Below is a Q&A interview with Orcon founder Seeby Woodhouse who this week sold his business to state-owned broadcasting network operator Kordia. Read what Seeby has to say about nuclear power, local loop unbundling and taking Orcon to $100 million in revenue…
SW: Yeah, it’s the end of an era but the beginning of the next phase.
PG: Any sadness losing ownership?
SW: A little bit. Anyone gets attached to things, whether its spouses, companies or dogs. I’m the sort of person that believes in branding. That’s why I chose Kordia, they have absolutely no intention of re-branding the business and they want to keep it running largely as a separate entity. Hopefully I’ll be able to look back in a few years and say, wow, now it’s New Zealand’s second largest or even largest telecoms company.
PG: You said at the press conference you had something like 50 offers for Orcon over the last couple of years.
SW: It was more like 50 offers since people started getting more interested, which is more like over six or seven years. Once every couple of months, someone would come along.
PG: Did Vodafone have a sniff around Orcon?
SW: It was more that Ihug was for sale. There was a bidding war for Ihug. They got it and probably wanted to bed it down. I was aware they were potentially interested in additional acquisitions but I felt if we were going to be acquired by them, they probably wouldn’t want multiple brands. The company would have been rolled into Ihug and that wasn’t something I wanted.
PG: Why was it so important to you that Orcon maintained its identity and structure?
SW: It’s basically my baby. It would be a different story if someone was to buy it and suddenly Orcon no longer existed. I’ll still have involvement in the business for a couple of years as consulting director. I’m able to take my money off the table now, relax a little bit, but still have the upside of the business, the challenge and the things that I enjoy.
PG: Is that a fulltime position?
SW: No, it’s a consulting directorship. The time is variable.
PG: What will you do next?
SW: I don’t want to make any hasty moves. If I did that, I could potentially get drawn into something I don’t understand as well. There’s a temptation when you’re cashed up to invest in silly things and fritter it away. The thing about Orcon, since I was 15 I’ve been passionate about business and it was the business opportunity I was initially excited about. Telecommunications came second. I had a burning passion in the early days of Orcon for a good five years, working 16 hours a day solid. If I do anything in the future, I want something that’s going to get me that excited.
PG: I looked back at the TV3 interview you did in 2004 which was very interesting. You weren’t a networking guy, but you were trained as an electrical engineer?
SW: That doesn’t teach you much about computers. I didn’t really use any of my degree. I was also pretty computer illiterate when I started the company so I had to learn fast. These days I’m tech savvy, I didn’t even have a computer when I started the company.
PG: You’ve made some moves at Orcon in the area of content, the deal with Digirama, plans for IPTV, as this Web 2.0 thing takes off, do you want to get into the content side of the internet?
SW: Yeah, in some ways content is easier than access, because you don’t have to have a load of boxes that physically exist. The advantage Sam [Morgan] had with Trademe, was that if something grows really fast, you just stick in more servers. With Orcon, if you want to grow something fast you need infrastructure. Telecom’s got a worse problem with that than we do. I’m probably going to sit tight for six months to a year, take some long holidays, do some travel and not worry about things. If I have any interest at all, it’s in things like sustainability and biofuels. Global warming is a big concern of mine. Maybe there’s an opportunity to make some money but do some good at the same time. Maybe introduce something like solar energy to New Zealand that’s actually going to help. It’s something I’m investigating. Alternatively, if I enjoy being retired a lit too much, I may not do anything.
PG: You’re 30 now right?
SW: YES, 30.
PG: It’s interesting how goal orientated you’ve been throughout your life from when you got your first bank book as a kid through to wanting to take Orcon to $100 million in revenue by the age of 30. Did you get there?
SW: No, the turnover is a bit lower than that, but I think it will only be a year or two off target. I’ll still be involved with the company by the time it hits $100 million. But the real issue has been our margins being squeezed having to resell Telecom’s broadband and LLU happening a lot slower than was thought. There have been some unexpected difficulties. Our revenue is still growing pretty fast.
PG: Looking back to 2003 – 2004, it seemed that Orcon was more willing to embrace the Telecom wholesale regime than some of the other ISPs who were a lot more vocal in their criticism of Telecom. Do you think that gave you an advantage, that you were more willing to play ball with Telecom than your competitors?
SW: I don’t think it gave us a huge advantage, but we weren’t so distracted by regulatory arguments. My attitude is you should make the best of the situation you have. At that time it didn’t look like we’d end up with local loop unbundling. Theresa didn’t expect it was going to happen, let alone myself. I don’t think we got any concessions from them, but the working relationship was the most amicable and productive of any of the ISPs. That assisted us a bit, even on small things like fault resolution. The Telecom guys were happy to work with our guys. We weren’t going to report faults that weren’t true, we weren’t going to bitch and moan.
PG: You talk about margins being squeezed. Have the economics of reselling Telecom’s wholesale products deteriorated?
SW: They’ve always been bad. The issue is that there are less and less dial-up customers sustaining the ISPs. It’s a global problem. Telecom has issues with making money out of broadband as well. I’m sure dial-up is more profitable for telcos than broadband. Someone like Telecom with toll calling and fixed line rentals, those things are declining. Broadband revenue is going up to replace those, but Telecom has one set of revenues going down and another set going up. ISPs have internet revenue that is profitable being replaced by internet revenue that isn’t profitable. With LLU telcos like Orcon will get access to the physical phone lines as well as additional services like IPTV. That will be fine in the future. The issue at the moment for ISPs is if a consumer spends $40 a month on a phone line, $20 on tolls and $40 on broadband, traditional ISPs don’t get to attack much of that and even if they do, most of the money goes to Telecom in the form of a wholesale arrangement. Under LLU you might buy the line for $15 and whack on as many services as you can. Then it sorts to become more profitable.
PG: You’re getting out at a time which for New Zealand is the most uncertain. Some of your competitors like CallPlus and Woosh are banking on WiMax to expand their networks, then there’s the big investment needed in unbundling. Is that why you chose to exit now with all that uncertainty ahead?
SW: The uncertainty was one reason that I chose to exit, but I’d been doing the same thing for ten years, I need to slow my life down a bit and have a bit of a change. Also I’ve started to become more interested in things like global warming. With the uncertainty there’s also huge opportunity, around unbundling. I’m sure Kordia will do extremely well out of their purchase. I may not have done so well by not selling because without sufficient funding you can fall flat on your face. I was concerned that if the capital started drying up, because Orcon was always self funding, my wealth forms the company. If the company was going to do anything it would have to make a profit so we could reinvest it. That’s been the strategy all along.
PG: So everything was funded out of revenue at Orcon throughout?
SW: Everything at Orcon from day one was funded out of cash flow. It was started with $100
PG: During the first dotcom boom, did you feel a sense of urgency that you had to get capital to take advantage of it?
SW: At that stage I didn’t understand how a venture capital relationship might work and the issue is they may only ask for 20 per cent of the company but not be prepared to pay what you want. They always want a good chunk of the business and then there are usually effective control clauses, so even if they only own 30 per cent, effectively they can remove you as a director. I’ve always been opinionated about what I wanted to do. I didn’t want to have the risk of bowing down to someone else and be depressed about it. Whenever a proposal was presented to me, I was reluctant. I said to myself, I’ll just try and grow the business as fast as I can, if it grows a bit slower, I don’t care.
PG: Orcon always had a reputation for very good service. How did you instill that culture?
SW: It comes from all those cheesy sayings, the customer being king, that type of thing. But it was important for Orcon to differentiate and the piece of copper you’re selling is largely the same thing, like petrol stations all sell the same gasoline but they all charge different prices. They differentiate through branding. I always thought we had to differentiate in as many different areas as we could and a lot of the time, ISPs were doing a pretty poor job on service. We made it one of the things we were going to differentiate on. One technique I employed early on was that we hired non-technical people like myself for the call centre rather than geeks. You can’t teach a geek customer service. There are only a hundred questions that will ever be asked at a help desk and you can teach someone the answers to those. We got happy, bouncy customer services people and taught them what they needed to know.
PG: Did you have any mentors?
SW: people come and go. There are people who will say, I helped Seeby out. But not really, I’ve always had a strong vision about where things should go. Most of the mentors’ advice I’ve had over the years, I’ve ended up disregarding.
PG: Was there anyone in the telecoms industry you admired as a young businessman?
SW: The Wood brothers were an early inspiration, because they were in game a year ahead of me. It was always a case of me having to catch up to Tim and Nick. They did really well exiting a few years ago and got more money than Ihug sold for (to Vodafone).
PG: And the successful exit at the peak is the real sign you’ve made it, isn’t it?
SW: It was certainly planned, choosing Kordia was planned as well. It was important to be Kiwi owned, there’s no risk of Kordia being taken over by an Australian outfit. I’m proud of the Kiwi heritage. Obviously, getting what I thought was a fair price was important. Ultimately I didn’t necessarily expect, even a year ago, to sell. But I started thinking, what does this business need? All internet companies are becoming phone companies and all phone companies are becoming internet companies. Then they’re all becoming converged media network companies. Looking at the regulatory environment after the Government’s announcement after LLU, we did the Siemens deal so we had vendor finance, but what we were lacking was media expertise and a network. We were going to have to build the network and invest in media technologies. Kordia as a network and broadcast type company, had the two pieces of the puzzle that we lacked.
I thought either I’m going to have to get a venture capitalist onboard or load the company up with heaps of debt. Take on a whole lot more risk where potentially it could fall flat on its face or sell it to someone who can extract the value. There was the risk that I could try and do all the stuff Kordia is trying to do, by myself.
PG: CallPlus has secured US$450 million for its WiMax plans. Maybe there’d have been an appetite for investment if you’d wanted to go that route.
SW: I was surprised by the CallPlus thing. I think it’s a real figure, but it’s probably a line of credit, so it will have to be drawn down over time and they’ll have to build the network. And its debt funding. If you borrow $450 million, you’re paying 40 – 50 million a year in interest. Just because they have $450 million, doesn’t mean they’re won’t be saddled with debt and crippled by it, in much the same way Woosh is. They’ve spent $100 million plus building a network and don’t yet have the customers to sustain it. If CallPlus goes and spends the US$450 million and only gets 100,000 customers, it will be a bit of a disaster.
PG: What’s your view on wireless technologies. Are you optimistic that some of these alternative models may work?
SW: There are a lot of variables. There’s a lot of uncertainty around the Government’s spectrum auctions. CallPlus has the same concerns. Wireless technology rests on having the right spectrum available at the right price. If it goes for a horrendous price and Vodafone and Telecom pay to block out competitors, it could be a moot point. One technology doesn’t tend to replace another. When email came along it didn’t replace the fax machine, when the fax came along it didn’t replace postal mail. Now we’ve got postal mail and couriers and FedEx, faxes, email and instant messaging.
The biggest success will be the company that can offer a seamless solution, wireless and wired technology, TV and phone calling together. I’m not just talking about multiple things on one bill, but being able to use your internet service wherever you are and pay in a consistent manner. We’re a long way away from that.
PG: Where you nervous when Vodafone bought Ihug, seeing as Vodafone @ Home is aiming for one converged device that acts as fixed line and mobile with seamless switch over?
SW: I saw it as an advantage but I wasn’t threatened by it. Orcon’s got an MVNO agreement with Vodafone anyway. We’ll be doing the same type of services, just in a different way. It just depends what pieces of the puzzle you have control over and which pieces you don’t.
PG: Did you benchmark the sale of Orcon against the $41 million sale of Ihug in terms of what you were looking for?
SW: It’s difficult to compare the two. Certainly, in terms of customer numbers, we’re 80 per cent the size of Ihug. It would have been nice to get more but I’m not unhappy with the sale price. We have different ebitda figures and more customers have multiple services with Ihug. They’ve a more established voice base. I got a fair deal and Kordia paid a good price.
PG: How do you feel about the fact that your staff is effectively now public servants?
SW: They’re not really. The Government has very little input into how Kordia is run apart from maybe appointing the board of directors. It’s certainly not the case that the Government wanted to do this to create a competitor to Telecom. They’ve some great products they want to sell like DVB-H (mobile TV). They haven’t had a lot of interest from the ISPs in terms of taking some of these services up.
PG: What’s been the reaction to the sale from staff.
SW: It’s been good, there’s been no tears. People have said it’s the end of an area, but once they realized there’s no change in job descriptions, they’re not suddenly Kordia employees, they’ll still be managed by the same people, there’s no redundancies, they’re okay with it. I’ll still be popping into the office, I’ll still be around for at least two years in an advisory capacity.
PG: And Scott Bartlett, your lieutenant, will be the CEO?
SW: Yeah, essentially I’d already stepped back a bit anyway. With a company the size of Orcon it’s important to spend a lot of time thinking about what’s next. You can’t get too caught up in the day to day issues or you can wake up and find you’ve been going in the wrong direction for two years.
PG: So the future, alternative energy technologies, are there good opportunities to invest here?
SW: I’m passionate about business, that’s number one, New Zealand is number two. The thing I’m concerned about is basically if we’re already past peak oil [production] and some of the wells start to dry up and the price goes to US$120 a barrel, then New Zealand is at serious risk of collapse because we haven’t got the densely populated cities. If you had a global price shock like the 1970s, the countries that do well will be the ones that have all their population gathered in one place. With New Zealand, everything in this country is run on gasoline, you have to have a car, and public transport is not good enough. We have to stop this urban sprawl. People need to get into more densely populated areas where there’s a subway infrastructure. We’re obviously not going to be able to build that infrastructure in the next five to ten years. If there is a serious oil shock, New Zealand will be at its mercy, particularly for things like exports.
The only country that will do well is Brazil, because 60 – 70 per cent of their cars run on ethanol produced by sugar cane, which is six times more effective at producing ethanol than corn.
New Zealand should be able to produce ethanol technologies and the Maui gas fields.
We should be working on complete energy independence.
PG: You’re moving out of a field that’s complicated enough and into one even more so. Are you going to go on a fact-finding mission to some of these places using alternative fuel sources.
SW: I’ve been doing a lot of reading. I’ll try and work my contacts, ask government officials. If a light bulb switches on in my head and I decide the best thing to do is buy a heap of land in the South Island and start growing sugar cane, that’s what I’ll do.
Solar generation or green homes.
If I can start a company that provides green technology to homes, it’s a way to start.
PG: How’s Orcon Racing going?
SW: It hasn’t been in operation this season.
PG: What happened?
SW: We didn’t sponsor the car this reason for two reasons – Orcon is focusing on call to action marketing rather than branding. Potentially motor racing is going to become a bit un-PC. Because I have environmental concerns I started thinking gasoline is in short supply, there’s all this concern about global warming, we don’t necessarily want to be involved in a sport that in two years time everyone is up in arms about.
PG: You did a sabbatical a while back right?
SW: Yeah I’ve seen a good portion of the planet. I’ll do some more.
PG: That’s the plan, take some time and explore?
SW: Yeah, I just came back from China so I’m a bit tired. But there are a lot of things I want to see. If I’m interested in environmental things, it may give me a better perspective while I’m traveling. One of the huge un-harnessed
technologies is wave power. The ocean is always moving. If we can have submerged power generators creating power by the motion of the sea, that would be ideal.
I get the feeling we need to keep our nuclear material for use in the future. I don’t think it’s a smart idea to go burning it all up. We may need it for exploring the stars or powering space ships. It would be really sad if we saved the planet but in 500 years time we’ve got these ambitious plans to colonise the stars but were 20 pounds short of uranium or something.