Ihug cuts spark takeover claim

Ihug's insistence that the weak dollar is mainly to blame for up to 60 forthcoming redundancies has raised eyebrows in the internet industry.

"The weak dollar is affecting us all, but not to the extent that ihug is saying that it has," said the head of a rival internet service provider.

Ihug claimed that the dollar shedding 22 per cent of its value this year has increased its costs, as the company buys both bandwidth and computer hardware in US dollars.

But industry commentators point out that wholesale bandwidth prices have fallen even faster than the dollar - by around 30 per cent in the past six months. What is more, they say, the recent discounting is nothing compared with the price-cutting that can be expected when the Southern Cross cable opens next month, and the country's current bandwidth shortage turns into a glut.

Admittedly, cuts in the price of US hardware have not been passed on here this year, but prices have hardly rocketed either.

Compaq, for example, managed to hold off an 8 to 12 per cent adjustment until September, and Hewlett Packard announced a 5 to 10 per cent increase across half of its range only this month.

Similarly Dell, by taking good Forex cover, has been able to stave off a 5-8 per cent increase until the beginning of November.

Despite a denial by managing director Nick Wood, rumours say the real motivation behind ihug's cost-cutting review is to put its house in order before a takeover from Telstra Saturn.

There is no doubt that ihug's customer base would be attractive to Telstra, which has already gobbled up Netlink and Paradise.

While both of these were strongest in Wellington, New Zealand's second largest provider covers the whole country with its 75,000 customers. And ihug's estimated 35,000 customers across the Tasman might just be the icing on the cake for an Australian buyer.

But the question is would Telstra want all of ihug?

It has grown rapidly in the past couple of years, and its revelation that it now has 350 employees, including 80 in Australia, surprised some in the industry this week.

Apart from their core dial up and satellite internet businesses, the Wood brothers have diversified into digital TV and cut-price toll calls.

They have also started an online shopping mall and travel agency, and also picked up a 51 per cent stake in the 115-store Video Ezy chain.

Ihug is also an active participant in the current radio spectrum auction. As of yesterday it had bids totalling $4.66 million for two chunks of 2G frequency.

When pushed on the issue, Nick Wood insisted the job cuts were necessary. Given that some of its new ventures are not likely to be very profitable, his assertion becomes more convincing.