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Q+A interview with Trademe Founder, Sam Morgan


Sunday 29th May, 2011

Q+A interview with Trademe Founder, Sam Morgan.

Points of interest:
Concerned that without fast connectivity creative and technology industries won't work in NZ and talent will be reluctant to move here.
Internet problem in NZ is "not a technical one" but a result of a monopoly with one Pacific cable.
Government's ultra-fast broadband plan won't work without another link to the US, it will only shift the bottleneck.

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be watched on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A, 9-10am Sundays on TV ONE. Repeats at 9.10pm Sundays, 10.10am and 2.10pm Mondays on TVNZ 7

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SAM MORGAN interviewed by PAUL HOLMES


PAUL In a minute I’m joined by the Trade Me founder, Sam Morgan, to discuss his new plans to boost our economy. It’s an exciting plan, but first this from Damian Christie.

DAMIAN CHRISTIE
Sam Morgan started up Trade Me at just 23 after he couldn’t buy a heater online for his student flat. Trade Me grew quickly and is now our second most visited website after Google. Morgan sold Trade Me to Fairfax in 2006 in a deal worth $700 million. He pocketed more than $220 million, becoming overnight one of New Zealand’s richest men. Morgan is now working on a project he says will make our internet faster and cheaper. New Zealand’s demand for international bandwidth grows by more than 50% every year. Most of that data travels through the one undersea cable connecting us to the US. Morgan claims unless we boost this international capacity, our internet will remain expensive and means the government’s $1.5 billion ultrafast broadband initiative is destined to fail.

PAUL So with is us Trade Me founder Sam Morgan, and he’s also part of a new group called Pacific Fibre. Sam Morgan, thank you very much for joining us on Q+A.

SAM MORGAN – Trade Me founder
Morning.

PAUL Did you hear anything in John Whitehead’s interview about how we might increase our productivity?

SAM Yea, it’s a little probably academic for me, a lot of that stuff. I mean, I tend to be working with companies that are doing the business more so than thinking too much about how we do the business, but—

PAUL You were also watching a bit of the soccer.

SAM I was watching the soccer. (laughs)

PAUL I don’t blame you. To you, our economic future is digital, yes?

SAM Absolutely.

PAUL It’s the net.

SAM Absolutely.

PAUL Can you explain that?
SAM Well, I mean, all the businesses that I’m investing in and all the businesses where I see the growth and the new employment and all of those things, digital is absolutely at the core of it, whether you’re selling things, physical goods or digital goods, you’re interacting increasingly with your customers digitally. And if you just look at the productivity tools that we’ve seen in terms of, you know, Skype video – it wasn’t even there five years ago. You know, iPhones and smartphones and internet in your pocket was not there five years ago. I mean the space is moving tremendously quickly, and whenever there’s change, there’s opportunity, and so investing in businesses that are capitalising on technology change is I think where’s lots of opportunity.

PAUL And, of course, you’re also right that all of your company – the minds of your company, the brains of your company – they’re all in the cloud, they’re all hidden, they’re all stored in their own databases.

SAM Yeah, that’s right. I mean, I guess the concern that we had as the founders of Pacific Fibre is that, you know, people like us will not work in places where we don’t have adequate internet connectivity, because we can’t work in places without adequate internet connectivity.

PAUL So the smartest and the best and most creative people now need good connectivity?

SAM Absolutely. I mean, our scientists and our movie-studio people and, you know, our software—

PAUL Universities.

SAM Universities and our software developers. All of those people need fast, always-on internet.

PAUL You’ve formed with Rod Drury and others, perhaps, Pacific Fibre. Tell us about your concerns, because you seem to be on to something here. What are the big concerns you have about there being only one cable connecting New Zealand to the great databases of the United States? The Southern Cross Cable.

SAM Yeah, well, it’s kind of economics 101, really. We’ve got one single cable provider connecting New Zealand to the United States, and that’s the Southern Cross Cable. It’s a fantastic cable system, but all of the data that Kiwis consume is in the United States.

PAUL Yes, 80% of what we do is with great big resources in the United States.

SAM I mean, your email, if you’re on Gmail, Hotmail or Yahoo, that’s all in the US. If you’re using Skype or you’re using— watching YouTube videos or you’re downloading software, that’s all in the US.

PAUL And so there is a limit to what we can— what connectivity we can each of us get from the South Pacific cable, yeah?

SAM Yeah, no, the issue is not really a technical one. The issue is one of we’ve got a single monopoly provider that decides the prices with which we connect to the United States, so the way that that manifests in New Zealand is as data caps. So your internet service provider buys international bandwidth off the cable provider that exists, and then they ration it across all of their customers, and that manifests to you as a data cap. And so one of the concerns we had and one of the triggers we had for doing this project is that when you connect the homes with fibre-optic cable, you make it extraordinarily fast for you to get to the Sky Tower, but you don’t get you to the content that you need to get to, which is in the US.

PAUL So without a second cable, without more band— international transoceanic bandwidth, ultrafast broadband is chasing our tail.

SAM Yeah, so again we don’t think it’s a technical issue. We think it’s a market problem. There’s one provider, they set the price, and so we think by introducing competition, we can, you know, help downward pressure on the price and move data caps. So, you know, imagine you’ve got a—

PAUL Is that bandwidth– international bandwidth price really an issue with business?

SAM Absolutely. It’s extraordinarily expensive.

PAUL Southern Cross Cable is owned by whom?

SAM Telecom New Zealand owns 50% of it, and they’ve got Optus, which is SingTel-owned – Singapore Telecom owned – and Verizon, the US.

PAUL And between the three of them, they pay themselves dividends of $186 million last year.

SAM Yeah, that’s right.

PAUL Because they’re a monopoly.

SAM Yeah, well, they’re the best and only system.

PAUL So are you saying that the ultrafast broadband, if it’s not a company buy – more international bandwidth – it’s not going to do us any good at all?

SAM Well, it’s a case of, you know, what we’re going to do is we’re going to have ultrafast connectivity to, you know, the seabed and foreshore, and then we are going to have a toll gate. And if your ISP wants to provide you with ultrafast broadband to the United States, they need to go and buy international connectivity, and the price of that will be set by the single provider.

PAUL So basically we’re sitting in the middle of Wellington, you and I will email each other, and it’ll be 10 times faster than it is now. But if we want to send a message to Joe up in Los Angeles, it goes on— that message will go on our 10-lane highway to the Sky Tower and then join at a two-lane toll road.

SAM Yeah, that’s right, except my emails are hosted on servers in the US, with Google, so it’ll be on the toll road as well. (laughs)

PAUL It would also seem to make us vulnerable, one cable.

SAM Yeah, I mean, it’s actually a very good system. They’ve got two cables, and they’re in a redundant configuration so if you get a anchor dragged across one of the cables, the other cable takes up the slack, so it’s a very good system. So, again, it’s really an issue of a single monopoly provider and the data caps that we get subjected to. And if you imagine your internet connection goes 10 times faster, if you currently exhaust your data cap in, say, 20 days into the month, then 10 times faster means you exhaust your data cap in two days, because, you know, you click on that full-screen video, you pull it down, you exhaust your data cap, and you get throttled back to a modem speed.

PAUL Well, now, so what is the—? OK, dial-up. So what is the great thing about ultrafast broadband, however, because does it mean that we’re just going to download movies faster, that we’ll download porn faster or so forth?

SAM Yeah, I mean, that’s kind of a classic kind of Luddite argument that we get. I mean, if we look back, sort of, 10 or 15 years and we, sort of, try to build a business case on what the internet could do in, say, 1995, and, you know, who would have thought that we’d be able to, you know, have Skype video with my parents when they were recently travelling through South America. I can Skype video with customers in the United States or people that I’m doing business with. We can send large files back and forth. You know, the movie studios here still put their digital files on to planes and send them to LA because it’s faster to do that than it is – and cheaper to do that – than it is to send them digitally over the web. So I think it’s difficult in the same way it was for computers. What’s the business case for computers? What’s the business case for electrification? It’s a platform for economic growth, and I think there’s enough evidence now that that is an important platform that we need to invest in it.

PAUL But how? How does it grow us economically with this great, fast, superfast international connectivity? What ways can you see it growing us?

SAM I think, yeah, there’s revenue side and there’s cost side. So on the revenue side, you know, at the moment, I deal with people internationally both through work with my foundation and through my various investments. I’m deploying capital and investing in businesses all around the world, investing in talent all round the world, pulling talent back into New Zealand, pushing talent out of New Zealand in order to look for opportunities and bring those opportunities back. You know, on the revenue side, I think there’s— you know, the businesses that I work with, every day they use that as their core infrastructure in order to do business. On the cost side, you know, if you look at the United States now, there’s video-on-demand services, so what that means is you pay, you know, $8 a month, you can watch any movie that’s ever been made, your TV’s connected to the internet, you click on the movie and you watch it. It’s $8 a month. New Zealanders spent last year $400 million on Sky TV. That service has been provided for $8 per person, effectively, in the US, and so New Zealanders have the ability to access telephony services, software services, entertainment—

PAUL Hang on a minute. So whereas New Zealand—? Sorry to pull you up there. Whereas New Zealanders spend $400 million a year on Sky TV, yes, anyone in the States would be spending only about eight bucks?

SAM Yeah, well, I spend 150 bucks a month on Sky TV. If I was in the US, I’d spend eight bucks.

PAUL We can have a future, you write, where we’re creating more highly paid jobs and net inward migration. How does that work?
SAM Well, I mean, I see it partly as a quality-of-life issue, so, you know, people—

PAUL And this is all because of the cost of international connectivity?
SAM No, it’s around the expectations, so all of the countries in the world with whom we compete for talent, they are rolling this out extremely quickly – the ultrafast broadband initiatives – and if you— can you imagine you kind of go home tonight and you hop on the internet, and you’re on the same internet speed that you had 15 years ago, so that’s their experience potentially coming here. If they’re coming from a high broadband world into a narrow broadband—

PAUL If they’re working and coming to work with us.

SAM That’s right, and so they come here, and that’s how they work. That’s how they get their entertainment. That’s how they connect with people, and they simply can’t do their work, and they simply can’t— they won’t want to live here, and so I think it’s a real risk for us not to provide that infrastructure for our digital talent.

PAUL So are you saying that you believe that we could become a kind of a high-tech hub? We could?

SAM Well, I mean, the potential simply doesn’t exist without that infrastructure, so—

PAUL Which infrastructure?

SAM Well, with the ability to have both— Look, stepping back, the government’s ultrafast broadband plan is fantastic, and I think they’ve done a really good job. It’s been painful for both parties – Telecom and for the government – getting to a point where they can get this thing going, and I think they’ve done that in the last week. The issue is that that is not quite enough. You need to also have the international connectivity solved, and so once those two things are in place, then I think we have the platform in place for us to build these businesses and attract.

PAUL So you’d be a private, independent second cable?

SAM Yeah, absolutely.

PAUL Offering competitive-priced connectivity, or might you become a comfortable duopoly?

SAM Yeah, well, I mean, we’ve got to raise $400 million – US$400 million – so that’s quite a lot of money for us to go out and try and find. Those investors are going to expect us to be able to provide good returns, so the primary thing we’re trying to do is introduce competition into the market, but we’re doing that clearly in a business construct. It’s not a charitable foundation.

PAUL I see you’ve got REANNZ involved, which is the big government Crown-owned research—

SAM Yeah, that’s right. It’s the Research and Education Advanced Network, and so that allows our universities and scientists and so forth, the schools, to connect with their peers overseas and around the country, sharing supercomputing power and all those kind of good things.

PAUL Someone just asked me to ask you – do you pay any tax?

SAM Do I pay—? Well, that’s a good question. (laughs) So, I have a charitable foundation, and all of the income that I make every year, I give to charity, so as a result of the New Zealand tax laws, I can take most of my income tax and put it through my charity.

PAUL You’re a fine and clever man, and this is a very exciting idea. We’ll see what the panel thinks of it. Thank you very much, Sam Morgan.

SAM Cheers.

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