Shock at cancelled $400m cable plan

Sam Morgan, internet pioneer and chairman of Pacific Fibre, which has just announced it has been unable to raise enough money to build a new fibre-optic cable connecting NZ to the world. Photo / NZPA

Pacific Fibre's cancellation of plans for the country's second international fibre cable has been labelled "devastating news" for internet competition.

Pacific Fibre hoped to build a 12,950km fibre cable between Auckland, Sydney and Los Angeles at an estimated cost of $400 million but announced yesterday it had failed to raise enough capital for the project.

Pacific Fibre chairman and Trade Me founder Sam Morgan said the company did not find investment appetite "of any scale" in New Zealand and experienced difficulties securing overseas funds for the project.

"We had pretty good support in large part from potential investors, but it just didn't really come together in the end," Morgan said. "We feel like we've done everything we can to succeed and we are all hugely disappointed that we have not managed to get there."

Pacific Fibre's shareholders - including Facebook billionaire Peter Thiel, Xero's Rod Drury and Warehouse founder Sir Stephen Tindall - had put more than $5 million into the company and Morgan said he stood to personally lose money.

Pacific Fibre hoped to rival the Southern Cross Cable Network's pipe, which is the only link transporting internet traffic in and out of New Zealand.

The second cable would have brought competition to the market and the price of international internet capacity down, Pacific Fibre argued.

This, it said, would allow internet companies to increase the monthly data caps they offer, so users could take advantage of the faster speeds of the Government's $1.5 billion ultra-fast broadband network.

The UFB scheme aims to provide download speeds of 100 megabits per second to 75 per cent of New Zealand by the end of 2019.

Drury, Pacific Fibre's co-founder, said the cost of New Zealand broadband made it hard to connect globally and it was "this market failure" the company had been looking to address.

"We still cannot see how the Government's investment in UFB makes sense until the price of international bandwidth is greatly reduced," Drury said.

But Economic Development Minister Steven Joyce said yesterday there was no issue with capacity on the Southern Cross cable and that retail prices for broadband were "dropping quite significantly".

A senior market source suggested the failure of the business was less of a capital markets problem and more about issues with Pacific Fibre's business plan.

"The issue was whether or not the business plan was going to work in a highly competitive market where you have got incumbents."

One potential investor could have been the $19 billion New Zealand Superannuation Fund.

But a spokesperson for the fund said it undertook extensive due diligence on Pacific Fibre but was unable to "gain enough confidence" in the opportunity.

"Any investment we make needs to generate sufficient returns for the risk we have to take on, relative to other investment opportunities both domestically and internationally."

The company will now be wound up and its six staff have been given notice.

Telecommunications Users Association chief executive Paul Brislen said the news was "devastating" and it would mean there would be a lack of competition in the international capacity market.

"We're stuck with one provider and that's never a good sign for any industry."

Although Chinese-backed company Axin flagged its intentions last year to build a 3000km cable between Australia and New Zealand, Brislen said there had been little noise from it recently.

Morgan said there was "plenty of talk but very little walk" from other players who spoke about a cable project but the Pacific Fibre team were the only ones who "put their money where their mouth is".

FIBRE FACTS

What was Pacific Fibre?
* Pacific Fibre was planning to build a 12,950km fibre cable between Auckland, Sydney and Los Angeles.
* It was estimated to cost $400 million.
* The company was backed by Trade Me founder Sam Morgan, Facebook billionaire Peter Thiel, Xero's Rod Drury and Warehouse founder Sir Stephen Tindall.