From TV techs to telco players

In 2005 Geoff Hunt was hired to bring together three disparate entities: BCL (the former broadcasting arm of TVNZ), THL and SAAPCS (and Australian contracting business). A year later the State Owned Enterprise was renamed Kordia, and a year after that it acquired the Internet Service Provider Orcon. Hunt speaks to Telecommunications Review editor Sarah Putt about the transformation of Kordia.

POSITION: CEO, Kordia GroupCommenced current role: May 2005Immediate past role: Managing Director, Areva New ZealandCar: Alpha Romeo 166Mobile phone: Blackberry CurveStaff: 695Education: Masters degree in electrical engineeringMost admired person: Steve JobsFavourite Website: New Zealand HeraldCustomer numbers: Around 100 excluding Orcon customersTurnover: $265 millionWebsite: www.kordia.co.nz

Q: Broadcasting is the foundation of the business, so what’s the current revenue split?

A: The total revenue is about $260m and broadcast revenue would be $40m out of that.Q: The rest is telco?A: The rest is telco or telco-related, keeping in mind that of the $260m turnover, about $120m is our contracting and consulting activity.All the growth will actually be in the telco side. Broadcast is a very low growth area for us. Analogue television is being switched off. We’re bringing more people onto the digital terrestrial platform and the satellite platform, but the growth is quite small, whereas telco growth is – infinite is not quite the right word because there’s competition out there – but there’s a very large market space with quite a few players and I guess we each think we can grab an increasing proportion of market share in a market that’s growing.Q: What do you think Kordia’s edge is in that market?A: Our edge is that we are small and we’re prepared to customise for business customers’ needs. We tend to deal with the customers who have got more complex needs, or because of their distribution of branches and connection difficulties they need a company that will put the effort into figuring out the best solution for their connectivity.Q: Is this because you have satellite capability, you have wireless capability and you have fibre in the ground as well?A: The fibre that we have is generally dark fibre from other companies. We’ve got a digital microwave network up and down the country, but we’ve just bought quite a lot of long haul fibre up and down the North and South Island off FX Networks.Q: What about the Orcon purchase? You said at the time that the reason for buying Orcon is that you had all these wholesale products but you just couldn’t get them out there through the ISPs. A lot of people queried why an SOE should be in the market place. Two years on?A: Let’s deal with the SOE thing first. There’s a connotation because of our government ownership that we’re somehow different or favoured, but I can tell you it’s just like any other business: the shareholder wants certain returns and there is no special treatment.Q: So you when you filed that pre-tax loss of $5.77 million – what was the government’s reaction to that?A: Well, we’re actually trading on budget. The challenge here with the business has been that it was hugely broadcast orientated. The growth was in the telecommunications sector. Three years ago the THL Group and BCL were kind of fixed on technology and broadcast, and our Australian businesses were dominated by two customers.But we weren’t looking at this TMT market – Technology, Media and Telecommunications. So we’ve made a number of investments, spent quite a lot of money and those investments have been about creating a new future for the business.We invested in Orcon and then we  invested in an ADSL2+ network and then we invested in acquiring customers, so Orcon will lose $6 million and it’s right on budget to lose that and the guys are doing a really good job to stay to that budget. Quite a lot of that cost is the customer acquisition cost for the LLU network, the ADSL2+ network, but each month we’re losing less and we’ll go through break even September/October time this year.Q: You’ve got a very outspoken CEO with Orcon [Scott Bartlett]. How comfortable are you with that?A: So we’re very clear that there’s the Kordia brand and there’s the Orcon brand. The Kordia brand is about being solid, reliable. We’re an expert organisation at what we do. Orcon is a racier part of our organisation because it needs to be with the market it’s tackling. So I think Scott’s a good Chief Executive for the Orcon brand and what we’re doing with that business.Q: Why have there been redundancies at Orcon (23 staff) and Kordia (25 staff)?A: We’ve looked out at next year; we’ve been growing roughly 40% year on year, which is quite aggressive growth, and our feeling is we won’t be able to achieve that growth rate in the next 12 months. So we made the decision to reduce staff.Q: So what’s your growth rate now?A: It’s about half of what it has been.Q: So what about Kordia?A: In our engineering business we’ve shed about roughly 20 staff out of 80 late last year and a few more this year, and that’s for a couple of reasons. It’s been a consulting business and it’s been mainly consulting in the broadcast space. A lot of the infrastructure built on the Kordia network has been completed, so there’s less demand. We were doing quite well with offshore work, but the global financial crisis seems to have caused every potential offshore customer to delay decision making. The business decision then is quite simple – as everybody else does, to match staff to the actual work that’s coming in.Q: You were saying before that the government is your primary shareholder but doesn’t make a difference to how you operate. There’s an interesting argument that says: why should the government even be in the telco consumer market when it is starting to invest in fibre instructure? The cabinet paper which proposes 25 Local Fibre Companies, half-owned by the taxpayer: would Kordia bid to have some input into that?A: We’ve looked at the landscape and we’ve said quite clearly what our areas of interest are going forward. We’re pretty interested in regional backhaul networks. By regional we mean truly regional, so Northland is one of our focuses, where there’s incomplete backhaul networks because they don’t make economic sense. So we’ve got partners up there – Northpower, Northland Regional Council and Top Energy – and it needs a government subsidy of about 50% in order to make it commercially viable to put in place. But we saw that as an area where there was a lack of interest from our competitors and the other area we’re particularly interested in is the trans-Tasman cable, which we’re calling Optikor (to be built in conjunction with PIPE Networks).The Tasman cable is another example, but the project won’t proceed unless we’ve signed up a certain number of foundation customers. There’s pretty significant interest from a variety of parties whose names you’d recognise – but I can’t tell you who they are.There are two drivers – one is a lack of diversity across the Tasman, so if the Southern Cross across the Tasman goes down, the alternative path is via Hawaii and there’s quite big data flows between NZ and Australian businesses.The second reason is that we think the Southern Cross pricing is higher than it should be and there’s no question that competition leads to better pricing for the customers – so we’ve modelled on a lower cost. The great thing about owning Orcon is that we actually see what happens in the consumer space and how it ripples through the entire business. We built the ADSL2+ network in Auckland and suddenly people had more bandwidth and they blimmin’ used it. And we modeled the business on a certain amount of international bandwidth, but when you get more bandwidth you tend to access a lot more video and a lot of that comes from offshore. So international bandwidth usage went up at a greater rate than we anticipated, and with that the cost also. That gave us a fairly good insight into what the future was going to look like.Q: What’s the timetable?A: These are quite complex projects to put together, so we would expect to have our business case ready for consideration by the board in the last quarter of this calendar year.Q: If the board gives it a tick, what happens?A: It’s about a two-year programme from there. The issues are getting a slot in the cable manufacturing factory and getting the cable laying ship, because there aren’t that many of them. The actual laying of the cable appears to be quite quick, listening to how it’s going with PIPE Networks, so the issue is getting your place in the queue.There are the shore facilities as well. The current plan is to hook into the branching unit offshore Sydney, so the cable doesn’t actually have to go ashore in Sydney – it connects on the sea bottom by this network. In New Zealand it will be landing near Waiuku.Q: What’s the cost?A: Between $170 – $200 million.Q: That’s borne by Kordia rather than PIPE?A: PIPE’s contribution for their share is the ongoing capacity from Sydney to Guam. We’re paying for the Auckland to Sydney bit.Q: How are you going to pay for it?A: Clearly there’s an equity share from Kordia, there’s foundation customers would buy IRU – Indefeasible Rights of Use, so effectively for a substantial amount of cash they pay for a long-term capacity commitment.Q: It’s the same model as Southern Cross isn’t it?A: I don’t know about the Southern Cross but it’s a typical model for doing this type of project.Q: It’s “I want x amount of bandwidth across the cable for the next 10 years, here’s the money up front?”A: Yes.Then there are some loans, and that’s about the formula.Q: Loans would be with banks or other financial entities. Would you consider taking on shareholders? For example the Southern Cross Cable is part owned by Telecom, Optus and some others.A: Yes, we aren’t fixed on the final ownership mix.Q: The business case for Optikor would presumably be strong if the government’s Fibre to the Home network goes ahead. So would Kordia invest in the LFCs as well?A: It’s not something we’re considering at present. Where we see our skills, our capability is the regional backhaul networks – so they connect LFCs together. We’ve also got a pretty comprehensive network operating centre – two of them. Our skill is in operating quite a diversity of networks from the one network operating centre, so we certainly see that we could provide operating services to LFCs.Q: But you wouldn’t want to be part of an LFC?A: They’re not part of our thinking at present.Q: You see the opportunity in international bandwidth?A: I’m driven by that thing on SOEs – we’ve got to make commercial decisions and deliver for the shareholder, so we do look pretty carefully at where we’re investing money to ensure we can generate the kind of return the shareholder anticipates. And the LFCs for us at this stage don’t fit the criteria for where we would invest. That’s not going to be the headline is it?Q: No! Finally, how do you get on with the rest of the telecommunications industry?A: I think it’s the most fantastic industry. We can be competing with each other, we can be customers of each other and we may collaborate on certain things where it makes sense.So we have disputes with some of our suppliers in the telecommunications sector and we work through them. People seem to be quite sophisticated, quite mature and able to work in this quite complex environment, and so I think it says a lot for the people in the industry. But there’s no doubt that everybody’s looking for their angle all the time, and where they’re going to actually take their business ahead and enhance their bottom line.Q: What is the purpose of the Telecommunications Industry Group (TIG)?A: The purpose of the TIG was a realisation that many other industries, like the wine industry or the trucking industry, have their own industry group. This government has sent messages that they like to deal with industry groups; it makes it easier to get an informed and consistent view rather than dealing with 15 different entities.As the investors in the industry we’re pretty knowledgeable on all the issues in the industry because the need to invest actually sharpens up the way you look at things, and so we felt that it would make sense to come together and to present unified views on the things we can agree on.Also, we had a view that if the industry was  a bit more cohesive it could do a better job  in communicating with the public and business about what all this stuff really means. One of Kordia’s concerns is that we build this broadband infrastructure, but where’s the demand going to come from?Q: So it’s about, as a group, stimulating demand in the market for your products and lobbying the government as a united front?A: No – I think you’ve taken a slightly cynical view there. Lobbying probably gives the wrong emphasis.Ultimately it’s about stimulating demand, but we’re certainly hearing the messages about driving productivity and here’s an industry that really underpins productivity growth, that enabling infrastructure is quite hard to grapple with to realise the productivity growth, and we thought we could do a better job in articulating how that might all come about.