Editorial: Two telco ventures

Why did Pacific Fibre fail and 2degrees succeed?

Why did a group of the country’s most prominent business people fail in their bid to build an international telecommunications cable, when an unknown stock market trader succeeded in getting a third mobile network launched?

This question occurred to me while waiting at a traffic intersection, contemplating the latest 2degrees billboard: “We didn’t break up a duopoly. You did.”

‘Really?’ I was thinking, “It was Tex Edwards who broke the mobile duopoly by founding a third mobile network.’ So why did he succeed where business luminaries such as Sam Morgan, Rod Drury, David Kirk and Stephen Tindall sunk $6 million into an abandoned cable project?

Pacific Fibre failed because it didn’t attract overseas investment. Having built successful businesses the directors may have thought that creating a viable product (signing suppliers, starting technical work on the cable) and acquiring potential users (Pacific Fibre had customer contracts worth $200 million) was the route to success. Although the choice of Mark Rushworth for CEO was a good one as the companies he’d previously worked for, iiNet and Vodafone, signed on as customers, he wasn’t able to convince the bankers.

The 2degrees experience is very different. Edwards helped secure $250 million in funding for 2degrees (and only a small percentage of it was his own), before a single customer was signed. Trilogy International, owned by billionaire John Stanton, has a 58 percent shareholding in the company. Stanton made his money buying rural telco licences in the US in the late 1970s and early 1980s.

Then he started challenging duopoly mobile networks around the US, before taking his business model overseas. Stanton told an Auckland audience in 2010 that the buyer of his mobile business didn’t want networks in central and South Amercia, so he and his business partners decided to keep them. Clearly Stanton has a taste for challenging established markets, as well as the chequebook to make it happen – also he’s not in a big hurry, he told that same audience he wasn’t expecting a return on investment for five to six years.

Then there is politics and in that world I would include regulation.

Pacific Fibre’s greatest selling point was also its Achilles heel – landing the cable in the US. Rod Drury told Computerworld there was political pressure from the US to avoid 100 percent Chinese investment. And that must have been tough because, post-recession, China, not the US, is a better source of overseas funding .

Sam Morgan publicly criticised Amy Adams for her assertion that there is plenty of capacity on the existing Southern Cross cable and Drury had approached the previous ICT Minister, Steven Joyce, for funding. But neither Adams or Joyce hold the government purse strings, Bill English does. English is a career politician from a conservative South Island farming community who in 2011 addressed a NetHui audience as the ‘sweaty T Shirt brigade’. It would have been a tough sell, but maybe English is the minister they should have lobbied, and if they did, maybe he should be the one they criticise now.

2degrees, on the other hand, has been able to tap into Chinese support through Huawei, which is building out the network through a $100 million debt-funded arrangement. And Edwards was right to focus on lobbying successive ICT Ministers because 2degrees needed something they, not English, could deliver – regulation.

Finally, the Pacific Fibre founders didn’t dig in for the long haul. They launched the project two years ago with a hiss and a roar, promising to be up and running in 2013. It appears that targets were set and when they weren’t met within a certain timeframe, the plug was pulled.

But telecommunications infrastructure is different to IT – it is a multi-generational investment. It took nine years, and three name changes, before 2degrees launched services in the market. During that time Edwards joined every telco body he could – the Telecommunications Carriers Forum, Number Administration Deed, Telecommunications Users Association.

He was always talking at meetings, standing up at events, phoning journalists. To his face, and behind his back, the industry questioned if a third mobile network would ever happen, but it did.

It’s unfortunate that Edwards appears to have fallen out with 2degrees’s majority owners, both as an employee and a shareholder. He’s lawyered up, and he’s taken his disputes to the courts and is not returning media calls. But if he could talk publicly, I would ask him if a second cable is viable.