abc inside business story on pwk

http://www.abc.net.au/insidebusiness/content/2007/s2281956.htm
ALAN KOHLER, PRESENTER: While the National Broadband Network is currently the focus of attention to bring Australia's internet up to a respectable speed, there are a couple of very expensive cables snaking their way across the Pacific Ocean that will have a dramatic impact as well.

But as Kathy Swan reports, while the owners of the rival projects agree they will turbo-charge the speed, they've got very different views about what it will cost consumers.

KATHY SWAN, REPORTER: There's a new wave of big broadband investment set to roll out across the Pacific Ocean seabed. From both ends of the telco food chain - a whale like Telstra and a minnow like Pipe Networks - are sinking hundreds of millions of dollars on new submarine fibre optic cables linking Australia to the United States.

STEVE BAXTER, EXECUTIVE DIRECTOR, PIPE NETWORKS: The technology has come leaps and bounds in the last 10 years - specifically the
cost to build our submarine cable, it will be just south of $AUS200-million.

KATE MCKENZIE, GROUP MD, TELSTRA WHOLESALE: It's really essential infrastructure. You know, this is where the next wave of
productivity is going to come from. We've got a lot of reports and data saying investments in these networks could add anything from $10 to
$50 billion to the productivity of the economy.

KATHY SWAN: Both cables come ashore at Sydney but Pipe's cable will run 7,000 kilometres to Guam while Telstra's will stretch more than
9,000 kilometres to Hawaii.

KATE MCKENZIE: That's a pretty long cable so unsurprisingly when you're talking about that kind of infrastructure build, it's not cheap.

KATHY SWAN: The head of Telstra's wholesale business Kate McKenzie says the cable should be in use by the end of the year but one thing
it won't be delivering is cheaper broadband.

KATE MCKENZIE: In the short term probably not because actually what's happening as people use more and more data, more investment in
the underpinning infrastructure is required and as I said these are expensive investments.

STEVE BAXTER: Our customers are the likes of iiNET, Internode, Primus, D S & L - these are the people who actually provide services to end
users. What I believe will occur once they start using our bandwidth and take advantage of the cost leverage which we bring to that part of
their business is that customers will see cheaper broadband.

KATHY SWAN: Steve Baxter says Pipe Networks' cable will pay for itself from the day it's switched on mid next year.

STEVE BAXTER: It is fully backed with customer contracts. It will be EBIT positive from day one. And we will have all the construction
finance payed off within six months.

MARK MCDONNELL, SENIOR ANALYST, BBY LTD: The risk for the two companies is really quite different. Telstra's capex spend annually is in
the order of four to $5-billion and so building this particular portion of its network is a relatively small chunk of that - particularly when you
consider that this is a long life asset and that Telstra already accounts for 50 per cent of the broadband market in Australia.

KATHY SWAN: BBY's telecommunications analyst Mark McDonnell says it's a change of focus for Pipe Networks which until now had operated
purely within Australia.

MARK MCDONNELL: Management are saying they have about $80-million worth of deals in the pipeline for the PPC-1 as it's called, the
network to Guam. So it's got a fairly positive outlook around the demand profile for this, bearing in mind that there is a slowdown occurring in
its domestic build.

KATHY SWAN: There's something of a mini-boom in submarine cable projects around the globe and the concern is - last time there was this
much interest in underwater fibre it was the late 1990's and the big players were the likes of WorldCom, Global Crossing and Tyco -
responsible for three of the largest corporate collapses in history.

TIM STRONGE, VP RESEARCH, TELEGEOGRAPHY: It was more speculative build - companies that never really been an ISPU or a carrier were
building just on the assumption that others would buy on their system.

KATHY SWAN: Tim Stronge from Washington based TeleGeography Research says there's always a chance history may repeat.

TIM STRONGE: There is that potential on some routes and I'm a little concerned about the trans-Pacific route bearing with pricing falling
very quickly because of a sudden oversupply of bandwidth, but the conditions overall are quite different from the late 1990's.

DAVID KENNEDY, RESEARCH DIRECTOR, OVUM: There wasn't a track record of internet growth in the region at that time - broadband was still a very small market - so they made some pretty optimistic projections at the time about demand growth.

KATHY SWAN: Telecommunications analyst David Kennedy of Ovum says there's another important difference this time. It's the operators
running the show.

DAVID KENNEDY: The kind of people who are laying a lot of the new cable were private equity companies that were investing in cable as a
stand alone business. So in other words they desperately needed to get the revenue they projected in order to keep their cables operating
and they were very vulnerable when the demand didn't show up.

KATHY SWAN: That's definitely changing. There are plans for yet more cables to Australia.

TIM STRONGE: There are a couple of proposed systems that would go from South East Asia down to the west coast of Australia, potentially
down to Perth.

KATHY SWAN: Consumers downloading data rich material like music videos, movies or even old TV series are driving the cable boom.

DAVID KENNEDY: About 75 per cent of the traffic is file sharing and I think we can assume that a good deal of that is illegal sharing of music
but especially video.

KATE MCKENZIE: By January this year eight-million videos were being downloaded on YouTube. You know, that sort of capacity is using up
more capacity than the entire internet used back in 2000.

DAVID KENNEDY: On a stand alone basis, international cable isn't the greatest business that ever existed. It isn't so much that there is a
business case for the cable by itself. It's a business case for the whole broadband offer in the domestic market.

TIM STRONGE: Local ISPs in Australia can charge three to four times as much for a DSL connection to a person's home than one sees in the
United States or in Europe and part of that is simply because those ISPs have to pay very expensive upstream bandwidth costs. When new
cables go in those costs will likely decline and it may very well be passed on to the end users in Australia.

KATHY SWAN: The risk lies squarely with Telstra, Pipe and their investors and they're all hoping the modelling that shows exponential growth
in broadband is on the money.