Rod Drury: Broadband really is the silver bullet

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Almost weekly I hear "... but that's not a silver bullet".

Broadband and connecting New Zealand digitally to the rest of the planet IS the biggest silver bullet for turning New Zealand around that I've seen in my business career. Let me explain why.

New Zealand is one of the most isolated countries in the world. Any business that wants to talk to a market size of more than four million needs to send the founder away on planes (often), learn to export, as well as have the funding and governance to be a sophisticated international entity. That's a tall order.

So in general we don't do it. Instead we build great little businesses that allow us to fund the 'three B's' lifestyle. We do services rather than manufacturing. We invest in property, not business.

Adding digital channels to business reduces international trade barriers. You can have a website in many languages. You can show video of your product. You can do seminars to thousands of people all over the world from your home office.

You can video conference local phone numbers in your markets.

International broadband levels the playing field for the 400,000 New Zealand small businesses, to get amongst it, with minimal upfront costs.

Already thousands of New Zealanders are doing this from all over the country. They've worked out how to get around the technical obstacles and constraints and are building little export businesses. Ultrafast international broadband mainstreams this opportunity. Any one of our two million working people can participate.

While there will be a few high profile businesses that will be successful, getting mainstream small businesses sending invoices every month to the US and beyond, is the productivity step-change that world class international broadband can create.

It's not just about pushing New Zealand services out. It's also about attracting investment in. If New Zealand is connected super fast to the US West Coast there are countless opportunities to attract very connected knowledge workers and investment down here.

Silicon Valley is an overnight sleep from most places in New Zealand. The same marketing person at US$150k might work in NZ for $120k and be able to go mountain biking after work. Affordable, high performance, international broadband gives us the opportunity to attract substantial inward investment.

How do we pay for all this? Well it's actually free. International broadband can fund itself - we just have to get organized.

Traditional telco models rely on a big upfront costs and customer fragmentation. There are minimal margin costs for services, so pricing is for revenue maximisation not public benefits.

Logically the market has woken up and various schemes are now aggregating demand so that the pool of money for broadband can be used to provide broader benefits to New Zealand. This allows the expensive infrastructure to be funded and paid for on a cost plus, open access model.

Older New Zealand investors got used to augmenting their income with high interest rates in recent years. Where they used to get 8+ per cent on their money they now get 3 per cent. Consquently there's plenty of demand for higher coupon bonds.

Income for those investors is the cost of capital required to connect New Zealand internationally. A billion dollars of investment may only require $80m per annum to fund.

This is quite reasonable as Telecom received about that same last year as a dividend from it's 50 per cent share of Southern Cross - the monopoly international cable provider.

As a rough back of the envelope calculation, that $80m, divided by 2 million users who access the internet via their phone, home account and at work, is about the cost of a cup of coffee a month. So, connecting New Zealand to the rest of the world, and the resulting step-change in opportunity only requires coordination - not cash.

Everyone, even the incumbent telco's, can win with this model. There has never been such an opportunity to step-change New Zealand's productivity and connect our many small businesses directly into global markets. Here is a real silver bullet. They don't come along often. Let's not waste the opportunity.

* Rod Drury is the CEO of Xero, a firm specialising in online accounting software. This blog first appeared on David Farrar's KiwiBlog website.

- NZ Herald

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