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.