Whose foot is on the hose?

The number of Internet hosts worldwide rose 67 percent in 1999 to surpass 72.4 million hosts by the end of the year. There were more than 30,000 newsgroups, around 80,000 mailing lists and at least 25,000 Internet relay chat sites where participants can type back and forward to each other in discussion forums. According to the Internet Software Consortium (ISC) New Zealand had the third highest registration rate of Internet hosts per head of population behind Finland and Norway with 271,000 registered domain names. This reflected a registration rate of 7765 per 100,000 people; the third highest in the world, behind Finland and Norway. Internet News, 14 February 2000.[1]

During New Zealand’s formative century governments financed roads and streets, rail networks, universities, schools, a national airline, a health system, banking, postal, and broadcasting networks. It also established electricity and telephone connections to every home.

They’d seen the future and planned ahead; New Zealand exceeded all expectations for a nation of its size and prospered. At the turn of the next century, however, we were still fumbling around with the information revolution as though it was an optional extra rather than an essential social and economic driver.

Major telecommunications companies and investment houses were behind a variety of plans to girdle the globe with gigabit-speed networks, but the two main undersea fibre-optic cables connecting New Zealand to the world were booked up, and there was a growing sense we were being left behind. No technological forecaster or planner had foreseen the exponential uptake of international bandwidth fuelled by the Internet. Local surfing wasn’t necessarily where the backlog was; this was often relatively fast to load. It was the international content New Zealanders spent 70 percent of their time surfing that was proving costly for ISPs who had to pass on those costs.

Telecom had 26 competitors in the voice market but very few in high-speed public data networking and even fewer offering international bandwidth.[2] Satellite transponders into and out of New Zealand were booked out unless you had prior arrangements. In 1999 Telecom admitted its Internet gateway had reached capacity and added an extra satellite circuit to compensate. That move and plans by other major carriers came too late to prevent both official America’s Cup Regatta web sites being hosted offshore and several entrepreneurial web sites relocating their content to the United States.

As a nation of early adopters, New Zealand had aspired to be at the leading edge of the digital age – not forgotten at the bottom of the world, once more lamenting the tyranny of distance. It was clear by now from our rapid Internet uptake and our fast adoption of computing and cellphones that we thrived on any technology that placed our ideas and innovations at light-speed distance from Silicon Valley.

However the cost of international bandwidth to New Zealand was proving to be a massive overhead and many ISPs were desperate to find cheaper alternatives. “Until we get a bulk boost of bandwidth into this country you are going to get a lot of flat-rate providers who can’t provide the needed level of service or reliability,” said Iconz technical manager, Tony Wicks. The options for offshore connections to the bulk of US Internet content were limited: Telecom’s Netgate, Xtra for budget providers, offerings from Telstra and Clear and the pre-booked satellite-based bandwidth.

In July 1999 there were murmurings in Internet newsgroups and from various ISPs that performance at Telecom’s Netgate Internet gateway had taken a dip. One ISP claimed it had only been able to drive data circuits at 60 percent capacity because of overloading. Certainly the latest ISP price wars triggered by Xtra were having a major impact on Internet use. Telecom’s total outbound capacity through Netgate, used by most Internet providers, was only 45Mbit/sec. It admitted through spokesman Glen Sowry that it had been aware for some time there would be capacity issues and had introduced additional satellite capacity from Commsat. Satellite bandwidth was being widely and successfully used by Optus and Telstra in Australia, and Ihug locally, and would be cheaper than terrestrial access for ISPs. “We’re confident satellites can meet the demand,” said Sowry.[3]

Several local ISPs had their own capacity but by far the biggest provider was a family business that had rapidly evolved from running an Internet cafe in downtown Auckland to full Internet service and bandwidth provider to Australia and New Zealand. Ihug supplied bandwidth to about 90 ISPs in Australia claiming an overall capacity of 150Mbit/sec. The Wood brothers had seen the problem coming, claiming Telecom should have been better prepared before offered flat-rate access. Telecom’s move was a knee-jerk reaction to Clear going flat rate. “Flat rate places a significant call on your services,” said director Nick Wood. Ihug had been offering flat-rate access for four years and had built robustness and capacity into its systems.

Entreprenuers go offshore

New Zealand had led the world in bringing in Internet traffic via satellite and making requests for data via undersea cable. While commending the entrepreneurial efforts of some providers, including Ihug, for finding their own solutions, Ramin Marzavini, principal with Sydney-based www.consult, said there was no point in complaining because ISPs knew it was a tough business. “ISPs knew what the costs were before they got into the game and if they find it’s a bad business they should get out of it.”

Marzavini’s company had been monitoring international Internet traffic and use patterns with a probe in Auckland, making 4000 telephone calls per month to determine the performance of local ISPs. While recent complaints suggested New Zealand access speeds were half those in the United States he said, performance was actually only 10 percent slower. That’s primarily because of the amount of cable, the number of connections between here and the United States and the practices of some ISPs. He claimed some were putting ‘a collar on dial-up access to control maximum speed to the United States. Xtra in particular skewed the download statistics because it limited the speed at which its users could download US files, he said.[4]

Having cut their teeth on dial-up speeds, New Zealanders were looking for the next level of experience beyond the worldwide wait, according to Sydney-based telecommunications consultant Paul Budde, who confirmed high-speed Internet access was definitely the next wave. “Approximately 20-25 percent of commercial Internet users were willing to spend between $15 and $30 extra for higher speed access.

Typically the service was around $100 a month when it is first offered but you only get 1-3 percent penetration. When it gets down to $30 a month you will get 20-25 percent penetration. People want high-speed access and they don’t care how they get it, but it must be at the right price,” said Budde. Wholesale prices for Internet bandwidth were coming down and that was a major factor, particularly for the international backbones, which still took 80 percent of the traffic from Australia and New Zealand. The next step was to ensure those savings didn’t go direct to the pockets of carriers and ISPs but were passed on to users.[5]

Inspired by all the talk about multimedia integration and information superhighways,s Kiwi innovators were developing software and systems that led the world. But they soon realised the essential infostructure they had been promised hadn’t kept pace with the hype. Craig Meek, managing director of Auckland multimedia developer Terabyte, was convinced a lack of international bandwidth was stifling the use of new media applications and the growth of e-commerce. He likened the situation to having a high-pressure hose inside the country and only a garden hose going out. Terabyte was attempting to trial its breakthrough technology for the Louis Vuitton Challenger Series web site and media centre in mid-1999. It was surprised to discover the maximum outbound traffic New Zealand could handle was no greater than 100Mbit/sec for the whole country – not much more than many business networks. Gigabit per second speeds were required if servers in New Zealand were to handle the millions of hits generated by such a major event as the America’s Cup Regatta.

Scott Mathais, managing director of the Parnell-based ITVworld.com (formerly Matcom), had become frustrated with trying to operate a new media business in New Zealand. The company, which provided a streaming-video news magazine on technology issues, had 40,000 viewers a month and was planning an exit to Sydney. He warned businesses intending to use a lot of video or audio content on their Web pages to host their sites offshore to avoid New Zealand’s bandwidth bottleneck. He said New Zealand Internet consumers were being held over a barrel, and if the country didn’t act quickly it would never catch up. “New Zealand is an impoverished and undernourished Internet community because of what hasn’t come of Wellington. We’re dealing with people in the United States who have larger pipes than the whole of New Zealand. We have a controlled situation here where the key players are extracting as much as they can from the Internet community.” Ironically his company was handling content for a number of export-based web sites including the New Zealand Tourism Board.[6]

Bruce Simpson, creator of the 7am.com and Aardvark news sites, had already moved his sites to the United States simply because there wasn’t enough capacity to cope with the demand for his content. “Because high traffic means high cost, the USA became the only way to stay in business.” Simpson claimed there wasn’t sufficient bandwidth to support early-evening Internet use, while the industry continued to grow at a frantic pace. “I fear we may have a real Internet Y2K problem on Jan 1, 2000, not because of bugs in the software, but simply because our pipes are too small.” As well as the usual surge of traffic from new PC owners going on line at Christmas, “every man and his dog from all corners of the globe will try to tune into the various Web-cams around New Zealand at sites set up to promote our ‘first into the new millennium’ status.”[7]

Escape routes jammed

Indeed what would happen as global interest increasingly focused here through the America’s Cup, and the fact we were about to become the world’s lab rat as the zeroes joined up at the end of 1999? This was the logical location to determine whether the Y2K domino effect had begun.

Telecom, roundly criticised in the past for failing to invest in its infrastructure, seemed to be waking up to the dilemma and instead of short-term solutions was beginning to look at the long-term picture. It had targeted $750 million for upgrading and extending its network, including $160 million for new international links to help clear the traffic jams. Its 50 percent shareholding (along with MCI WorldCom and Cable & Wireless Optus) in the 29,000km Southern Cross cable due to come on line from January 2000 was enough to promote a glimmer of confidence with a potential 200Gbit/sec capacity between Australia, New Zealand and on to Hawaii and California. However Southern Cross, first announced in 1998, wasn’t due to go live until just ahead of the 2000 Sydney Olympics.

Clear Communications had its own Internet gateway, the Clear Internet Exchange, and a relationship with Telstra to handle all Australian-bound traffic as a back-up if it needed to re-route traffic. Late in 1999 it had about 40Mb of international capacity into the country and had signed off on an extra 4Mbit/sec for outbound traffic, including cable and a deal with Intelsat for satellite capacity. Clear had a fibre-optic loop around the country but still needed to link through Telecom to get the majority of its telephone customers talking to each other.

Telstra was a shareholder in both Tasman 2 and PacRim East cables; it had less than 100Mbit/sec and opted not to buy into the Southern Cross cable. Voyager, now wholly owned by MCI Worldcom, the world’s largest Internet backbone provider, had satellite capacity to spare and access to the Southern Cross cable. TVNZ had discussed accessing its own international data circuits for pay-per-view streaming video over the Internet from its web site. However it had backed off in case it contributed to further overloading of the national backbone and Internet gateway. Wholly owned subsidiary, infrastructure company BCL, obviously had access, but it wasn’t keen to make this available beyond meeting the needs of its parent.

Telecom continued to increase bandwidth at its Internet gateway and ultimately replaced NZGate with an international IP service known as the Telecom Global Gateway, including Usenet newsfeeds and secondary domain name servers, which would also be made available in Australia. The new ‘gate’ would have nodes in Los Angeles, Palo Alto, and Auckland. IP routing would be handled by Cisco GSR 12,000 routers.

By March 2000 NUA Network Surveys claimed 304.3 million people around the world were now surfing the Internet; around 5 percent of the global population, including about 70 million in Asia-Pacific.

Alongside Singapore, New Zealand had the highest user ratio in the region. By May there were more than 80 million domain names, or unique Internet addresses. The Internet Software Consortium said New Zealand had 271,000 of those; the third-highest per head of population behind Finland and Norway. With traffic doubling every 100 days, IDC Research was predicting 500 million people, or 11 percent of the world, would be on-line by 2003. The Web featured over six billion pages of information.[8]

As laser-light-speed communications criss-crossed the globe like a skein of wool, the demand for bandwidth was skyrocketing around the world. Despite patchwork efforts to keep ahead of the curve, demand continued to outstrip New Zealand’s infostructure capability. By mid-2000 close to 50 percent of New Zealanders were estimated to have Internet access and there was still no sign of the Southern Cross cable. According to Ovum research, broadband Internet capacity was expected to grow 100 percent a year to 2006. In the United States domestic broadband access, 2Mbit/sec and upwards, was a mainstream social phenomenon and the government was determined to keep pushing the boundaries. Michael Butcher, the president of international operations for leading equipment supplier Lucent, said more than US$1 trillion would be spent creating the telecommunications environment of the 21st century. He estimated NZ$446 billion of that had already been spent in 2000, much of it on submarine cables.

Telstra’s Millennium Network, a robust 2.5Gbits/sec fibre-optic ring for video, audio, data, phone, fax, and mobile services, had already spread from Sydney across Australia using enough cable to circle the earth 37 times. However when Bill Gates visited Australia in September he was disappointed at the slow roll-out of high-volume, low-cost communications and surprised at the lack of broadband initiatives. He warned lack of high-speed Internet access could leave smaller nations in a permanent backwater. If he thought Australia was slack, Gates would have been appalled at the digital divide already evident in New Zealand. Although Clear, Telecom, Telstra Saturn, and 20 or so competitors were planning to spend $4 billion between 2000 and 2003, they were mainly focusing on the CBDs. Those who had, were about to get more.[9]

Capacity concerns continue

As expected, Southern Cross was a waiting game. It had faced its share of challenges since it was commissioned and needed to be repaired three times, including in 2000 when a Russian ship dragged its anchor at the entrance to the Sydney Harbour and cut the cable.[10] The $2 billion cable was expected to meet New Zealand’s international communications needs for at least two to three years, delivering a 120-fold increase in bandwidth capacity – enough to transfer a 780-metre-high stack of typed documents or two full-length motion pictures every second.

Despite capacity concerns, Southern Cross couldn’t have arrived too soon. It began to restore confidence to those trying to compete in data services, and the larger ISPs, who were rapidly learning that to survive they must provide much more than dial-up and fast Internet. They needed to reinvent themselves as carriers with a range of services that could cope with the convergence of voice, data, and video with robust billing, Web development skills, Web hosting, on-line software rental, e-commerce services, and attractive content to keep customers coming back.

The first commercial traffic began to flow from 15 November 2000. Shortly after the cable came ashore at Takapuna Beach near Auckland, it was clear the allocated 40Gbit/sec capacity was insufficient to meet the nation’s growing needs. Upgrades were planned early in 2001 and towards the end of the year, to extract the full design capability of 120Gbit/sec. Further growth in demand would mean the cable’s capacity had to double by early 2003 using dense wave division multiplexing (DWDM) technology. Of course 50 percent owner of the Southern Cross cable, Telecom, made the most of the capacity from day one, which is largely why it was virtually booked out.

The market was getting tougher. The number of ISPs had dropped to around 60, with 20 or so having failed in the 18 months to the end of 2000 while others had merged or been acquired. Only those who were cash rich and technically geared for growth would survive the pressures ahead. Those pressures included the new wave of entry-level users who had been enticed onto the Internet by the free ISPs who had sucked all the profit out of low-end dial-up access and email. And Telecom hadn’t softened its stance on competitors now that rival ISPs were definitely in that category.

David Dix, founder of KC Internet Services, had brought considerable business Telecom’s way as he on-sold his technology services supporting other ISPs and set up Internet access for businesses. In 2000 he found the once-helpful Telecom machine was no longer co-operative. “We’d order Telecom services on behalf of a customer and then Telecom would go direct and offer them a bundled deal. We realised that even though we were getting Telecom a lot of business they had no loyalty to us. We constantly complained but they didn’t give a damn,” he said.

He swapped to Telstra and initially found it had better business ethics until its management changed to include ‘fast business guys’ and the co-operation vanished. “Netway, a Telecom subsidiary, always tried to tie us down to fixed-price, long-term contracts but anyone who tied themselves down to a year capacity needed their head tested. Someone else always brings on a few more gigabytes of bandwidth. I remember when we were paying $72,000 a month for 512kbit/sec of international capacity from Telstra in 1999. A couple of years later you could buy that capacity for $1500 a month.”

Between June and December 2000 data traffic on Telecom’s network was going through the roof. According to Simon Moutter, Telecom’s network group general manager, Internet traffic was growing at 75 percent year on year and other data traffic, mainly business based, was increasing 64 percent annually.[11] Web surfers were no longer satisfied with simple text and a smattering of images – they wanted the whole multimedia experience including fat graphics, moving images, and sound. The Internet had become the conduit to download an endless array of software, streaming audio, MP3 music files, and video clips.

The transition to more complex content was becoming too much for even the 56kbits/sec dial-up limits of high-end modems. On-line shopping meant catalogues, credit card authentication, and security, all of which were driving greater demand for broadband services.

Initial high-speed Internet options had been too costly for most home users or even small businesses, but as prices came down demand for speedier accounts was escalating, reigniting concerns about access to the local loop. Clear in particular was concerned there had been no provision in the Telecommunications Inquiry for unbundling the local loop, an issue it considered pivotal for the delivery of competitive DSL services. The Inquiry had required Telecom to make DSL available at a wholesale rate to its competitors. It had already agreed to deliver DSL access to Clear, but there would only be a 7 percent margin for it to carve out a business. Unless Clear had equitable access to the local loop it would stay out of the domestic market.

Clear fails to deliver

Meanwhile Clear had to sort out some of its own dirty laundry. Network failures and slack accounting practices dating back a couple of years were coming back to haunt it. In 1996 marketing and business consultant Simon Riley, Actrix founder John Vorstermans, Iprolink founder Craig Anderson, and Robert Hunt of Plain Communications formed Pronet, an alternative frame-relay-based Internet backbone to deliver alternative backbone bandwidth across the country. Pronet had points of presence in Auckland, Napier, Palmerston North, Nelson, Christchurch and Dunedin, servicing ISPs and corporate customers.

“Telecom’s Xtra had just come into the market with a big splash and ISPs were already going through a major growth phase so the question was, how are all these guys going to stay in business?” said Riley. Through its overall buying power and the exemplary IPNetworking skills of Craig Anderson, Pronet offered more control over the wholesale national and international bandwidth links. From around 1997 the company began to deal exclusively with Clear; in fact it soon became one of Clear’s biggest customers. “Clear realised it couldn’t get into a price war with Telecom and while offering us the same price, we knew they would at least try harder for us,” said Riley.

In the end Clear’s failure to deliver on its contractual promises of quality of service put Pronet out of business. “They had a series of major outages, not just for hours but for days over a period of about two months which put a lot of people at risk. All our upstream customers were saying, ‘We can’t live with this.’” Pronet was forced to shut down and ended up suing Clear Communications in the High Court in August 2001. “The impact on our business would have been very difficult to recover. It was a bit like an airline strike when all the pilots go on strike; you never get that business back,” said Riley. Pronet won its lawsuit but Clear had counter sued, both results cancelling each other out.

In fact the three-week trial ended up being something of a case study for the industry, with several law firms and consultants citing the judgement in public presentations as a warning against bad business practices. Pronet sued for $4.6 million but “Clear was fortunate that the judge could wade through lousy pre-contract and contract paperwork and limit liability to $99,000,” said barristers and solicitors Wigley & Company. In its contract Clear had promised Pronet 99.8 percent availability measured over 90 days. In the end it was revealed Clear had not taken reasonable efforts to provide a high-quality, reliable service.

The only thing saving Clear from having to pay the full amount was its contractual limitation on liability. “The judge had quickly concluded that reduced performance was enough for there to be ‘unavailability’… packet loss, slow service and increased error rate meant the service was unavailable even though traffic could get through,” said Wigley & Company. Clear was looking to counter sue for $250,000 arrears in fees in its defence of the case. “Poor paperwork can create unnecessary problems for defensive debt recovery.”[12]

Meanwhile in his ‘Telecommunications and Information Highways 2000’ report, Paul Budde insisted Telecom had again been under-investing and infrastructure in New Zealand was not sufficient to meet the government’s dream of taking the country into the frontline of the global e-economy. He said, there was an unmet demand for affordable high-speed access with 20–25 percent in the residential Internet market and 80 percent in the business Internet market requiring such services now. He suggested Telecom’s monopoly was likely to continue until 2006 largely due to the government’s failure to open up the local loop to competition.[13]

TUANZ chief executive Ernie Newman said proper competition had not been allowed to emerge because the of the sheer size, and power of the incumbent’s local network, in particular the local loop, which had deterred new entrants and the emergence of full competition. “Certainly it has slowed down Saturn’s development of the market, kept Telstra back through the carrier re-billing issues of 1999, and after ten years Clear is a shadow of what it might have been if it had been able to enter the market with a level playing field,” he said.

Newman was adamant that urgent action was needed on full local loop unbundling (LLU). “Wholesaling is simply a rebranding, an accounting convenience. It won’t create a situation where there is maximum opportunity for new technologies to emerge. With unbundling a new entrant can directly attach its equipment to Telecom’s lines.” With wholesaling, he said, the entire roll-out decision of broadband was in the hands of one company which had a lot of competing priorities for its capital expenditure programme both locally and offshore. “If they are not facing competition on the local loop why would they give priority to investing in that area?”[14]

Meanwhile Telecom, which had led the world by running its IPNet parallel to its existing public switched network, was at last looking to move its own network into the 21st century. It had been investing about $500 million a year on the network with capital expenditure focused heavily on its data business. Now it claimed it was finally making an effort to replace its NEC NEAX exchanges, which had been struggling for years to cope with voice traffic, ISDN, and dial-in Internet. Other investments in the heart of its network were geared to benefit its more lucrative customers. In early 2001 it was upgrading its core ATM backbone network with a multimillion-dollar investment in new switches and management software to ensure greater robustness for larger corporate customers. The core network was being boosted to provide ‘carrier class’ IP traffic to meet the growing demand for dedicated 2Mbit/sec circuits and frame-relay services.

Telecom was spending up to $20 million on ‘rehabilitating’ the rest of its network by either replacing or upgrading copper in rural and other areas where there were coverage issues. It had plans to extend its JetStream DSL offerings for home users and small to medium businesses. By March 2001 it had around 12,000 customers, with the service available at 82 exchanges and within the reach of 700,000 subscribers. Once it sorted out its billing problems it would be able to comply with Telecommunications Inquiry requirements that it offer wholesale DSL to other providers. Clear was already piloting its DSL service using Telecom’s lines, with manual billing until Telecom got its automated billing system together.

On the fence

The arrival of the Southern Cross cable and Telecom’s commitment to improving its core communications meant the focus was back on the local and not-so-local loop. While the Internet was helping to close the gap between New Zealand and the rest of the world it had also opened up a new kind of distance between town and country, rich and poor and those with and without fast Internet.

There was little evidence anyone was making a halfway decent attempt at providing high-speed Internet to ‘unprofitable’ outlying suburbs, small towns, or the rural sector. Even so-called competitors preferred to cherry-pick the CBDs and high-growth areas. Telecom had admitted to the Telecommunications Inquiry that it had under-invested in its network, and agreed to make further investment to achieve a minimum of 9.6–14.4kbit/sec speeds for outlying and rural areas. This would require at least $100 million. Ironically the generally accepted Internet access speed at the time was 33kbit/sec, but ensuring everyone got that speed, Telecom said, would cost it $550 million.

It wanted proof that its lines weren’t up to scratch and was now complaining that conforming to the Kiwi Share agreement, to continue supplying free calling to residential New Zealand, had cost it around $186 million to December 2000 – $18.7 million more than for the previous year. It claimed an increasing number of residential customers were costing it money, largely due to Internet use. It alleged 471,000 customers were costing it $400 each in rural areas and places where there was a high cost for upkeep of the network. Under the new legislation before parliament, Telecom’s competitors could be liable for one-quarter of any losses sustained through the Kiwi Share agreement.[15]

If there had been any real substance in the hype of the past decade New Zealanders would by now be fierce competitors in the knowledge economy, regardless of whether they operated from a Queen Street high rise, a rural home office in Oamaru, tucked away in the bush at Coromandel, or a bach at Piha. Overall investment in telecommunications in New Zealand had been below the OECD average for most of the decade – virtually stagnating in 1999 at 1 percent growth compared with the international average of 7–9 percent. Close to $5 billion had been invested in the telecommunications market since deregulation but little had been done to decentralise the benefits. Neither of the major carriers had plans to move beyond high-density domestic, commercial, and industrial areas. The same applied to wireless providers and several independent wholesalers who now had their own CBD fibre. Telecom still dominated and fiercely protected the last mile of copper to the majority of homes and businesses.[16]

Grass-roots shock

Concerns about the rural sector being left out were highlighted in the July 2000 ‘Telecommunications Use, Constraints and Potential in Rural Areas’ survey commissioned by the Ministry of Agriculture and Forestry (MAF). Problems ranged from the inability to get calls through to the lack of knowledge displayed by operators in locating callers geographically, which was even resulting in emergency vehicles responding to 111 calls being sent to the wrong address.

The survey of 150,000 rural delivery addresses had a 20 percent response rate and of those 99 percent had landlines, 70 percent cellphones, and 61 percent computers. The report said people using the 111 service reported problems ranging from exchange overloading, which prevented calls being connected, through to poor cellphone coverage. More than half of rural phone users reported line problems, disconnection during Internet calls, noisy lines, and exchange overloading. MAF said the problems related to the centralisation of emergency services as well as telecommunications issues. The report said it was difficult to see how the rural sector could be adequately serviced for Internet access without access speeds of 33kbit/sec over the next two–five years.[17]

The primary sector – providing 67 percent of our exports – was attempting to embrace e-commerce and on-line activity, but its biggest challenge, said Communications Minister Paul Swain, was telecommunications. “The suggestion that electric fences are preventing farmers from accessing their email is not a good image of the new economy.” He was responding to Telecom’s claim that New Zealand’s high use of electric fences in the farming community was contributing to poor line quality in rural areas, making it impossible for many locations to access the Internet at anywhere near decent speeds. This was tantamount to blaming the farmers for poor Internet access because they hadn’t been weeding under their electric fences.

A special working group of Federated Farmers, fence manufacturers and of course Telecom, began developing guidelines and embarked on an 18-month education campaign. The official brochure, the ‘Five-Step Electric Fence Check,’ said poorly installed or maintained fences could cause loud clicks on phone lines or greatly reduce the speed and reliability of dial-up Internet connections. Poor layout and tall grass apparently caused fences to earth and arc up the telephone lines. While these preventative measures might improve speed and reliability, it was certainly a poor substitute for replacing or upgrading corroded copper and inefficient insulators. Meanwhile many rural customers continued to experience congestion and line-quality problems, with many unable to get Internet at all.

Heartland initiatives

Fortunately there were more practical, innovative, and forward-looking solutions on the horizon to drag provincial New Zealand from the world of the crank-handle phone into the modern age. Paul Swain’s long awaited ‘broadband for everyone’ vision was finally taking shape, even if he was simply tapping into existing resources and waking up communities to their do-it-yourself heritage. He promised equitable broadband access across the nation by 2003.

TVNZ-owned distribution arm BCL would provide wireless interconnection to all carriers to help bridge the digital divide. Its technology would be upgraded and new broadcast towers added to ensure maximum coverage. Swain said he would tell government agencies to pool their communications budgets in conjunction with local industry to force a better deal from the nation’s carriers. The government would invest $300,000 so Northland, Southland, Taranaki, Wairarapa, South Waikato, and East Cape could assess their needs and start bargaining.

New radio frequencies would be auctioned, with up to 20 percent designated for needy areas. Communities able to attract and supply better coverage might even be eligible for Kiwi Share rebates. The solution might be a mix ’n match of copper, fibre, satellite, and wireless, ensuring speeds of at least 128kbit/sec. It was a ‘user pays’ affair, but at least it got beyond the 9600kbit/sec involuntary speed limit, likely to remain common until Telecom was forced to upgrade its network within a year of the Telecommunications Bill passing into law.

Not long before Telecom had been talking about exiting ‘loss-making’ rural areas, but now it had decided to stay in the game. It knew competition was emerging and of course government funding was now available, so it would continue to play the game as though it owned the field. There were options, it said, to boost coverage to 150,000 disadvantaged rural customers – including 66,000 farmers and 10,000 businesses – but not without a commercial return. Copper-enhancing DSL, satellite, its new-generation cellular network and wireless could do the job but Telecom claimed it would cost between five and fourty times more to reach remote customers than city folk. A guarantee of 50 DSL users within 6km of an exchange was the benchmark for an upgrade.[18]

Communities fed up with being ignored by carriers were exercising their collective might. The Otago Community Trust was underwriting upgrades at Telecom exchanges; for every 320 customers signed up Telecom would pay back a portion of the cost. Tuatapere School in Southland couldn’t get decent bandwidth to Christchurch so the community built a third tower. And mega-dairy conglomerate Fonterra was talking with telcos and the rural community about poor Internet access with a view to maximising its own resources and possibly offering nationwide bandwidth. John Pask of Federated Farmers welcomed the broadband initiatives with caution: “People have been promising these sorts of things for three or fours years. Until it happens I think people will remain a bit sceptical.”

One relief plan backed by Federated Farmers had been at a stalemate for eight months, with Telecom refusing Timaru ISP Bay City Internet access to its rural exchanges. The ISP wanted to trial Ericsson’s copper-enhancing Home Internet Solution, enabling data speeds up to 128kbit/sec (soon 512kbit/sec) within 20km of an exchange. In the cities and some suburbs electrical authorities were beginning to diversify and put in their own fibre, while independent carriers such as Wellington’s CityLink and the new generation of wireless and satellite players were doing their bit to help close the gap. Saturn Communications had broken Telecom’s hold in Wellington with a full service including cable TV, telephone, and fast Internet access. It had made such an impression that Australian carrier Telstra decided to partner with it to extend that network across the country. TelstraSaturn’s Chello fast Internet service included line rental and 512kbit/sec Internet for $110 per month. For another $25 you could receive 20 channels of pay TV.

TelstraSaturn and Clear were both partnering with Vodafone for mobile services and forging alliances with wireless providers to extend their coverage, and there was a new level of co-operation between academia, business, and local authorities to establish alternative access in some regions. These were encouraging signs.

The broadband backblocks

At the end of 2001 statistics suggested around 60 percent of New Zealanders now had Internet access, and moving up to broadband for a richer content experience and easier use of complex services was top of mind.

According to a report by Multimedia Research Group, the number of broadband users worldwide was expected to reach around 15 million, doubling to more than 30 million by 2004. However that option remained untried by most New Zealanders. The manager of the Southern Cross cable system linking us to the United States and Australia said while a lot of cable capacity had been purchased, its use remained sluggish. Ross Pfeffer said poor marketing and high pricing from the major carriers had kept broadband ‘the world’s best-kept secret.’

New Zealand rated only 16th among 30 OECD nations in the 2001 ‘Development of Broadband Access’ report, largely due to lack of competition and high costs. At the start of the year we had only 0.27 broadband subscribers per 100 inhabitants compared with South Korea at 9.2, Canada with 4.54, the United States at 2.25 and Austria at 1.7. The report said governments must promote competition by opening the networks of dominant telcos to competitive forces through LLU or line sharing. New Zealand was singled out as one of four countries that hadn’t passed laws requiring this. Telecom still dominated the fast market with its JetStream service running at speeds of between 256kbit/sec and 6Mbit/sec with 400Mb and 600Mb data caps; users paid 20 cents per Mb for any excess data use. A flat-rate JetStart service with a speed limit of 128kbit/sec was also offered. Telecom had signed up around 22,000 DSL subscribers, 39 percent of them residential customers. DSL was now available at 110 exchanges and 30 ISPs were reselling Telecom’s service.

Clear Communications was offering its own DSL service in some parts of the country but TelstraSaturn’s high-speed cable offering had failed to reach beyond Wellington and Christchurch. Clear had a number of business-based wireless offerings. For domestic users the only other alternatives were Ihug’s wireless and satellite accounts and Waverider accounts from Walker Wireless, which was bullishly talking about coverage of 70 percent of the population by 2004. Users were paying $70–$100 per month for a fast Internet service including modem rental and ISP access. Efforts by Paul Swain to have competing providers, including TVNZ-owned BCL, deliver broadband access for all New Zealanders, including ‘farmers down lonely roads’ by the unlikely deadline of the end of 2003, still awaited a viable business plan.[19]

The great dream of high-speed telecommunications closing the gaps between town and country and the major cities was fading by the day, while the government commissioned endless reports but remained on the sideline. While Paul Swain had suggested bold targets to accelerate the spread of high-speed Internet to outlying areas, Treasury stepped in with the surprising suggestion that New Zealand should abandon rural areas and small towns and focus on making our major cities more competitive with Sydney and New York.

Faster Internet access was pivotal for progressive nations to participate in the next economy of interactive e-commerce and a media-rich Web. While Telecom had promised the government it would upgrade its aging network to ensure 14.4kbit/sec access speeds across the nation within a year, the Australian Government had pledged broadband access for all homes and businesses, and was rapidly moving to implement local loop unbundling. Telstra was promising to upgrade all its lines to enable minimum access speeds of 19.2kbit/sec.

New Zealand was being slammed for the high cost of broadband access and its use of metered rather than unlimited monthly access charges used in most OECD countries. Telecom’s flat rate 128kbps JetStart, ranked 29th out of 35 OECD offerings, fell below the 256kbit/sec threshold considered to be broadband.[20] The company’s claims that unbundling might discourage investment in new infrastructure were also being questioned.

Fading vision

Swain’s scheme to get us all within reach of broadband by 2003 was admirable, but he was still up against the free market where nothing was for free. Having government agencies pool resources to leverage a better telecommunications deal for themselves and local communities was a great suggestion, but he needed to remember government agencies had been retreating from rural areas and smaller townships for some years. The local dole office, hospitals, post office, and police station were no longer a given in small towns, and the local library probably couldn’t afford subscriptions to basic magazines, let alone high-speed Internet. That left schools and the agricultural industry at the hub of the rural information society. Breaking existing commercial contracts with Telecom and Clear to pool resources would also prove difficult. Perhaps more local authorities should have taken a closer look at section 657 of the Local Government Act, which allowed them to contract for the provision of telephones and telephone lines and pay for it through the general rate.

In 2001 residents at Piha beach on Waitakere City’s west coast were justifiably frustrated by a Telecom advertisement filmed in their community, showing a businesswoman teleconferencing from her laptop while her husband painted her toenails under the table. Who were these people? If you lived in Piha you would have known that it was hard enough with exchange overloading to get a second line for a fax let alone access to fast Internet or videoconferencing. Telecom insisted the location for the advert was entirely hypothetical. Ironically the home used for the film shoot was owned by millionaire art patron Jenny Gibbs, whose husband Alan Gibbs had been involved in the privatisation of Telecom.[21]

It was becoming obvious that real competition for the average subscriber could not happen in any substantial way while Telecom remained the wholesaler of services to all other carriers. The deadline for Swain’s ‘broadband for everyone’ initiative continued to slip, with the claim there would be no government money invested or a review of local loop unbundling until at least 2003. Meanwhile Telecom was in full-blown competitive mode, slashing monthly line charges in Wellington and Christchurch, the only places where it was facing serious competition from TelstraSaturn. Telecom began bundling Sky TV with its voice and Internet services. In Christchurch, in particular, competition seemed to be working as prices edged downwards.

So what had happened to the magnanimous billion-dollar announcement at the end of 1999 that TelstraSaturn would cable the country and significantly expand its residential and broadband services? Financially troubled partner Austar didn’t have the resources to make much of a contribution so Telstra had slowed its own investment in local infrastructure and was looking for another partner to make good on its promises. Then TelstraSaturn made its move, paying British Telecom $435 million for a majority shareholding in Clear Communications, including $270 million in debt. The company, which was halfway through its $200 million high-speed cable roll-out in Christchurch, immediately froze the project with the loss of 150 jobs.[22] The takeover initially appeared to be good news, with the likely outcome that the acquisition would accelerate plans for a leading-edge competitive network. In the past both companies had come up against the unmovable might of Telecom. Together and rebranded as TelstraClear you might imagine big battle plans, sinister strategies and rapid roll-out were the order of the day.

The Overseas Investment Commission (OIC) wasn’t concerned that the two main market competitors were joining forces; in fact it seemed to welcome the decision:

The Commerce Commission investigated the takeover but found nothing to prevent it, simply outlining its assets and ownership structure and stamping its approval.[23] A report from Merrill Lynch Australia, however, warned the takeover would reduce competition, leading to the loss of 500 jobs from the combined company’s workforce of approximately 1700 and higher prices for consumers. It would create a “duopoly fixed network telecomms structure in New Zealand for all but certain CBD areas where other fibre has been laid.” Telecom would benefit: “TelstraSaturn and Telecom NZ should experience some benefits from a reduction in general competition levels and pricing pressures across long distance voice, Internet, and mobile services.”[24]

Indeed it had been too good to be true. TelstraClear would refocus on the easy money, rationalise investment, prepare for major redundancies, and begin cosying up to its nemesis. It boasted that it expected annual savings of about $100 million in capital expenditure and $50 million in operational savings by combining the businesses, including the sacking of hundreds of staff. That didn’t sound like an aggressive competitor about to leverage the expertise of a major acquisition and make good on the $1.7 billion combined investment already made in the local market. The grand plans forged only two years previously for a massive full-service business and residential network to compete against the largely unchallenged might of Telecom had been downgraded to a friendly duopoly.[25]

TelstraClear would renew its focus on core services for the business community and strike wholesale agreements to on-sell Telecom services to bridge the gaps in its two networks. Early in 2002 it tried to reassure the market of its ongoing commitment to a domestic network, but the completion of the Christchurch phase remained on hold. Its Auckland roll-out was a year behind and it was uncertain of the timeframe for other centres. It was doubtful its planned nationwide coverage would be achieved by 2004, or if TelstraClear would ever live up to its promises to provide independent access to the majority of businesses and residences.

Meanwhile Telecom continued to diversify as a formidable trans-Tasman carrier, raising questions about its commitment and investment on its home patch. Despite gross earnings of $537 million for 2001 – $17 million up on 2000 – Telecom was concerned about eroding profits and slashed $200 million of its proposed $1.1 billion capital expenditure for 2002. It was hoping to reap an extra $26 million annually through residential line rental increases (up $1.71–$38.05 a month) although in Wellington and Christchurch where it faced direct competition from TelstraClear there would be a discount. Again Telecom blamed Internet use for its need to raise prices, saying its Kiwi Share obligations left no alternative. It claimed free domestic calls were costing it $180 million a year and it had already spent $119 million in the past three years upgrading the local network.

The New Zealand telecommunications market was worth about $4.1 billion in the 2000–2001 year and expected to grow rapidly to $5–$6 billion by 2005, according to Telstra International president Dick Simpson. Australian telecommunications researcher Paul Budde was even more bullish, predicting market growth to $15 billion within a decade. Investing in high-speed infrastructure to service the main centres, suburbs, towns and provinces was essential for New Zealand’s competitiveness, prosperity, and well-being. This required long-term thinking and planning. However greedy boards of directors demanding an instant return on investment were doing themselves, their customers, and the nation a major disservice.


writing services

[1] David Legard, Internet News, Singapore, 14 February 2000

[2] Keith Newman, ‘Last mile “green out”,’ Metro magazine, October 1998

[3] NZ Herald, July 1999

[4] NZ Herald, 7 November 1998

[5] Keith Newman, ‘Bandwidth battle begins,’ TUANZ Topics, July 1999

[6] NZ Herald articles and interviews with Keith Newman, August 99

[7] ‘Cup, Apec, New Year threat to NZ pipes,’ NZ Herald and personal interviews with Keith Newman circa July 1999

[8] Keith Newman, ‘Anarchy rules,’ Metro, July 2000

[9] Keith Newman, ‘Access Denied,’ Metro, November 2000

[10] Manufacturing faults showed up in the Southern Cross cable in 2002 and 2004, which were covered under warranty but caused sections of the cable to be dredged up and replaced

[11] Keith Newman, ‘Data Use Forces Upgrades,’ NZInternet.com, March 2001

[12] Wigley & Company paper presented to New Zealand computer society, The Law of IT seminar, October 2002

[13] NZInternet.com, November 2000

[14] NZInternet.com, November 2000

[15] NZInternet.com, November 2000

[16] Keith Newman, ‘Choking on Broadband Hype,’ NZ Business Times, 13 July 2001

[17] ‘Telecommunications Use, Constraints and Potential In rural Areas report,’ Ministry of Agriculture and Fisheries, July 2000

[18] Keith Newman, ‘No Time To Sit On The Fence,’ NZ Business Times, 19 October 2001

[19] Keith Newman, ‘Beefing Up Your Bandwidth,’ Home Technology, November 2001

[20] OECD 2001 ‘Development of Broadband Access’ report

[21] Ironically Gibbs vented her frustration in the media at not being able to access Telecom’s DSL service in January 2007 despite living in Paritai Drive, one of the wealthiest streets in New Zealand. As for the Piha episode Telecom announced on 15 September 2003 that 77 percent of Piha residents could finally get DSL

[22] Review of Christchurch cable, Christchurch Press, 16 November 2001

[23] Commerce Commission report number 447 on TelstraSaturn’s acquisition of Clear Communications, 7 December 2001

[24] ‘Clear under Telstra: Higher prices, job cuts,’ The Independent, 31 October 2001

[25] Keith Newman, ‘Lazy Telcos Hold Us To Ransom,’ NZ Business Times, February 2002