Monday, March 2. 2009I Have A Cunning Plan My Lord......John Linton .......to obtain huge amounts of International IP bandwidth for no charge. (apologies to the Black Adder script writers - Ben Elton and Stephen Fry?). Exetel is again considering buying IP bandwidth direct from Southern Cross when our current IP bandwidth contracts expire in a few months time. Each year at this time for the past three years we have looked at the available options, and costs, of obtaining the international IP bandwidth we are likely to need for the coming 12 months and two years ago we semi-seriously considered buying directly from Southern Cross and last year we very seriously considered it. We very nearly did make the decision to go direct last year but there were already signs of difficult economic circumstances looming on the 'horizon' in February 2008 and we decided the risks were too great. So, it may sound strange that now the "looming" difficult financial conditions have become a reality, we should again consider a $A30 million plus investment over ten years but, of course, the economics of any major financial investment change over time and the conditions vary enormously over even a short space of time such as 12 months. A year ago the Australian dollar was heading towards parity with the US and Southern Cross had yet to complete its full upgrade to the trans Pacific cable. One circumstance has now dramatically increased the price and the other more dramatically decreased the price. Also there was the Telstra decision to build its own dedicated cable which had ramifications in terms of Telstra not taking up its expected 'share' of the increased capacity from the late 2008 upgrade and, presumably, eventually reducing what it currently uses. That may have lead to the 'special limited offer' by Southern Cross late last year of attractive incentives for new customers to buy direct. Exetel currently buys over 2.6 gbps of international IP plus generates up to 700 mbps of 'international' IP via its PeerApp caching with another up to 5 - 600 mbps via its Akamai and Pipe peering at different peak times delivering a maximum to date of 3.5 gbps at the busiest time of the late evening and then again at midnight. Our lowest price for 'pure' IP is around $A150 per mbps and we would expect that to drop to around $A130 or lower in the current round of asking for quotations. Although one provider has said the drop of the Australian dollar will make it hard to reduce their current prices I have simply pointed out that their own US dollar prices have been cut by more than 70% for the additional cable capacity and if they really want to give the impression that they think we're really dumb then such statements will certainly do it. (we may very well be dumb but we don't like being told we are). While we could easily fill one 2.4 gbps dedicated link buying direct from Southern Cross what is also possible, if Steve had his way, is that we could buy a 10 gbps link for very little, relatively, extra money and go into the IP wholesale business with around 5 - 6 gbps to sell at much lower prices than are available today and are likely to be offered by anyone in the near future. If we sold the 'spare capacity we could always commit to buying another 10 gbps link and open up a whole new business for Exetel in Australia - the lowest cost IP connections (by a factor of at least 50% (more probably 80%) than is currently being paid by Australia's larger companies. There is a problem with that scenario which is we would have to sell the bandwidth to ISPs smaller than ourselves and that's not such a good idea - based on the track record of ISPs smaller than Exetel tending to go out of business with monotonous regularity. However, and this may 'swing the deal', there are also major opportunities to sell large IP connections to major corporates in Sydney which means, if that were possible, we could turn a major current cost of around $A500,000 a month to a profit (not revenue) of something like the same amount! We don't have precise numbers but believe there are several hundred companies in Sydney alone that use over 100 mbps IP services (excluding ISPs) and it would be a logical next step for Exetel to go beyond the current 100 mbps services which is the most we can offer at the moment. As we put a lot more effort in to corporate sales such a 'product' would be a major 'door opener' and perfectly leverages the huge efforts we have made to grow a solid residential business that allows us to use the established volumes of purchases to make our business services even more competitive than they are today. It, obviously, also provides scope for decreasing the prices of residential plans because we remove the majority of the IP cost component. Currently there is something like an $8.00 IP cost in a mid range ADSL2 plan and obviously more on the higher plans so there would be some 'discount' available if we went this way. Sounds good? Sure does - now where do we find the $A30 million or so up front investment required to do that and do we believe we will survive the next ten years of massive financial and societal change that is being foreshadowed by a quite considerable number of people? Well, I think that things are going to get very much worse in Australia over the coming six months and then stay that way for quite a while after that. Having said that I'm almost convinced that Exetel has the 'perfect' business model for such circumstances and will actually become a more attractive supplier of services than those companies currently charging a premium for little/no added value. I've been wrong before but I'm actually more relaxed now than I have been for many months about how the "GFC" will affect Exetel. We need to go back to New Zealand to have some serious discussions with Southern Cross and also have even more serious discussions with our banks as to how we could sensibly structure such a deal. The alternative is to find a business partner to better underwrite the project but I am very, very reluctant having put in this much work over five years to now have to consider another party's view of any future decision we took. Any way - a nice possibility to start the new week with. Trackbacks
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Sounds interesting. I can imagine being able to offer such deals to corporate customers would be a great opportunity for Exetel, and a wake up call to several other industry players in general.
The only challenge (other than finance) would be making corporations see the benefits of such a deal. So many are likely going to be unwilling to change what they do not 'get'. Comment (1)
You could be right.
However bear in mind the price per mbps that Telstra, Optus, AAPT etc charge at the moment? Around $A250 per mbps? Would a large corporate, such as CBA, turn down an offer of IP at $50.00 per mbps? Difficult decision. Comments (15)
I'm with Steve. I would much rather see Exetel spend money on a 10gbps link than trying to establish a business in the UK or NZ.
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I've got $10k lying around i'd invest. Now just find 2,999 people to do the same.
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I second felix.
I don't really know anything about corporate finance but what about an exetel corporate bond or something? As long as the t&c's were in plain english. Comment (1)
We will look at all options.
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JL
What i dont feel i understand about that is...wouldnt the bulk of CBA's data be internal to the exetel australian network which is routed via australian peering? and therefore suffering costs of australian peering data and not scc's ? although the current cost is $250 per mbps all you would be offering them is cheaper internet access? Comment (1)
Most/All large corporates have dedicated IP links for their staff, and far more importantly, for customer access that's totally under their control.
The largest Ethernet link we have sold to date is 40 mbps with a terabyte of IP. There are more than 400 companies in Sydney that have gigabit links. five of those would allow us to have our own IP for free and add $500,000 to our monthly bottom line. We currently have 1.25% (or thereabouts) of the residential broadband market. It doesn't seem over optimistic to aim for 1.25% of the corporate large end IP market. Comments (15)
It would be mildly amusing for Telstra to back out of the extra SXC capacity only for someone else to grab it and seriously undercut them in the large corporate retail market.
A bit of schadenfreude from the the rest of the SXC perhaps? Comment (1)
Have you looked/negociated with PIPE's new cable? They are supposed to be cheaper than SXC
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I think we have asked for a quote but there was no availability date and the 'ball park' pricing was out of contention.
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Telstra is not, and has never been, part of the consortium who owns Southern Cross Cable.
Telstra is simply a customer of SXC- so it seems the motivation to build your own cable rather than being a customer of TNZ, Optus and Verizon is pretty logical. Comment (1)
Thank you for the correction - I'll amend the text.
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john,
how does all this benefit normal exetel customers. are you saying if exetel takes on a 10Mbit connection with southern cross -- that you can sell the excess above 2.4Mbit and pass on a saving to residential customers for whats left over. you have always said that the telstra charges to exetel make the major component of what the average residential users pay .. please explain how residential users will benefit. Comments (2)
Last line of the 6th paragraph.
If the cost to Exetel is an effective zero for IP then there is no need to make a charge for that portion of the service to the customer. Comments (15)
John,
If you had the market position of Telstra why shouldn't I think you would not do the same. I have no problem with supporting someone who gives every intention of doing the right thing -- but I have become disillusioned with the system, and have started to believe that those that achieve a position of superiority in the market, they will also become greedy and take advantage of the trust people have given them. I’m a swing voter too, one that has voted more times for L/CP than Labor -- I’m disillusioned -- If you achieve a position of power the next step is to protect that position --- just like Telstra -- Would you do the same as Telstra if you had the same market position. People when they achieve position of power just cant resist the temptation to consolidate it, so no one can take it away from them.. Are you really sure in your heart that you would not follow the same course.. Comments (2)
Exetel is a small/tiny PRIVATE company that only exists because, after the disappointment of setting up Swiftel's ISP operations (for someone else) Steve and I decided to see, definitely the last time, if we could set up and operate the 'perfect' communications company and for that we had to have no shareholders other than ourselves.
We started with the objective of only offering a product if we could provide it at the lowest cost available but deliver the equal or better quality and speed. We have never deviated from that and as we aren't in it 'for money' there is no need to ever deviate from it. Our plan was to develop the lowest cost of operation of any Australian provider and that, inherently, protects the company and its customers from ever paying more than the lowest price available from any supplier. We never will become as big as Telstra nor will we ever aspire to be any bigger than we get by customers telling non-customers that we are a good company to use. We have made many mistakes over the past five years and I'm sure we will make many more (hopefully not terminal ones) but we will never deviate from the base reason we set up Exetel in the first place. Comments (15)
Good Luck getting the dosh.
It's likley that PIPE will introduce some serious competiton to the market in a year or three. How will you deal with that? Comment (1)
I don't know.
Probably the same way we deal with every other competitor - but it's not something I'm going to lose any sleep over. Comments (15)
John, you have said in the past that you ultimately most enjoy setting up operations that sell things to customers. I would imagine that this new opportunity would fit that quite nicely. Undercutting the established businesses is always enjoyable
I don't know anything about corporate cusotmers, but my imagination says they like paying for a cutomised experience thinking that they all are a special case. I will enjoy is reading about how you plan on automating the customer interaction, and convincing them they're not special, all they need is a plug and for their 1's and 0's to work eh. Comment (1)
My main interest is in delivering on Exetel's base premise.
If we can bring our tiny amount of pressure on the ridiculously high prices that Telstra and the other 'big players' continue to rip off corporate Australia with then that would be a really good thing to achieve. However it's not something we will be able to do easily - it's just something that is a possibility. The large communications companies in Australia are woefully managed and absudly over staffed with grossly over paid people who if they ever reached a standard of mediocrity would wildly exceed their parents expectations. Too much fat, too much ineficiency, too much "don't care" views of business by these companies have ensured Australian business communications are not just the most expensive in the western world but 5 to 10 times more expensive than in the US or even the EU (home of total over staffing and unionism). Why this is the case I have never been able to determine. Comments (15)
Isn't 10 years a long time to sign a contract to buy IP bandwidth?
If you buy it at a fixed price what happens if future IP costs tumble dramatically? I hear that new compression techniques on the horizon may enable the expansion of "current" capacity by many many times and hence reduce costs. Comment (1)
Well - you're right in concept but that's the term for the cable segments. It used to be longer when it was new.
Doubtless Pipe will try and make a difference to the market wen it gets its cable active but that's a free market for you and that's what competition is meant to do in a free market. I don't think that there is ever an easy decision in the technology business and I've been in it making wrong decisions for a fair while now. Comments (15)
Won't the Southern Cross ppl read this and think ahhh, john has gr8 margin to work with? $30M is a lot of money
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I would doubt anyone at SX reads this blog but in the unlikely event they do it would make no difference to their list prices.
I don't expect to get any "special deals" - list is good enough to reduce our current costs to zero. Comments (15)
no problem, I just emailed this URL to ross @ southern cross and to bevan @ pipe.
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You're very kind to publicise this meaningless blog.
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I am sure Bevan and Ross love it when you talk up the value of their services.
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We would definitely consider buying a 20Mbps pipe for $100/Mbps.
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Now all we have to do is to find another 24 people like you and it's a no brainer.
I really don't think finding buyers of 6 gb of IP will take very long to do at all. Comments (15)
I agree with you. The trouble with these types of things usually is trying to find people to commit to buying a product before it has been released, especially with something like bandwidth with organisations taking 12-24mth contracts (min) on their current bandwidth.
Like most big-business deals, you either get a fast no, or a very slow yes. Comments (2)
I'm sure you already know this, but watch out for contracts which forbid the onselling of your excess bandwidth.
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