.”42

And indeed it did. Details of the next phase were announced in July, in a ten-year, billion-dollar investment plan for its NGN. It was already well advanced in its work with Alcatel to roll out a ‘totally new infrastructure’ across the country, to exponentially increase bandwidth to customers and pilot and deliver new services. It had already provided fibre to 1100 roadside cabinets (fibre to the curb) and would extend fibre to 1000 more cabinets over the next five years, over which time it would invest $120 million to enable new services for business and residential customers, including video, very high speed Internet access and ‘other’ new services. Fibre to the curb (FTTC) would be extended to fibre to the premises (FTTP) once demand for speed, capacity and new services developed in the residential market.

Meantime a $10 million pilot would be undertaken in the Flatbush residential subdivision and the Highbrook commercial development in Manukau City. A further $110 million would be invested in enhancing data services over copper cable through to 2007, including enhancing its broadband equipment. And $25 million a year over five years would increase the capacity of the core fibre network to meet growing bandwidth demand and develop the next stage of its multi-service network, which would eventually carry all Telecom’s voice, data, Internet, and video traffic.

New fibre routes would also be installed between Auckland, Hamilton, the Central North Island, and the lower South Island, and the capacity of its existing fibre expanded to cope with expected demands. Telecom had also begun replacing its telephone network including its ISDN service. A new Alcatel next generation exchange would be installed in Auckland to provide ISDN services in 2005, and detailed planning was underway to replace 600 exchanges and remote line concentrators with new IP technology over the next eight years.43

Meanwhile back at the coalface, where the market was still crying out for an improvement in basic DSL services, Telecom was making adjustments to its accounts and keeping its competitor just sufficiently behind the curve. Its DSL competitors purchased at wholesale rates but were initially constrained to lower speeds than Telecom itself. A more reasonable ‘bitstream unbundling’ option was supposed to be available to competing carriers by mid-2004 but kept slipping out. Progress was being monitored by the government, which wanted to see greater competition in the market by early 2005, otherwise it might take a harder line.

Telecom introduced new packages extending the data cap out to 10Gb on some accounts, but more tightly managing the throughput to specific parameters. That included plans to ‘grandfather’ the ‘full-speed’ 600Mb capped account, which had ranged from 2Mbit/sec to 8Mbit/sec speeds, effectively scaling back top speeds on all accounts to 1–2Mbit/sec. Entry-level accounts for 128kbit/sec–256kbit/sec now cost $40–$50 with 500kbit/sec–2Mbit/sec offerings costing up to $80 per month, depending on use. By the end of 2004 Telecom had about 120,000 JetStream customers, and claimed it would soon have 100,000 on a minimum of 256kbit/sec speeds.44

Internet Society executive director Peter Macaulay, however, believed Telecom was still clouding the issues around broadband. He said it was time to stop using the term broadband to describe ‘neutered’ 256kbit/sec technology and make it a minimum 2Mbit/sec to the subscriber and 500kbit/sec from the consumer to the network. “Telecom’s got a three-year window with DSL but by the time they start delivering the real product to everyone it’ll be obsolete like dial-up is today.”

Chapter 17 Sidebars

ISPS’ SHAKE-UP AND SHIFT OUT As the ISP market underwent further consolidation, many smaller players were facing an identity crisis, caught between Telecom and TelstraClear and ramping up their own IT and outsourcing offerings. Meanwhile software developers, systems integrators, and IT firms were adding Internet connectivity to their armoury.

By the end of 2001 Telecom claimed it was owed $20 million by ISPs, a strong indication many were struggling to survive in an increasingly tough market. Telecom had accelerated its efforts to reclaim the accounts, many of which were overdue by more than 90 days. It had been owed a similar amount the year previously, but the market had taken a turn for the worse in the past six months, said Telecom’s general manager of industry services Greg McAlister.

He said Telecom had written off $1.5 million in debt since mid-1998 through ISPs going into liquidation, and to June 2001 just under a million dollars in bad debt was owed. That situation was unlikely to improve anytime soon. One in four of Telecom’s ISP customers had difficulty paying on time.5

The number of ISPs had more than halved in the five years to 2003, but the market space they contended for was growing. Annual ISP revenues were more than $300 million and Australian commentator Paul Budde suggested their slice of the overall telecommunications market could be far greater if they lifted their game. He estimated the market was worth around NZ$6 billion and likely to stretch to around $15 billion by the end of the decade.

How much of that went to ISPs would depend on how professional they were and whether they could excel in broadband-based customer service including video-on-demand, ‘tele-education, tele-health, community and regional services, games on-line and network delivered applications.’ Their future success would also depend on wholesale access to Telecom’s broadband network on commercially viable terms, and whether or not Telecom was forced to unbundle the local loop, giving ISPs more freedom to build innovative solutions.

The battle for subscriber loyalty was heating up as ISPs sought to seduce consumers with increasingly attractive plans for flat-rate or low-cost dial-up surfing. Most PCs came bundled with a 56k dial-up modem and typically Internet subscribers used the Internet at home and work. Many people had multiple email accounts, and many email accounts had multiple users; Internet cafes were springing up in every town and mobile Internet use was growing rapidly.

WORLD-LEADING INTERNET USE An international survey of 31 countries confirmed New Zealand’s high level of Internet use. The GO2002 survey found 71 percent of New Zealanders used the Internet in November 2002, higher than Australia, Britain, and the United States. In December, Neilsen Media Research said three quarters of all Kiwis over the age of ten – about 2.4 million – had Internet access. That was 20 percent up on 2000. A quarter were apparently logging on daily for email, travel, and related services or listening to music.

According to IDC Research, about 40 percent of homes (1.6 million users) had Internet access in 2002, up from 200,000 on the previous year. If you added business users, including those with a home office, the penetration might be closer to 60 percent. IDC believed home use would grow exponentially to 2.6 million by 2006. The top ISPs, by subscriber accounts, were Telecom-owned Xtra (450,000), TelstraClear, which owned Paradise.net (100,000) and ClearNet (150,000), Ihug (150,000), and Iconz (37,000), which together shared about 85 percent of the market.

In the next tier were those with 10,000–30,000 subscribers, including Orcon Internet, Maxnet, Slingshot, Quicksilver, Actrix, PlaNet, Compass Net, Iprolink, and Wave. The balance typically had fewer than 5000 users, either operating regionally or in the niche business or hobbyist market. Those without a solid business model or financial base, and with customers who spent less than $300 a year, were rapidly headed for obscurity. When Internet penetration reached 50–60 percent, as it had in New Zealand, the challenge was to innovate and continue to invest in new equipment and services, then push past slowing profits into the next phase of growth. This challenge fell particularly to the second- and third-tier ISPs, who were being forced to reinvent themselves or risk being gobbled up in the next round of acquisitions as dominant players sought to acquire their customers, databases, and skilled people.6

In 2004 New Zealanders continued to have one of the highest penetration rates for Internet use in the world, with 79.8 percent of us connecting from home, school, work, libraries, or Internet cafes. Figures for the second quarter were up 2.7 percent on the same period for 2003. Not so encouraging was the realisation that about 90 percent were still on dial-up connections.

Mark Ottaway, managing director of Nielsen NetRatings, thought market growth was slowing, with 61.3 percent of New Zealand homes having Internet access, up from 58.4 percent in 2003. Xtra remained king of the castle with 49.7 percent of home users, TelstraClear and its ISP Paradise.net and ClearNet had a 23.3 percent share and Ihug had 7.9 percent. The remaining 10 percent of the market was shared by about 120 regional ISPs including niche or small town players, servicing fewer customers or specialising in areas like on-line gaming.

High speed Internet access was lagging. Only about 50 ISPs offered a solution, the majority reselling Telecom’s digital subscriber line (DSL). Telecom claimed to be adding customers at a rate of 2000 per month. Woosh, Wired Country, and several other niche players offered wireless broadband in a market segment that was growing rapidly and an increasing number of people were using cellphones or PDAs to access the Internet.

Cecil Alexander, director of sales and marketing with WorldxChange, was a relative newcomer to the Internet provider market, having traditionally been involved in tolls. The company was bundling its Xnet service to its 50,000 tolls customers and the wider market. “The vast majority of New Zealanders will probably remain happy with dial-up until such time as access costs to broadband are low enough. While broadband is important to the country your grandmother doesn’t really care,” he said.

WorldxChange was offering an all-you-can-eat dial-up service with five email addresses, 100Mb of email storage, 5Mb of personal Web storage and antivirus and spam filtering for $20. “We’re ready to move into the broadband market but there too many unknowns at the moment. Telecom is actively promoting their stuff heavily before the rest of us get a shot at it.”

UNSEEMLY SCRAMBLE Not only were higher speed accounts and e-commerce skills becoming the great differentiator, there had been a spate of acquisitions and mergers and price wars as consolidation continued. Wellington-based ISP Paradise had been founded in November 1997 by businessman Shane Cole. After rapid growth in a dial-up service it expanded to Auckland and Christchurch in 1998. It gained a reputation for reliability and good customer service and entered into a reseller agreement with TelstraSaturn. That meant customers who subscribed to TelstraSaturn’s cable telephone and cable TV service could also get Paradise dial-up or cable modem service included on their phone bill.

Nationwide dial-up access was provided in 1999, and Paradise became one of the first DSL providers after Telecom Xtra. In late 2000 the company was sold to TelstraSaturn for an estimated $30 million, and relocated to its new purpose-built call centre on Wellington’s waterfront. The Paradise brand was retained, even after the purchase of TelstraSaturn by Clear Communications in December 2001. The 24-hour helpdesk was merged with that of ClearNet in Auckland. Between them Paradise.net and ClearNet had the second largest number of Internet subscribers in New Zealand.7

Cole continued to invest in technology, namely Angel, a service for maintaining mobile phone contact details on-line. He also ran LAN Place, a networking gaming centre in Wellington with a gigabit link for Internet and remote gaming access. LAN Place featured low lighting, comfortable chairs, refreshments, and sophisticated network support and was set up in an office building in the heart of Wellington to accommodate 80 or more on-line gamers at a time. The rumour was, when Cole sold LAN Place he bought a Lamborghini and on the way to Auckland got himself three speeding tickets and nearly lost his licence.

In October 2001 when Asia On-line’s parent company placed the New Zealand branch in voluntary liquidation along with its Australian and Hong Kong counterparts, there was a flurry of activity with ISPs fighting for a share of its user base. “Every man and his dog who had a server seemed to think they’d be capable of hosting us,” said TradeMe’s managing director, Nigel Stanford, an Asia On-line customer. Another ISP, StrongNet, ran into trouble with DNS company Domainz for spamming Asia On-line customers.

Meanwhile Voyager, with 11,000 active subscribers, had split into corporate and consumer divisions in late 1999. Voyager, a partnership with Australian ISP OzEmail, itself now owned by Worldcom8 MCI, decided to pull out of the local residential market late in 2001 and divest its customer base. It was now going after the WAN space, offering managed services where large businesses required lots of bandwidth and security, along with support and servicing. Voyager had offered its domestic users the chance to move to Telecom Xtra’s service with no registration fee where they would be able to use their existing email addresses for six months.9

The troubled local arm of struggling international brand Asia On-line also began competing for Voyager customers, offering three months’ free access. However Xtra seemed to have won the bulk. Telecom’s Internet and directories business, employing about 1000 people, had become a star performer among the company’s four divisions. Xtra’s revenues, $49 million in the half-year to 31 December 2001, were up 36 percent over 2000, with a 34 percent increase in its user base to 335,000.

The gains were made despite criticism of Xtra bumping up the price of its flat-rate Internet offering and removing a popular pay-as-you-go scheme. Consumer general manager Rod Snodgrass said the continuing recession in the PC market failed to dent growth, which had been boosted by the acquisition of an undisclosed number of Voyager customers. Xtra had about 20,000 customers using its JetStream or JetStart high-speed Internet services, which CEO Theresa Gattung said experienced a combined take-up rate of 1500 per month. Those services contributed to earnings of $14 million in the half year to December 31, up 250 percent on the same period in 2000.10

BUY, SELL, AND EXCHANGE In 2002 the ISP industry shakedown continued as smaller players struggled to find their way against increasingly consolidated contenders. As bandwidth became commoditised, the focus shifted to service and services. Business customers in particular were more concerned about the quality of connections and added value; for example, development skills, secure hosting, and e-business applications that could connect customers and partners to transaction-capable web sites and back-end systems and processes.

The local assets of Asia On-line were bought by Dresden Equities, the country’s largest private company, majority owned by the Spencer family and associated with businesses as diverse as Toyota New Zealand, Caxton Paper, and Equitable Insurance. Michael Spencer’s Internet Corporate Solutions,11 already owned several ISPs throughout New Zealand – Ezysurf, Esurf Wireless, Virtual ISP, and Jafa. When it placed the highest bid for the remaining business of the failed Asia On-line operation, liquidated in October 2001, it picked up 10,000 residential customers and 3000 business customers, Spencer’s customer base was boosted to around 40,000.12 Iconz had been purchased by Asia On-line in 1999 but since that time had undergone several management changes and a restructure, reverting to the better known Iconz name in November 2001.

Spencer was convinced 95 percent of existing ISPs in the market weren’t making any money. “I would be very surprised if there were more than a dozen strong players in this market in 18 months … Eventually their shareholders will want an exit strategy.” A study released in early January 2002 by the Australian Bureau of Statistics showed 115 ISPs had ceased trading there in the year to September. New Zealand had more than 80 operational ISPs but the top four still accounted for more than 70 percent of the dial-up market.13

At the helm of Iconz for its new growth period from 2003 was managing director Sean Weekes, who had migrated from Britain initially to work for Compaq New Zealand.

At the beginning of 2003 Iconz had 20,000 residential customers and 11,000 business customers, making it the third largest ISP in that sector. The company now employed a staff of 50, plus a research and development team of five. It had made good inroads into the business community, and was on the comeback trail under new ownership. It now referred to itself as an ISP and had broadened its offerings to include equipment leasing, co-location or tele-housing and end-to-end connectivity. What it couldn’t offer directly it delivered in conjunction with partners.

“The biggest challenge is to ride the stormy waves of consolidation while maintaining quality of service,” explained Weekes. “If ISPs really understood what it costs to deliver a dial-up or DSL service to a customer then the pricing in the market would change. Dial-up is not ‘cheap as chips’ – the modem banks, back-haul line, and customer servicing cost about $26 a month per customer. A lot of companies can only get away with $10–$15 a week if people exceed their data cap or if they have a good mix of corporate customers.”14 Like the other ISPs in the market, it was eager to make the most of any determination by the telecommunications commissioner that would improve interconnection rates and wholesale access to Telecom’s network for independent broadband services.

Another pioneering firm, under new management from September 2003, was Ihug, which sold for $81 million to Perth-based Internet provider iiNet. The Australian company was actively placing its equipment into Telstra’s local loop exchanges, and had become the number two DSL provider across the Tasman following unbundling legislation there. This was consummation at last, after several attempts by Ihug management to sell off the company saw it jilted at the aisle. In May 1999 Sky Network Television announced it would take a 30 percent interest in Ihug, with an option to buy a further 15 percent, but the deal fell over due to a disagreement on future directions including, according to one source, the Wood brothers pay packets. Apparently they wanted $500,000 each with ten weeks’ leave.

Another merger proposed with Force Corporation collapsed in 2000.15 The decision by Ihug to lease additional satellite bandwidth as a hedge against the late arrival of the Southern Cross cable had cost it short-term profits and spooked Force Corporation shareholders. In April 2000 when the acquisition was up for approval it was disclosed Ihug now had 220Mbit/sec of international capacity, including 90Mbit/sec for wholesale customers, which had contributed to a projected loss of $2.5 million for the six months to 30 June 2000. Its lease commitments through to 2004 totalled US$33.4 million according to a memorandum sent to Force shareholders, who were warned the commissioning of the Southern Cross cable might lead to a reduction in the cost of international bandwidth.

Ihug’s financial performance had also taken a substantial hit when both Xtra and Clear had introduced flat-rate Internet prices below those offered by Ihug in mid-1999. Outlined in Ihug’s business plans were an intention to purchase smaller Internet-related businesses in both Australia and New Zealand.16

Two days after effectively being rebuffed by Force Corporation, ISP Ihug had taken 51 percent of the 115-store Video Ezy chain, which claimed 35 percent of the local rental market. The deal was part of Ihug’s on-line strategy to allow customers to have a life outside the Internet by ordering goods on-line. Director Tim Wood said it was foundational to its e-mmediate delivery system, an e-commerce fulfilment system where the goods would be delivered to customers within half an hour. Talks were apparently progressing on a number of fronts about what might be delivered. However Wood conceded the video rental business was past its peak and there were many challenges ahead with the arrival of pay-per-view systems and new technology.18 Within a year Video Ezy was sold back to its original owners.

Ihug maintained steady growth in a turbulent market but always seemed to keep a step ahead of its competitors through innovation and sometimes sheer bullishness. At the beginning of 2003 it had around 150,000 customers across Australia and New Zealand and was number three rated ISP in New Zealand. Xtra, ClearNet and Ihug between them had 80–90 percent of the country’s 800,000 Internet users, according to telecommunications analyst Paul Budde.19

The cash component of the deal with iiNet was worth A$30 million, with the balance made up of 24 million iiNet shares at A$1.75 per share to Ihug’s shareholders including the Wood brothers, their father John Wood, Bart Kindt, and CallPlus owner Malcolm Dick. The acquisition revealed, for the first time the size of Ihug’s business. It had been generating annual revenue of A$48 million from its 170,000 customers on both sides of the Tasman, and appeared to be a relatively profitable company, earning A$10.8 million net profit for the June 2003 quarter alone.20

UNDER NEW MANAGEMENT After the sale, a restructure saw Ihug settle into much more of a business focus as a carrier and an ISP, reselling fibre, frame relay, DSL, tolls, and other services. This was a shift away from the eclectic adventures of the entrepreneurial Wood brothers, who had founded the firm in 1995 and always had an eye out for the future, experimenting with pay-per-view video distribution over satellite, e-commerce, and a range of other leading-edge plans, including developing their own set-top box, which never made it to the market.

The new owners were lobbying for unbundling, promising Ihug would ultimately deliver its own service if it was given access to Telecom’s network. Michael Malone, managing director of iiNet, said unbundling had been behind iiNet’s fourfold growth in Australia in 2002–2003 and New Zealand was lagging in broadband. Heading Ihug in New Zealand was former Telecom Company Secretary Martin Wylie, appointed in February 2002 after the departure of the Wood brothers. Two years later Wylie abruptly quit the company just as iiNet reported a profit, and made another acquisition to expand its influence along the east coast of Australia.

Wylie denied rumours of disagreement with Perth based management, saying Ihug had recapitalised ahead of schedule and the merger had left iiNet with the remnants of a head office it no longer needed in Auckland. He’d been brought in to sort out and restructure Ihug. He had also become increasingly vocal about industry issues such as the proposed opening up of Telecom’s networks to competitors. While he was keen to stay in the telecommunications industry he would never reconsider joining Telecom. “Hell will freeze over first. I don’t think I’m flavour of the month at Telecom.” He left iiNet as it announced an A$1.5 million profit for the second half of 2003.21

Although the market had come under significant pressure, with fallout recorded after the free ISPs entered the market to take advantage of cross-carrier interconnection payouts, things appeared to have settled. The big players had taken over or acquired most of the gratis subscribers who realised the free lunch was over. The profit for smaller players was gone, leaving only those with a stronger business focus and diversity of services to pick up the pieces. In 2003, just when it looked as though the ISP market had bottomed out in terms of attractive dial-up rates, another price war broke out.

The move in February by paradise.net to undercut rivals with a revised monthly dial-up plan; 20 hours for $10, 150 hours for $15, and 250 hours for $20, gave the budget market a real shake-up. The deal was topped off with free Web hosting and multiple email accounts. Knowing there was little margin in dial-up access, many saw this as a strategic move to draw residential and low-end business users into the TelstraClear stable. Its ClearNet offerings remained focused on higher-end, more profitable business services. It may also have been a ploy to keep the remaining i4free customers from defecting elsewhere for a better quality of service.22

ACQUISITION TRAIL CONTINUES Among those on the acquisition trail was Orcon Internet, which rated in the top ten of second-tier players and already had an impressive record buying up smaller players including ProHost, Clubnet, Bestnet, Securenet, NZOn-line, AGlobal, Dreramnet, and Wisenet. Among its acquisitions was the iPhone business previously operated by Voyager and MCI Worldcom.

In 1994, while participating in the Fletcher Challenge Young Enterprise Programme at school, Seeby Woodhouse began to harbour ambitious dreams of building a large New Zealand technology company. He drew a visual icon called The Orconagon, which eventually became the company logo, ultimately shortened to Orcon. While at university Woodhouse started Orcon Group, providing computer advice and support, and selling early model cellphones and accessories. The business expanded to include PC upgrade and repair services largely focused on Auckland’s North Shore.

By 1996 it broadened to become a nationwide distributor, and in 1997 Woodhouse launched an ISP with three dial-in 33.6kbit/sec modems at the no-frills end of the market, around half the price of the cheapest competition. It aimed its services at more skilled and technically minded customers, and soon moved into wholesaling Internet capacity for other ISPs. This proved so successful he dropped the hardware services business and put all his energy into the ISP sector.

Orcon Group began developing its own billing system to handle not only its own growing requirements but those of its wholesale ISP customers. This resulted in the iBill system built in conjunction with Mark Mackay, director of Digital Edge. As a result of the obvious synergies, the two firms merged into what became Orcon Internet Limited. By 2002 Orcon was a major player in the residential ISP market. In fact by 1997 it had become New Zealand’s fourth largest Internet provider, with a carrier-class Internet data centre and growth that took it to 80 staff and a 15-fold increase in revenues, according to the company.23 From humble beginnings as a three-modem dial-up player in 1997, Orcon was by 2003 supplying Internet services to hundreds of corporate and business customers and thousands of residential customers, as well as delivering carrier services.24

Another success story of a backyard ISP that made it big is that of Maxnet, which by the end of 2003 had grown from a $35,000-a-year operation in a Warkworth bedroom to one of the five fastest growing companies in New Zealand. Its surprising success was also due to its acquisition of a handful of smaller ISPs, allowing it to provide a full range of access options including DSL, frame relay, and wireless. It had moved quickly into Web and e-commerce development, hosting, co-location, and voice and mobile. Maxnet was founded by 15-year-old Quentin Lake who had been running the start-up ISP from his bedroom after school. With the help of mentor Anthony Urbahn he built the business to a multimillion-dollar enterprise, which gained fifth place in the Deloittes Fast50 awards. In mid-January 2004 it was rated 21st fastest-growing business in the Asia-Pacific region finals.

According to Xtra marketing manager Chris Thompson, the biggest challenge in the growing Internet business was managing complexity. “What used to be a dial-up business is increasingly a mobile and a broadband business with a wide range of customers, from those just starting out to those who want sophisticated solutions.” There’s unlikely to be much of a change in the economics of Internet access with costs as low as $1 a day through some providers, although the differentiator is often what you get with your account, whether its virus protection, spam filtering, music, games, lively and current content, additional email addresses or Web hosting.”

Users were becoming more specific about what they wanted and adjusting their surfing habits accordingly. ‘Power communicators’ were more focused on using the Internet as a business tool, to send email and get information quickly, narrowing their resources to maybe six reliable sites rather than a lot of pointless surfing. Then there were the ‘happy adventurers’ who were less likely to have any purpose or direction, happily downloading MP3s and randomly following links, viewing the Internet as entertainment and an alternative to sitting down in front of the television.25

According to the Ministry of Social Development more than two-thirds of New Zealanders had Internet access at home by 2004, placing us 8th in the OECD. The number of people aged 18 and over with Internet access, had jumped from 36.5 percent in 2000 to 65.1 percent. Asian and other ethnic groups were at the top, their access rate rising from 50.5 percent to 79.6 percent by 2004. The least connected were superannuitants with little secondary income, but that was still well up on the 2001 figures.

Internet access had grown 36.8 percent to 63.1 percent between 2000 and 2004 for Europeans; 26.9 percent to 45.5 percent for Maori, and 11 percent to 39.5 percent for Pacific Islanders. Working age households aged 18–64 with at least one full-time worker increased their access from 42.6 percent to 73.5 percent.26