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Cable guy builds a billion dollar network plan

Friday 5th May 2000

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Jack Matthews HYBRID FIRM: Jack Matthews says Telstra is a mixture of dotcom and bricks and mortar
Telstra Saturn will start rolling out its national cable network next month, CEO Jack Matthews tells Rob Hosking

Telstra Saturn chief executive Jack Matthews is unfazed by the drunken stagger of technology stocks over recent weeks.

Before Telstra New Zealand merged with Saturn two months ago, Saturn Communications which Mr Matthews headed was suggested as a possible IPO offering. Mr Matthews himself canvassed the idea publicly.

Any float is now likely to be some time off though. The newly-merged company will have to demonstrate its earnings capacity first and that is unlikely to happen until it has a sufficient subscription rate in Christchurch, and, even more so, Auckland.

The board of the new company, of which Mr Matthews is not a member, may take that option eventually, but that is likely to be some way off.

"While we may benefit from the dotcom kind of focus, at the end of the day we're an infrastructure company, a content aggregator and a marketing company," Mr Matthews said.

"So that makes us an interesting hybrid between a dotcom company and a bricks and mortar firm.

And no matter who wins in the online world they are still going to need distribution platforms to get products to consumers and they are still going to need marketing and bundling strategies to add to their commodity products."

Saturn is understood to have been due to make a profit on its $250 million Wellington cable in the coming financial year had the merger not taken place.

The melded company is now set to roll out a $1.2 billion cable infrastructure over the next two years, running an offshore submarine cable from Christchurch to Auckland. This will also include an upgrade of the Wellington network to internet protocol.

Industry sources suggest the new network is planned to be in the black in 2005.

The network looked set to include landfalls at Kaikoura, Wellington, Wanganui, New Plymouth, Raglan and Auckland, Mr Matthews said. There is some flexibility about where the cable can be brought ashore and it is dependent on issues such as resource consents.

One spur off the main cable will definitely run from Raglan to the provincial cities of Hamilton and Tauranga.

Work starts next month in Christchurch, while resource consents are still being sought in Auckland.

"Where we start does depend to some extent on where we get permission first. Obviously we're looking to get some work done in the CBD area pretty fast."

Permits for underground cabling, which tends to be the main sort in central cities, are comparatively easy to obtain. It is the overhead cabling, more suitable for residential areas, which is inclined to run into opposition from locals.

"We weigh up a number of factors in deciding where to put cable. There's a simple technical one; we tend to build next to where we've already built. Then there's where we think the market is worthwhile. A third factor is political - we don't want to be seen favouring one section of the community over another."

And existing customers accessed through interconnection with other carriers' networks are also a factor.

"If we target existing customers we tend to generate a lot better margin than if we're using someone else's network. So we throw all those factors into the algorithm. It might appear a bit of a hodge-podge from the outside but a fair amount of analysis goes into it."

The merger has raised a number of issues around integrating the brands of the two companies. Telstra New Zealand had a strong business presence, while Saturn's strength was in the residential market in Wellington.

For now, the company is split into a business division, based on Telstra's market, and residential, based on Saturn's. "There will be some issues around integrating those down the track but for now we don't want to distract the business where the rubber meets the road."

The merged company is also looking with favour on the government's proposed Commerce Act changes and the upcoming telecommunications inquiry.

Mr Matthews and other Telstra Saturn executives were quoted as saying at the time of the merger the Labour-led government's stance on such issues gave the group confidence the new regime would have a regulatory stance more favourable to new entrants.

Those comments have been taken up by some opposition politicians who have pressed ministers with suggestions Telstra Saturn was given word on the quiet about the proposed competition changes and that the government had already decided on its course of action regardless of the outcome of the telecommunications inquiry.

Those suggestions have been denied by the government and Mr Matthews follows suit. He believes the regulatory approach would have softened regardless of the election result.

"The decision was not in any way the result of any encouragement either direct or indirect from the new government.

"If you look at what the government was saying in opposition, and even what the National government was doing in terms or proposing new competition rules and more stringent financial disclosure on Telecom, it seemed to us the game was moving in a way that gave us greater comfort."

One option under consideration by the government is requiring Telecom to open up part of its network to competitors - the so-called "unbundling the local loop" option. Some of Telecom's competitors - Clear, for example - are enthusiastic about this, but Saturn - with its own local loop in Wellington - was never keen.

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