The pioneering ISPs

Telecom did not appear to be using a dominant position to harm competitors, and was simply using every incentive to keep its access prices as low as possible to encourage the market to expand more rapidly. And the competitive process in the relevant markets was less likely to be harmed now that Clear had arrived and Telstra had announced it would also be entering the market. Commerce Commission findings reported in Aardvark, May 1997.[1]

As the Internet moved into the mainstream providers began battling to gain customers and keep them. The pressure was on and new, more powerful players wanted in on the action. Out came the marketing tactics and the dirty tricks. Rampant egos were to the fore as the industry experienced price wars, legal threats, spamming, denial of service attacks (DoS) and yes, even death threats.

It wasn’t a game for the fainthearted as the laid-back attitude of the techies from the bulletin- board days gave way to the need for more robust systems and business nous to keep the customer satisfied. Growing demand from home users wanting access to newsgroups and email resulted in the Status bulletin board system transforming into the Iconz in 1992 and relocating its equipment from a Parnell garage to Airedale Street, opposite the Telecom central Auckland exchange.

Founder Jon Clarke and technical manager Craig Whitmore added marketing and business manager Chris Thorpe and others to the team and began looking to expand beyond home users into the business market. One of its first customers was the Pelican Bar on Elliot Street, run by brothers Tim and Nick Wood. Brian Rudman of the NZ Herald interviewed the brothers at the height of their careers in the ISP business. As preschoolers in Singapore, where their father John was stationed as an airline pilot, the Wood brothers had sold fruit from their neighbour’s tree around the apartment block, until their mother, Jan, found out. Back in Auckland 14-year-old Nick grew his own pot plants and sold them to raise money for his first computer, a Commodore 20. He started reading programming books and was soon hacking into primitive computer games to see how they worked. Then he developed his own games including one called Nicktron. He would copy them onto cassette tapes – the storage medium before floppy disks – and pack them with instruction sheets coloured with felt pen.

“I flew around the country selling them, 20 at a time, to the computer stores. That’s how I raised the money to buy my first IBM computer.” By that stage Nick was 18 years old and off to university, where he took degrees in commerce and computer science. He lasted one term before he got bored and moved on to teach himself cooking, working at a series of restaurant and hotel jobs, then joined his father in Los Angeles, where he was on a three-month posting. Nick stayed two years, pumping gas, selling art prints, and discovering the pre-Internet on-line experience offered by CompuServe. With his US connections in the print business he started an operation back in New Zealand selling at factories and door to door. This proved more lucrative than the underground bar in Auckland’s Elliott Street which he went on to run, and the restaurant in Queen’s Arcade operated by brother Tim. The restaurant got off to an inauspicious start when dozens of police turned up on opening night and closed it down. Some technicality regarding the licence, said Nick. After that the police became regulars at the Pelican Bar, which was also a live entertainment venue.[2]

Nick Wood, who had been keeping an eye on the evolution of bulletin boards, and following his earlier experiments on CompuServe, knew that when the Internet arrived on the scene it was worth pursuing. “We converted the bar into more of a nightclub-cyber cafe with a bunch of Internet terminals and networked computer games. I think it was the first of its kind in the South Pacific.” The venue often hosted university bands, including Supergroove, but the row of computers also began to attract a steady stream of customers eager for their first taste of on-line activity.

Even for the regular clientele of university students this was cutting edge. “It was the first time people had latched on to the World Wide Web and Internet relay chat (IRC)[3] where you could talk to people around the world in groups.” The club took a feed from Iconz but Nick Wood wasn’t impressed with the customer service. Fed up with system failures and downtime he paid a visit to owner Jon Clarke and convinced him he needed a more reliable service. Clarke agreed to let Wood set up a system alongside Iconz equipment in return for assistance with helpdesk and customer service support for home users.

Wood plugged his two Unix computers and related terminals and access equipment into Iconz network with a coaxial cable, ultimately believing the two operations would join forces. Iconz would handle the business side, and he would handle the customers as the Internet Home Users Group (Ihug). Early in 1994, Iconz had around 18 dial-up lines and a 48kbit/sec MDDS circuit to Auckland University. They were charging $50 per Mb for email and $10 per Mb for data.

Knowing the technical obstacles to entry Nick Wood began doing home installations and developed a self-installing disk that made it easy for customers to set up their own connections. “Prior to that you had to set up their modem and do some command line stuff to download software from your ISP and then hand configure it, which was all very messy. We built a Windows application which would let you download the software from a floppy disk and automatically set up a script so you could dial up straightaway.”

The company showcased its new, user-friendly approach at a computer show at the Ellerslie Showgrounds in mid-1994. However the relationship between Iconz and Ihug was to be short-lived. Founder Jon Clarke worked for the Hong Kong Bank and was about to be transferred to Hong Kong, so he and business partner Chris Thorpe began looking for investors to take the service to the next level. That wasn’t what Nick Wood had in mind. He wasn’t ready to sell any part of his business and could see that if he persevered there was momentum for serious growth without having to sell out.

Systems administrator Craig Whitmore worked for both operations and as Iconz and Ihug went their separate ways he walked across the hall and joined Ihug as a business partner with Nick Wood. The two eventually gathered up their technology and shifted across town.

Iconz disappearing act

Business at Iconz was booming, and Clarke was keen to upgrade and expand his access equipment but a little short on the dollars to make that happen. He met a ‘business person’ who seemed to have the answer to his dreams. The enthusiastic individual claimed he could help the fast-growing ISP keep pace with market demands and bankrolled some seriously grunty new equipment. Then came the bombshell.

One Friday night there was a visit from the police, who unplugged and removed all the new Iconz hardware to the sixth floor of the central Auckland police station. Important data necessary to keep operating was on a 1Gb disk drive. After convincing the sergeant in charge, Clarke was given permission to make a tape back-up copy. So he and David Dix from KC Internet took a Sun SLC computer, disk and tape drive, spare disk case, and all the cables to the police station only to discover the lifts weren’t working. They climbed six flights of stairs with arms full of technology to the office where all the hardware was stored.

The sergeant in charge of the case wanted to know why the contents of the disk were so important. After some explanation about user password files and the operating system that were essential for Iconz to continue in business, he suggested they just take the disk. The police had no desire to see Iconz become a casualty of the equipment thief and were convinced Clarke had done no wrong. Within a day or two Iconz was resurrected, and all the existing users notified that there had been a disk problem which was now sorted out.

Apparently most of the equipment seized by the police had been obtained through credit card fraud. The so-called business partner had created the scam while working for a company that sold PBX equipment. He had acquired a pile of credit card carbon-copy forms from a retail outlet in Newmarket to get names and card numbers, then convinced retailers to deliver goods to an office address. The couriers would then be intercepted by this person or an accomplice just outside the office, often in a high rise in central Auckland, saying they had urgently been waiting for the disk drives, screens, modems, or whatever equipment was being hijacked. The courier, in a rush, would be glad to get a signature and head back down to street level. The supplier never knew anything was wrong until a month later when the real credit card owners denied ever purchasing the products.[4]

By 1995 Iconz was offering dial-up access through branches in Auckland, Wellington, Hamilton and Christchurch, as well as Pacnet access for dial-in from other centres. It was the catalyst for getting a number of other ISPs on-line, including Midland Internet in Hamilton formed by Bryce Farmilo and Simon Lyall in mid-1993. It devised a groundbreaking solution to connect to the Waikato Internet gateway using 1.6Mbit/sec Lucent Wavelan radio link for its main feed.[5]

Iconz moved to Beach Road, closer to Auckland’s waterfront, and ahead of plans to sell up there was much talk about the Telecom data link it had to Waikato University. The company’s advertising claimed its 1Mbit/sec speed was faster than any other Auckland ISP. “Then someone pointed out that it was in fact a 128kbit/sec line. The comeback was that the way it was used was in fact equivalent to a 1Mb link. Someone at Waikato entered into the fray, explaining the link was in fact not a wide-band link or a Megalink. Once the reality sunk in along with the embarrassment the advertising ceased, and the 1Mb claims were was never mentioned again.”[6]

Kim Schienberg from Panix.com, a New York–based Internet hosting company, invested in the business, which was sold later that year to Ron and Chris Woodrow of Mitsubishi distributor Melco. In 1998 Iconz added 56kbit/sec modem capability and purchased three new Cisco boxes capable of handling 120 phone lines each. It was getting more serious about the business market not only providing videoconferencing but voice over IP.

In 1999 Iconz was acquired by Asia On-line, a subsidiary of Softbank (Japan) and in 2000 changed its name to reflect that new ownership. Paul Budde described the ISP as “the Swiss army knife of ISPs with something for everyone.” It had begun to refocus on more influential and profitable accounts with specialised services and products including access, Web design, e-commerce, hosting, and systems integration as different prongs of the business. In 2000 it admitted to having around 30,000 subscribers; more than half of them businesses. Iconz later reclaimed its original trading title and continued to operate as one of the more respected second-tier operators.

Ihug aims for the sky

Splitting from Iconz in early 1995 was a turning point for Ihug, with Tim Wood selling up what assets were left in the Pelican nightclub and cyber cafe to join his brother Nick in the new business venture. Their father John weighed in with financial help, making the operation, now located in Newton Rd, a family business.

To survive and move beyond the couple of hundred customers Nick Wood and systems administrator Craig Whitmore had been servicing, they needed their own access pipe and to ramp up the modem banks and equipment. “Tim had been on the periphery and our father put up several thousand dollars to help us out and try and take Internet provision to the next level. We didn’t go around raising capital; everyone just got involved,” said Nick Wood. “We had some short-term debt and overdrafts but once we got through covering the cost of setting up, the service pretty much funded itself.”

The focus remained on being a domestic provider. Users were charged a set-up fee and a monthly fee of around $10 per megabyte to start with. The only real competition in Auckland was from a few fringe ISPs and former partner Iconz. Initially systems administrator Craig Whitmore, who had been offered a partnership in the company, said there was no real research and development, just lots of good ideas and a willingness to try anything and see if it worked. Sometimes the system would go down for several hours at a time but without serious competition everyone just took it in their stride. “Imagine looking after 500 run-of-the mill dial-up modems. One or two would die each day and you had to check them all every day to make sure they were working. It was a big hassle. Every one of those modems represented a single Telecom line. We used up all the analogue copper lines in the street at one point,” said Whitmore.

Nick Wood put his computer skills and software coding to good use. “I wrote the billing software for the company, mixed it with monthly charges from people’s accounts, got all the web sites organised and managed the mail server.” Wood had a mix and match of technology, which worked reasonably well but there were times when he was living at Silverdale, just north of Auckland, when he had to drive into town – sometimes twice a night – to reset everything. “Linux was still a very new operating system and it wasn’t always that reliable and neither was the hardware. We had scripts written that would tell us it had fallen over and you would be halfway home and have to turn around and drive back and kick it in the teeth. That was only a small part of the network but it was still a pain in the backside.”

While most other ISPs seemed content with trying to capture a localised market, at least within their free calling area, Ihug was not only looking for nationwide coverage but for an independent route out of the country so it didn’t have to rely on the Waikato gateway. Ihug had already had run-ins with Telecom trying to get enough lines to keep up with its growth curve. “They were forcing everyone to pay per megabyte without any other options, and as soon as the university stopped providing access to ISPs they put the price up and started to control the suppliers’ bandwidth so we decided we’d find out own way out of the country.”

Ihug approached Judith Speight, head of the local branch of SITA, which provided international links for travel companies and airlines. It just happened to have a frame-relay connection direct to the United States. Ihug had always wanted a fixed price for bandwidth so it could charge a fixed price to its customers. The SITA frame-relay offering was a chance to review that option. “We convinced them to let us have a 128kbit/sec frame relay connection to Los Angeles at US$12,000 a month. Then we had our own router installed in the US and purchased a second router from another US carrier which terminated the capacity into the wider Internet. That was our first fixed cost price.”

In November 1995, a year after Ihug launched, stiff new competition arrived in the form of Voyager with the full backing of Australia’s largest ISP, OzEmail. It also had independent international access, a simple Windows-based CD that sped up the process of setting up an account and an 0800 number that meant for the first time there was nationwide free calling access.

Anticipating Voyager’s launch, Ihug jumped in with the flat-rate charging it had been working on, making a big splash at the Computerworld Expo with its Diamond Account, costing only $44 a month. Voyager countered with a low-entry level and the ISP market was forced into the first of many rounds of price cuts that quickly took their toll on smaller players already operating on low profit margins. Ihug believed it had enough customers to support the new business model and began an all-out marketing campaign. At first competitors, including several newcomers, looked on stunned at this new approach, refusing to believe it could work. Until now this had still been something of a hobbyist’s game, an area that required technical expertise. No ISP had undertaken a major marketing campaign before. Wood said most of the people running ISPs were highly technical and not very focused on the dollars-and-cents side. “We had a good blend of technical capabilities and were also thinking of the business and customer side of the service and what people wanted.”

Marketing also meant market research. According to Nick Wood there was global evidence that “guys took up the Internet ahead of their wives or women in general.” They were using it at night and hogging the phone line. “Their wives were bitching in their ears about how much money they were spending on the Internet, or how much time they were spending on line. Most people didn’t understand what a megabyte was, or how quickly they would use it and end up with a $300 bill at the end of the month.” With Ihug’s flat-rate customers at last had some certainty about cost. “We thought if we fixed the price they could say, ‘it’s only $40-$50 a month’ then the pressure would be relieved to some degree. It gave them a clear picture of what it was going to cost. It created a momentum. We had a huge increase in uptake of customers.”

Craig Whitmore said flat rate came as a great relief to many users who had become addicted to Internet use and were clocking up bills of hundreds of dollars each month. “I remember over a year manually adding around 50-60 customers a day and at peak times it would get really busy and people couldn’t get on-line. If you managed to get on at peak time you tried to stay on for as long as you could without getting logged off. We had trouble keeping up with the number of customers.”

Competition among ISPs changed dramatically in May 1996 with the entrance of Xtra, a business unit of Telecom, which was immediately in a commanding position through its access to every town and city and its huge marketing ability. Voyager increased its investment in technology and dropped its prices further.[7] Xtra’s high-handed, commercially driven approach, however, offended many of the old guard who remained loyal to the smaller ISPs despite the offers of cheaper access.

Ihug grew substantially during this period; its flat-rate services and its independent international bandwidth setting it apart. While Xtra was snapping up hoards of new customers, those who understood something about megabyte or time-charging and were looking at downloading larger files or spending longer on-line, were attracted to the surety of monthly costs. Ihug’s success allowed it to continue investing in new ideas and keeping ahead of market demands.

During the first access price wars, the cost of computer hardware and modems had begun to fall and the Internet itself was gaining global momentum. “Our main problem became infrastructure. Telecom was only delivering services on copper pairs and there were only so many you could have in certain locations. You had to have scripts that ran through all the phone numbers to find a free line so it was quite complicated. Initially you had a script that meant someone would dial across 500 lines until it found one that was free,” said Whitmore.

The mid-1996 solution to relieve that congestion was to deploy Ascend Max 4000 hubs, which could deliver 30 numbers on one line through primary rate ISDN. The cost, though, was around $108,000 each. “We used to laugh and point at three of them in a cabinet and say to someone, ‘There’s your house’ and they were only the size of a PC. The price ended up coming down substantially over time.” While having the Ascend boxes should have solved the problems, Telecom’s software at its exchanges wasn’t smart enough to link the lines together, so there was still a need for a script to dial a series of numbers to find an available line.

As Ihug expanded its coverage down the country to Hamilton and Wellington and into the South Island it found common goals with Efficient Software, which had coverage from Dunedin down to Invercargill and across to Queenstown with about 4000 customers. Owner Bart Kindt, a Dutchman with a strong technical and engineering bent, agreed to a merger with Ihug for a 10 percent share of the growing business.[8] Kindt moved to Auckland to work with the Woods on strengthening their local network to cope with the growth and help them with an expansion plan into Australia.

The pressure was also coming on from SITA, which realised that Ihug was taking up so much of its backbone capacity into the United States it couldn’t afford to maintain the relationship. Nick Wood said through quick thinking they leveraged Telstra, which had just entered the market, against Telecom. “We stretched the truth a little and Telecom, not wanting to be beaten out, eventually matched Telstra’s offer. We ended up with a reasonable level of pricing for the capacity in and out of the country.” Not happy with that Ihug pushed the boundaries further in its search for alternative international capacity and redundancy.

It was aware the PacRim East undersea cable was running out of capacity and began looking at ways to run at faster-than-dial-up connections. “We had found some hardware in Europe that would deliver us a solution off the satellite, and it also looked like it could also deliver us a backbone solution. We could have two satellites from America delivering capacity into New Zealand but you couldn’t go back the other way. Because most of the data was coming into the country from the US you could however use the copper for up-stream,” said Nick Wood.

In 1997 The Internet Group (TIG) Ihug became the first New Zealand ISP to cross the Tasman, creating a beachhead in Australia with services in Sydney and Melbourne, Brisbane, and Adelaide. It established two 34Mbit/sec feeds coming from the Napa Valley transmitting up to PanAmSat and down-to-earth stations in Auckland, Sydney, Melbourne, Wellington, Christchurch, and Dunedin.

Around 85 percent of its Internet traffic came in via satellite plus there were redundancy links. The company used PanAmSat’s PAS-2 satellite to provide Internet services to the United States through the T1 circuit across the Pacific and was supplying a number of Australian ISPs capacity on its satellite link.

This new model with high capacity feed to uplink stations and normal landlines for the return path required an equipment upgrade; Unix servers with Pentium PCs running Linux for minor league stuff and Axle hardware for major services running Solaris 2.5. The main site Web server was running on Silicon Graphics machines and customers’ home pages were served from an Axle machine in Napa Valley. An Internet outsourcing service for corporate customers was launched in 1998.

Locally Ihug launched its StarNet services in October 1997, serving Auckland customers via a microwave link from the Sky Tower. It offered download speeds between 256kbit/sec and 2Mbit/sec, something unheard of for Internet access. This was expanded via satellite during 1998. Performance, however, depended on a lot of things, including cloud cover, rain density, and waving trees that might be in the path. Line-of-sight connections with the Sky Tower or a major transmission point guaranteed a strong signal but direct satellite links requiring a much larger dish were less reliable.

Sales were booming and Ihug continued to be surprised that none of the other ISPs had followed it with flat-rate accounts. Few were even advertising their services, which gave the company a distinct edge. By 1998 it had 70 staff on board. The journey to success had been dependent on entrepreneurialism and good timing. There had been no major outside investment other than their father John Wood’s initial investment of $8000 followed a little later with a $10,000 top-up. Apart from that, growth was funded through profit.[9] In July 1999 Ihug had become New Zealand’s second-largest ISP, with 65,000 customers both locally and in Australia, with a staff of 200. Annual turnover had risen from zero to $30 million. The National Business Review (NBR) in its annual Rich List estimated the Wood brother’s, Tim, 30 and Nick, 32, combined wealth at $75 million.

It had been evident for a couple of years that the Internet in New Zealand was entering a new era. Perhaps it was the end of innocence or the inevitable outcome of commercialising. At one end the World Wide Web was maturing to the point where businesses could see the possibilities of doing much more than creating electronic pamphlets to showcase their wares. They could be as up to date on global trends and information as anyone, and email was so widespread now that it was being used for business transactions.

New Zealand felt a little less isolated because of this growing connectedness, which in turn meant that companies were requiring much more from their ISPs, who in turn required much more from their bandwidth suppliers. Being in the ISP business was no longer something for the hobbyists; you needed ongoing investment and growth. The market was becoming highly competitive, and for the first time ISPs began to advertise their services rather than relying on word of mouth.

Voyager runs rings

Voyager launched in November 1995 as New Zealand’s first truly national ISP with nodes in Auckland, Hamilton, Napier, Wellington, Christchurch, and Dunedin and free 0800 access to users outside the node cities. It was the first time everyone could get Internet access without incurring toll charges or Pacnet expenses. While it was greeted by stiff competition from day one, particularly from Ihug which launched ‘all you can eat,’ flat-rate dial-up accounts in the same month, it quickly outperformed all challengers. Voyager claims it was the 42nd ISP to start business in New Zealand but within ten weeks of launching it was the largest of all.

CEO John O’Hara had earlier set up Hargon International, a large local distributor of floppy disks for businesses. When a couple of his workers left to set up OzEmail they approached him to head the New Zealand operation. Initially he declined, then at an industry conference in Boston he had an epiphany. “Everything I saw said the Internet was going to be big so I had to change my mind.” O’Hara wasn’t new to the on-line world. He’d been running a forum called Go Kiwi on CompuServe, promoting New Zealand software businesses. While he had his CompuServe access address on his business card it was mostly viewed as a curiosity. Hardly anyone had Internet or on-line addresses in their promotional material. Fax was still king.

Of course when you’re starting a new business a good name is essential but O’Hara and his business partner and technical manager Alistair Stevens were having difficulty. All the logical extensions link… email and Kiwi had been taken. “My wife was looking along the row of National Geographic magazines at home and said, ‘What about Voyager?’ We looked at each other and said, ‘That’ll do.’” Chris Barton in New Zealand’s PC Magazine explained: “Voyager company director John O’Hara is aiming high. He wants Voyager to be ‘the biggest and the best’ Internet service in New Zealand. ‘We hope we can help them to have a Grand Tour’ says O’Hara, an oblique reference to the 1970s Voyager spacecraft mission developed by the NASA Jet Propulsion Laboratory. The mission was born of a concept known as ‘The Grand Tour,’ to take advantage of a geometric arrangement of the outer planets – Jupiter, Saturn, Uranus and Neptune – which occurs about every 176 years.”

O’Hara was also acutely aware the Internet still had a bad reputation for being difficult to use. Even getting signed up was enough to trigger bouts of technophobia. So he and his team developed Voyager Wizard on a floppy disk to bypass a lot of the geek stuff. Ihug had already found the approach worked wonders for them so it wasn’t a new idea. Voyager’s Windows application included a licensed copy of the Shiva PPP Dialler, which auto-detected the modem in the user’s PC.

An on-screen map of New Zealand showed access nodes, and after clicking their location users could select the appropriate access number. Once connected they could download a licensed copy of Netscape Navigator and further Internet software. Voyager offered unlimited technical support and customer service via toll-free 0800 numbers from 9 a.m. to midnight seven days a week. It also provided permanent Internet connectivity via leased lines to high-use customers. Users were charged on an hourly rate rounded up to the next minute. There was no charge for volume and no fixed monthly fee. Rates were $10 an hour.[10]

Unlike most ISPs, Voyager bypassed the Waikato gateway with traffic sent through OzEmail and Aarnet in Australia, via a high-bandwidth data circuit across the Tasman. The company initially contacted Telecom about providing New Zealand backbone services but O’Hara’s friend Phil Norman advised against it, as he was about to head a rival Telecom ISP. Voyager went with Clear for its 0800 nationwide access. Several hundred Netcom 28.8kbit/sec modems were installed at about a dozen points of presence around the country, initially at Clear exchanges then regional points, mostly Dick Smith stores.

Within six months of operation Voyager shifted to Telecom as its backbone provider, consolidating everything down to a single Auckland site with 0800 access. “They were cost competitive and generally came up with a better deal. The market had become very competitive by this stage,” said O’Hara.

Things had remained fairly collegial between most ISPs but the tone changed noticeably at Telecom a month after Voyager had launched, and Phil Norman was replaced at the head of the new Internet Services Group (ISG) on-line business unit. American Chris Tyler had arrived in December 1995 bringing a management style not seen before at Telecom. According to one staff member he “had this vision that we were going to own the Web and we were going to tie up every Internet user.” Tyler’s main problem, said O’Hara, was that he was too aggressive and approached the market in a very confrontational fashion, polarising the other ISPs against him. “His approach did him more harm than good.” So aggressive was Xtra’s drive to build its customer base that Tyler reportedly considered buying out other ISPs at the rate of $200 per customer.[11]

Telecom makes aggressive entry

Telecom was late to the Internet game. It had dismissed advice to get into the market much earlier and the warnings, when upstart hobbyists grew from being bulletin board providers to making serious inroads into what had traditionally been carrier space. What smarted even more was that its own joint venture, Netway Communications, was providing international bandwidth via the Waikato gateway to a number of the ISPs who were nibbling around the edges of its business.

Its first dip into Internet waters was NZ On-line, a joint venture with Taranaki Polytechnic, delivering a ‘cut-down Internet access product’ for schools and other special interest groups. This only served to show just how far behind the market Telecom was, as smaller ISPs quickly proved they were much more adept at delivering such services. Telecom announced in September 1994 that Netway itself would start providing retail Internet service to its existing customers but the service never launched. Then early in 1995 Telecom On-line Services (TOLS) was born, more as a research group than a business unit, and began conducting service trials. Business development manager, Phil Norman, announced his strategy for entry into the ISP market which would be different to Telecom’s mainstream business.

He believed this new venture would prosper if it was allowed freedom to grow and make decisions quickly and act entrepreneurially. “Over time certain services should be pulled back into the mainstream organisation because of the tremendous ability that Telecom has for contact with just about every New Zealander.” Norman admitted the Internet was a hard sell to some ‘sceptical’ people in Telecom, but scoping studies gave way to technical trials and discreet recruitment, including some of the first wave of local Web publishers.[12]

In December 1995 when Chris Tyler became general manager of Telecom’s ISG, one of his first decisions was to acquire Brisbane-based multimedia company Digital Video Productions (DVP), to create Xtra’s branding and design a Web presence. He claimed this new company would be at the core of a new media business soon to employ hundreds of skilled staff.

Xtra was officially launched at a function on 1 May 1996 at Kermadec restaurant in downtown, Auckland. It was alleged in a number of media stories that Telecom spent NZ$9 million to start Xtra and there were predictions it would be operating at a profit within one year. However as customers flocked to the new service they discovered the front page to its Web, the cumbersome ‘X-ville’ township graphic[13] weighing 135kb, took longer to load on-screen than just about any other page they had encountered.

Most people still had 14.4kbit/sec modems and many were still on accounts where you paid for local traffic. The highly graphical first impressions backfired on all counts. The enormous image also acted as something of a wall between Xtra and all the content DVP had developed behind the scenes. Behind its portal were community interest areas, a shopping mall as well as news, sports, weather, children’s and teen content. The site also offered a jump off to Telecom’s 18 telephone books on-line. DV quickly cobbled together alternative Web entrances for low bandwidth users, but still users had to click through to each specified section and click again to see any content. There was no way of easily showcasing new content; the front page just stayed the same.

Journalist Russell Brown said content developer DVP entered the frame through its relationship with another Telecom Australian asset, the IT and telecommunications company Pacific Star. “They made quite a pair. PacStar designed and installed the billing and security system behind Xtra, an infrastructure that Tyler told the press would be good for the first 50,000 customers. But the PacStar system started double and triple-billing customers, or not billing them at all. Billing records got so out of hand some were simply dumped. Almost every other ISP had billing problems at the time, but Telecom had been expected to get it right. Within six months, PacStar’s system was replaced at considerable expense by Technology Applications’ IPAC 9000, a turnkey solution from the US.”

Xtra did not signal its relationship with Telecom in advertisements and news announcements. However staff were located within Telecom buildings and had access to Telecom management staff. The Xtra technical staff also had unfettered physical access to the Telecom network for installing, testing, and maintaining their own equipment. Most importantly, Telecom was funding the venture and seemed to have an open-ended timeline for success. Its stated goal was to obtain 50 percent of all new Internet users. In fact, during the rest of 1996, Internet connections grew at a rate of 17 percent per month.[14]

Xtra set-up fees were much lower than those of many competitors. It charged on a time basis rather than by usage (Mbytes), thereby making it easier for users to estimate charges. Internet charges were included on the telephone bill, allowing users to make one payment for all Telecom services, and its connection package was tailored to the inexperienced computer user.[15]

According to the Internet Hall of Shame, Alan Marston of Auckland PlaNet applied to Telecom for the 0800 PLANET number in July 1996. After some deliberation his account manager informed him the name had been reserved and was unavailable. Marston, despite every effort, couldn’t find out who had reserved the name or why. Then in September Telecom began running spacey TV ads with a UFO slowly casting its shadow over the earth, scaring herds of animals that stampeded in panic. The UFO stopped and a bright beam of light illuminated a large circle from which arose a message that Telecom had ‘a new lower cost’ scheme for calling anywhere on the planet. The number to call for more information? You guessed it: 0800 PLANET.

Shortly after the first ad appeared Marston began to get phone calls from people enquiring about the new scheme. Then the trickle of calls turned into a stream, then a torrent. It was a weekend so he had to wait until Monday to get a response from Telecom. Apparently nobody had told the Telecom operators about the 0800 PLANET campaign so they looked up PlaNet and redirected all calls to the Auckland ISP’s enquiries number. Of course the cost of the 0800 calls was also put on the PlaNet bill. Marston’s Telecom account manager duly sorted out the billing problem, and Marston was convinced he’d been given the 0800 number by default. No, said Telecom, the number was allocated to it by a dealer, and Telecom had the rights to it so it could not be reallocated.[16]

Price wars get serious

In anticipation of Xtra’s launch, Voyager had announced its intention to add additional points of presence to supplement the six already operating around the country. This would increase the number of customers who could access the service via a free local call. Voyager also announced its intention to purchase additional servers. Soon after the launch of Xtra, however, it had problems with fast-growing customer numbers, resulting in complaints of slow service and inability to fulfil customer requests. Rumours circulated in the press that Voyager was slow paying Telecom for wholesale services. Voyager even cut its 0800 number briefly in a dispute with Telecom. Xtra also had significant problems providing service, and there was negative press regarding technical help, ability to connect, and service outages.[17]

From mid-1996 the major ISPs were engaged in an all-out battle for new customers. In May Voyager halved its hourly rate to $5, and in August Xtra halved its hourly rate to $2.50 and, more controversially, dropped its 0800 rates from $4.95 to $2.45 an hour, a lower rate than any other Telecom customer could get. Xtra now had 10,000 customers, and the price wars were starting to take their toll on smaller ISPs with rates down to $1.50 per megabyte and 50 cents for local traffic. Voyager, which had previously been market leader, was a significant loser in the price wars. Its market share dropped from 38 percent to 22 percent. It was unable to meet the new pricing regime due to its cost structure, which it complained was largely dictated by Telecom, from whom it purchased bandwidth and its 0800 service.

Many smaller regional ISPs complained they were unable to compete, and 19 of the 80 ISPs in operation around the country were forced out of business. The Internet Service Providers Association (ISPANZ) was formed to represent the interests of ISPs and their customers, largely in response to Xtra’s price cuts. Most ISPs joined but Xtra refused to be part of the group. In September the Commerce Commission agreed to investigate complaints against Xtra from Voyager and others. IBM and CompuServe didn’t even try to compete with that new benchmark and began to lose customers. The cheap international bandwidth of these previously big players was no longer enough to keep their edge in the face of this new level of competitive behaviour. The high cost of a national presence meant they soon became insignificant.[18]

The following advertisement was run on the 30th of August 1996 in the following publications by the following ISPs:

Meanwhile there were serious problems with Telecom’s network, and it was now obvious Xtra was adding customers it could not service. Customers from the larger ISPs, Ihug, and Xtra, were dialling in to the newly launched Ascend Max 4000 hub, which in turn connected to exchanges through primary rate ISDN circuits, rather than conventional analogue phone lines. By September 2006 there was chaos. Telecom had not anticipated such a demand for digital services; Ihug and Xtra had booked all new ISDN lines out of Auckland’s Mayoral Drive exchange until the following March. Neither could add enough dial-in lines to keep pace with customer growth.

And a bug in Telecom’s exchange switches meant only 30 lines could be assigned to any dial-in number. Both ISPs, who were running hundreds of lines, had to issue dozens of different numbers to customers. Xtra customers, who had numbers preconfigured in set-up packs, got busy tones for hours, while lines relating to other numbers were idle. It was a shambles. Ihug briefly stopped accepting new accounts. Xtra briefly stopped advertising.[19]

Industry commentator and Aardvark Webmaster Bruce Simpson in his inaugural Aardvark Awards presented the “I Can’t Believe It’s True” Award to Xtra “for being reckless enough to drop their prices by more than 50 percent, while knowing full well they wouldn’t have the capacity to handle the extra business.” Simpson said Xtra was already ahead of its projected sales figures at the time and its actions simply appeared to be “motivated by greed and a need to unfairly dominate the market by squeezing the little guys.” He said through halving its fees Xtra was not only guilty of ‘overtrading’ but had unnecessarily devastated the profitability of the smaller players in the marketplace.[20]

The Commerce Commission cleared Telecom of cross-subsidising its Xtra Internet service late in 1996. After price cuts by Xtra earlier in the year the Commission had received 15 complaints. These alleged Telecom was charging less for providing 0800 access to Xtra than to other ISPs, that competitors were being denied access to the new IPNet access service and that Telecom was deliberately running Xtra at a loss to drive others out of the market.

The Commission found Xtra and other ISPs were paying the same rate for 0800 services and that IPNet was still at trial stage. However Commission chairman Alan Bollard said he would still look into whether Xtra’s losses for its first years of operation were a legitimate investment to gain a foothold in the market or anti-competitive. He was concerned at Xtra’s below-cost pricing, which could be considered a breach of section 36 of the Commerce Act if used by a dominant player to drive competitors to the wall.[21]

The bad feeling between Xtra and Voyager continued, and there seemed to be no end to the bag of dirty tricks both sides were prepared to dig into. Broadcaster, columnist, and IT journalist Russell Brown wrote in Unlimited magazine in 1998 that “the great Xtra security debacle (was) an episode in New Zealand’s Internet story from which nobody emerges with much credit.” It began in late September 1996 when John O’Hara, general manager of Voyager, got a phone call from someone at another ISP who said he could access the email of any Xtra customer. O’Hara and his partner Alistair Stevens drove to the man’s home to witness a startling security flaw.

On registration, all Xtra customers were able to choose their own ‘Xtra ID’ to be used in their email address – [email protected] The name was an alias for a numerical log-in the PacStar system assigned to new customers, along with a password. O’Hara’s informant discovered that the letters in Xtra’s passwords directly corresponded to the numbers in its log-ins – for example, the password for xtr188772 was wppqqv. By any security standard, it was pathetic.

The ISPANZ steering group talked by phone and decided to advise Xtra ASAP, said O’Hara. “We called and Chris would not take the call. We then faxed them and asked for a response within 30 minutes. There was no reply so we went public with the fact it could be done but did not say how.” To discover passwords, it was necessary to know a customer’s Xtra log-in, and not just an email address. There would have been no practical way of finding log-ins had Xtra not inexplicably left open an old Internet utility on its system called Finger. This meant anyone who ran Finger on an Xtra email address would be provided with that customer’s numerical Xtra log-in.

Xtra management went into panic mode, shutting the service down, without telling staff what was wrong. Customers were offered the chance to change their passwords on-line without being told their security might already have been compromised. Indeed, a malicious attacker could have used the facility to lock people out of their accounts by changing their passwords. Within days Xtra had couriered new registration packs to 10,000 customers. Yet a press release headed ‘Telecom rejects anti-Xtra lobby claims’ insisted “the fact of the matter is that Xtra’s security procedures are robust,” and the press was directed to a security consultant who confirmed this. He later admitted he had been unaware of the problem at the time he was quoted.

Meanwhile Voyager staff had done more than Finger one or two addresses. They identified every possible Xtra ID between xtr000001 and xtr999999 – thus compiling an email database of all Xtra customers. O’Hara emailed every one, offering information about the security gaffe and the chance to transfer to Voyager. It was an unacceptable act of spamming, and even industry body ISPANZ issued a public rebuke. Xtra might have enjoyed the moral high ground for a little longer, had not Tyler returned from a sales tour to the United States and issued a press release headed ‘Voyager nabbed!’ demanding it destroy its database. Then, without warning, he ordered all traffic between Xtra and Voyager blocked – to hell with Xtra customers who might have been waiting for email from friends at Voyager. It was Internet heresy.

“I would say that I am absolutely surprised and disappointed in the way that the media have worked very hard to try and turn this into an Oprah Winfrey-type event,” Tyler whinged to Computerworld shortly after the block was lifted, insisting the security problem was “a tremendously overblown identification of a weakness that we had in the service.” Suspicion of the press and a hatred of O’Hara had become something of a culture at Xtra, said a staff member. “Whenever anything came out in the press bagging Xtra, it was just down-tools and how the hell do we counter this. But they never seemed to take advice on board. It was ‘we’ll do it our way and destroy the bastards.’”[22]

Xtra had a strict corporate information policy forbidding staff from talking to the press. O’Hara, however, maintained a good relationship with the press, even after a number of critical stories about Voyager. He dropped enough hints about the security gaffe for journalists to piece together the story. This made him all the more reviled at Xtra. In the wake of the Finger furore, a young and over-emotional Xtra employee made threats to O’Hara and his family.

“There was this thick guy who sent me an email threatening to come around to my house and sort out my family. He tried to disguise his email address. But Alistair, as a technical guru, quickly found out it was [email protected] so I just rang the Xtra office, asked for Lenny and they put me through. I said ‘Hi Lenny this is John O’Hara from Voyager.’ There was this long silence. I said ‘Listen, Lenny, mate, the police are on their way to see you so don’t leave your desk.’ And he confessed and apologised. Threatening my family was just going too far.”

The man was interviewed and warned by police, but Xtra insisted no wrong had been done. Tyler told Computerworld the employee was “a particularly high-quality human being.” The same man proved also to have posted abusive messages to chat channels while posing as an IDG (publisher of Computerworld and PC World) staff member, wrote Russell Brown.[23]

The way Voyager was set up initially meant local data was shunted across to Australia and then back again, which often meant much slower traffic in New Zealand. The use of proxy servers helped improve the performance of popular offshore web sites. In December 1996 it adopted routing to local sites through the Waikato NZIX gateway, which also helped speed things up.[24]

Voyager was also trying to balance out the network load. “Most of our retail customers were dialling up during the evening and for a start the pipes were fairly empty during the day. I recall moving a lot of X-ray images and graphical data around within the health system and a lot of banking and real estate information during the day,” said O’Hara.

Clear makes an entrance

Clear Communications, New Zealand’s second telecommunications service provider, entered the ISP market six months after Xtra’s launch. It invested $8 million, establishing 15 points of presence for ClearNet,[25] which like Xtra before it had the full resources of its parent behind it.

There was, however, much less fanfare: it would primarily offer services to existing customers, most of them businesses. In 1997 it delved even deeper into business needs, delivering value-added services such as web site hosting and high-speed data. ClearNet’s pricing was based on peak demand times. At $5.95 per hour, its 0800-access was unable to compete with Xtra, but did still manage to capture about 17 percent of the market, and maintain this for some time. It targeted large users, mainly in the CBDs with Internet services and initially focused only on Auckland with its residential Internet business.

Clear carefully avoided being embroiled in the Commerce Commission complaint instigated by Voyager, by pitching its price at a dollar more than Xtra’s. The ISP wars heightened and while it was unable to match Xtra’s marketing budget, arch-rival Voyager could at least keep milking the divide-and-conquer strategy. There even appeared to be some sympathy for Voyager within Xtra, particularly from sales and technical people. Voyager director John O’Hara remembers being contacted by a commercial person from Telecom with an interesting offer.

“He said, ‘I’ve got the 0800 number you want.’ I went, ‘Yeah, what 0800 number is that?’ ‘You know, 0800 BUY EXTRA.’ I said, ‘Oh, that one… okay, great. Remind me why I want that?’ ‘Well, 0800 BUY XTRA is Xtra’s one. So we just thought you’d like EXTRA.’ “Absolutely, yes we would.’

So we took it, at their suggestion, and started getting 100 calls a week from that phone number.” In December 1996 Telecom hit back, demanding Voyager give up the number or face court action. It stated in a letter that it had the right to withdraw any number and replace it with another, and threatened litigation if Voyager didn’t relinquish the number voluntarily.[26]

Voyager’s marketing manager Phil Dagger, however, responded that the word number not only spelled BUY EXTRA, but also BUY FXVOYAGER and was being used to promote its new Fax by Internet service. Dagger said Voyager had asked for BUY-FAX but been told by Telecom it was reserved.[27]

Then came a further round of legal exchanges in the form of a warning from Voyager that Xtra should stop using the Voyager catchphrase ‘Discover the Internet.’ Voyager said it had been using the phrase since November 1995 and it was a part of its image and branding, and Xtra was confusing the market. It wrote to Xtra asking for withdrawal of all material using the phrase. Many, however, saw the exchange as another episode in the now long-running list of spats between the two rivals.[28]

Ron Woodrow, the managing director of Iconz, also tried to capitalise on the natural inclination to misspell the Telecom flagship’s name, by registering the domain www.extra.co.nz. He received 100 emails during the marketing campaign. After the fun had gone out of the prank O’Hara rang Chris Tyler to fess up about the business he’d been getting at Xtra’s expense. “He was just his usual mad dog self. He went completely off the deep end and took our marketing manager to court. We ran for two to three months then relinquished the number.” O’Hara insisted that if Telecom had played it a bit straighter with the market and had a wholesale and resale business everyone would have been better off. That first year of operations for Voyager was, ‘a ride and a half.’

In March 1997 another marketing ploy from Xtra backfired. A CD-Rom to make it easier to sign up to Xtra was widely distributed to Telecom customers. It came preconfigured with Netscape’s Web browser and other programs which would load onto the recipient’s PC. If unsuspecting customers loaded it, then decided they’d prefer to stick with their existing provider, the problem became evident. What existing provider? The CD had written over any existing browser software, along with any configuration details to any other ISP.

In one innovative effort to turn that campaign on its ear Peter Belt, business manager for Auckland ISP Web World, sent out his own promotional material as part of the ‘Xtra – Just say no’ campaign, offering $5 credit on its service if people handed in Xtra CDs. “The idea came to us when we were kidding around how I now own an Xtra CD which is being used as a coaster for my coffee mug. The joke was that I somehow keep the real perks for myself, and am not eager to share them with my colleagues.” The basic idea of how we could get more CDs for the rest of the staff started out as a joke, but became a promotional and cost-saving opportunity.

Don Campbell, Web World’s support manager, reported to the management team that since Xtra’s aggressive promotion customers had let their curiosity get the better of them and had their software overwritten. This has caused an extremely unwelcome load on the support people. “The ISP industry repeatedly expressed its distaste for the CD ploy, some even going as far as labelling it as nothing less than a ‘commercial virus.’ In Belt’s view, Xtra had declared war on the industry. “I can only think that our response to the latest campaign is one of the more creative seen in recent times, and would like to see it repeated around the country.”[29] The same day Web World’s comments were published, 18 March 1997, the Advertising Standards Complaints Board upheld a complaint that Telecom did not supply the ‘fast, reliable’ service it advertised. Xtra offered toll-free help desk support from 7 a.m. to 11 p.m. but it was clear this was not available as claimed.[30]

Voyager had pioneered a number of services including 0800 nationwide access, launched its own Anzwers search engine, a fax over the Internet service, and even voice over the Internet as part of its business bundle, although the latter received little patronage. It had done extremely well for a small business but as the market became more crowded, demands from its owner OzEmail to increase customer numbers and profitability were putting the squeeze on Voyager. OzEmail’s original idea was to create a regional grouping of ISPs with New Zealand as the first. Then it set up shop in Malaysia and India and listed on the US Stock Exchange. Involving 80 percent owned Voyager in the US listing process, however, involved a lot of drama. “The focus changed from building a regional ISP network to running a profitable business and there was a lot of pressure from American investors about getting the numbers of business customers up.” O’Hara and his partner were losing interest and began negotiating their way out.

At the end of May 1997 the Commerce Commission announced a not-guilty verdict following complaints from Voyager that Xtra was engaging in predatory pricing. Voyager’s new general manager David Mackey said that the findings were ‘no surprise’ and wouldn’t affect Voyager’s intention to pursue the matter through the courts later in the year. The Commission found that Telecom did not appear to be using a dominant position to harm competitors and was simply using every incentive to keep its access prices as low as possible to encourage the market to expand more rapidly. And the competitive process in the relevant markets was less likely to be harmed now that Clear had arrived, and Telstra had announced it would also be entering the market.[31]

OzEmail finally bought out the 20 percent of the Voyager shares held by John O’Hara and Alistair Stevens in September 1997. When the Australian company decided to pull the plug on the local operation two years later it ironically signed a deal with Xtra to take over the bulk of its customer base.[32]

Meanwhile Voyager had commissioned Colmar Brunton in October 1997 to survey the market to “get to the bottom of what was driving the Internet and learn about the consumer.” In a press statement on 4 February 1998 it revealed that the Internet was still a new experience for most New Zealanders. The key findings, from a sample size of 115 people ranging from senior business managers to residential customers, suggested the experience could still be quite intimidating. “People do not feel confident using the Internet.” It said 30 percent of connected businesses felt inexperienced and 25 percent of consumers felt lack of knowledge was a barrier.

Most people used the Internet for email (60 percent), but it was also being used as a marketing tool (20 percent) and for education (30 percent). It was also becoming increasingly popular for games (17 percent) and chat (12 percent). The report said consumers selected an ISP on the basis of price, first-time connection, fast network, and helpdesk support with price being more important to residential customers and reliable access more critical to business. “Generally consumers have low expectations of what an ISP offers. Many consumers feel that what might be considered basic ISP services (such as 24-hour technical support) are currently treated as additional services from an ISP perspective. Consequently in many cases ISPs are not meeting basic service needs.”

Residential use was driven by the need for stimulation, fun and excitement while business use was founded on security. The research identified Voyager as the most preferred ISP for business (17 percent) ahead of Xtra (13 percent) and ClearNet (6 percent).[33]

Warning: steep curve ahead

After two years of intense price competition the Internet market moved into a period of stability from the end of 1998. Most ISPs offered some type of data or voice service focused on business customers, competing directly with those of the telecommunications service providers and frequently undercut their prices. As marketing for these services grew, so did customer interest.

Christina Enright’s thesis on the development of the market broke the players down into generalists and nichers:

ISPs were offering a variety of account options from a flat rate, all-you-can-eat service at $40 a month from Ihug through to higher quality accounts with guaranteed throughput using a mix of time and data charges, costing $50–$150 a month. The reality was most of the 100 or so ISPs were still trying to become profitable. Newcomers such as Quick Internet, which arrived in 1998, further squeezed the evolving market, which was splitting into lower-tier budget players and more robust, sophisticated operators, who would eventually challenge traditional telephone companies with nationwide and international services.

Chris Miller, director of KiwiLink, said there was only one main reason Internet charging remained high in New Zealand. “It’s in the hands of the one company with lines in the ground.” Only Telecom could supply digital data circuits for ISPs and “they’re about five times the price of what you can buy them in the US.” While prices had reduced since mid-1996 he said it still had a long way to go, as did the prices ISPs paid for ISDN lines. Clear was beginning to provide links for ISPs in some areas and that had made some difference. Miller said KiwiLink used a time-and-volume basis for charging, which passed the cost on to the user and discouraged people surfing all day. All-day surfers on flat-rate accounts did a disservice to others and could also slow down other users who were signed with smaller providers.[34]

Xtra bleeds cash

Telecom’s wholesale business in international Internet bandwidth bounced back after a period where Telstra and Clear had beaten it to some serious business. In fact Telecom was doing a roaring trade, as business customers flocked to the Internet taking on leased lines and ISDN to gain faster access. Most home users could not afford ISDN, so many opted for second telephone lines. The one area the dominant carrier was still failing to get right though was Internet provision through its own provider, Xtra. After 30 months in the business there were serious doubts it had been able to turn a profit. So why, asked journalist Russell Brown, with all its marketing and technology clout, couldn’t Xtra make money out of the Internet? He suggests Telecom got into the Internet initially because it was a threat and an opportunity, neither of which it was prepared for.

From the outset there was no shortage of people saying Telecom doesn’t understand the Internet. A model of corporate culture, it was caught off balance by a phenomenal rush from the fringe. Its ridiculous home-shopping trial with the Auckland Savings Bank (ASB) (depending on special phones costing $1000 each) did not even use the Internet. A yen for content seemed quite logical back then when the local on-line market was dominated by CompuServe, which sold its customers not just connectivity but exclusive content and services. Elsewhere, America On-line’s stock was rocketing and Apple Computer had its eWorld service. Most of all, Microsoft had positioned its own on-line service, Microsoft Network (MSN), as a key part of Windows 95. But eWorld died, CompuServe was split up and sold, and Microsoft spent three years getting the hell out of its original MSN strategy. Maybe content wasn’t such a great idea after all?

Xtra’s decision to get in the media business was creating its own problems. By hiring Auckland journalist Nigel Horrocks as managing editor it seemed to be signalling it was getting into the content business, despite assurances it would not be a content provider. Mixed signals were worrying to potential business partners like the NBR. From mid-1995 Telecom staff had extensive discussions with NBR. Eventually, according to NBR’s Barry Colman, Telecom “couldn’t get the price right,” and the job of creating NBR’s on-line presence went to Clearfield (later Clearview) Communications.

In the end the threat of Xtra as a content provider never really eventuated. Horrocks’ role was marginalised, with content officially controlled by publishing manager David Maire, who had entrepreneurial skills but no media experience. And the realities of the media business soon struck home. The site did not attract a profitable level of advertising. And Xtra’s young content team must have wept as ClearNet’s web site, a nicely done bunch of links created by the Hamilton firm Webmasters, won plaudits and awards on its December launch. Xtra’s site had far more substance – but all of it was obscured behind the dread dark wall of X-ville.

In September 1997 Xtra, alleging 74,300 customers, undertook a site redesign which among other things shrunk the huge X-ville graphic that had been such a turn-off for low-end dial-up users. It added the NZ Herald and others as providers of Microsoft ‘Active Channels.’ In February 1998 it entered the travel business, partnering with nine other companies to launch Xtra Travel Club. Its customer base headed precariously close to the 100,000 mark. By May its IP telephony trial with VocalTec had proven a failure. Xtra then took up the BNZ Buyline service and launched Xtra Business Builder. It lost MetService as a customer after service failures. Then in June 1998, Xtra unveiled Auckland Live, the first of a planned network of on-line ‘villages.’ It now had 119,400 customers.

Xtra boss Chris Tyler had hopped the Tasman to join Solution 6 less than a year after Xtra’s launch. His replacement, Bob Smith, began refocusing the business and quickly declared an end to two of Tyler’s pet projects. The first was the plan to package Xtra as an ISP-in-a-box for other telcos, and to ‘franchise’ Xtra internationally. But with a failed billing system and a poor technical record, Xtra really had nothing to sell. The second was the ‘media engine,’ an idea even Tyler’s staff never understood.

Smith reworked Xtra into ‘three key business divisions’: electronic commerce, communications, and publishing. E-commerce was put in the hands of Nevin Grieve, a veteran of the NZ On-line days, who improved Xtra’s lacklustre Internet shopping story. Buyline, a credit card authorisation scheme with the Bank of New Zealand, and Intershop, a German-developed web shopping system, were bundled into Xtra Business Builder, a package that, for almost the first time, made Xtra attractive to third-party Web developers. Under Peter Hutterli, the access business finally started to provide the leased-line services business customers wanted, and consumers were offered new prepaid ‘advance’ rates. This helped stem a flow of customers to flat-rate ISPs such as Ihug and provided reliable monthly cash flow.

Smith also fixed a glaring problem area, Xtra’s telephone helpdesk, by spinning it off to the call centre specialist Teletech. Helpdesk performance had been a victim of Xtra’s technical problems, but the outsourcing worked. Quality improved and Xtra had a significant problem out of its hair. Smith’s IS background also helped shape Xtra Business Network, a system of approved service providers based on the channel model common throughout the IT industry. Internet was, he declared at the launch of Xtra Business Network, “just another service business.”

Despite the stream of controversies and the restructuring behind the scenes, Xtra seemed quite happy about its progress and its successes in the market, making that quite clear in a press release celebrating its first birthday on 15 May 1997:

In July 1998 Xtra faced a further restructuring after turning over only $20 million in its first full year in operation, a shortfall of $40 million. There were subsequently 15 redundancies made from the 150-strong staff. It had opened nearly 150,000 accounts in two and a half years through a huge mass market campaign but in the process learned some hard lessons. Xtra was rebranded as Telecom Xtra, with Telecom admitting it did not expect to recoup costs for another two to three years.

Eventually Xtra made progress in bringing the advertising industry on-line. Chantal Dunbar was brought from ACP in a sales role, and AGB McNair was hired to conduct New Zealand’s first web site audit. McNair measured daily visits to the Xtra site at 17,491, making it apparently the most-visited site in Australasia. But was the site’s content driving those results, or was it the inevitable result of the site being the home page of hundreds of thousands of users? Despite the fact the Xtra site probably reaped more advertising revenue than any other in the country, the basic problem remained: If Xtra was in the media business its ‘content’ remained locked up behind a top page which flouts almost every element of Web publishing wisdom. If it was a portal site, the same criticism held true.

Under Smith, Xtra moved back towards a Telecom culture. Ties were no longer lopped off at the door, and customer growth settled down to a steady 10,000 or so a month. Xtra’s content business still wasn’t scoring any hits, but seemed to settle into a groove. Telecom communications staffer Quentin Bright moved across to manage a new community initiative based around Auckland Live, the first of many planned regional sites. Bright brought media experience and did what Xtra had failed to do for so long – making small but significant partnerships, with Peter Fowler’s Newsroom, for political coverage, and the street mag Lava, for local entertainment listings.

Further restructuring bought Xtra under the control of Telecom Services, resulting in more staff losing their jobs and the company looking more closely at its core business. Was it a media content company or an ISP? Regardless, there were still issues. TVNZ had waited all year for progress on a proposed joint America’s Cup web site only to find Xtra had put up its own Cup site…[35]

Footnotes

[1] Aardvark News, 30 May 1997

[2] Brian Rudman, ‘How to net a family fortune,’ Weekend Herald 17–18 July 1999

[3] Internet Relay Chat (IRC) is a form of real-time Internet chat or synchronous conferencing. It is mainly designed for group (many-to-many) communication in discussion forums called channels but also allows one-to-one communication and data transfers via private message

[4] KCCS Internet Hall of Shame. Page since removed

[5] Midland was sold to Jets Internet in the last quarter of 1997

[6] KCCS Internet Hall of Shame. Page since removed

[7] Voyager initially charged $6.95 an hour and Xtra $4.95 per hour, but Voyager immediately dropped its price to $5.95

[8] The Ihug/ESnet merger occurred on 29 October 1996

[9] Brian Rudman

[10] Chris Barton, PC Magazine, December 1995

[11] Russell Brown, ‘Telecom’s Xtra agony,’ Unlimited, Tuesday, December 1998

[12] Russell Brown

[13] The X-shaped junction was a shameless knock-off of the interface for Apple’s eWorld according to Russell Brown

[14] Telecom 1998 Financial Statements

[15] Christina Enright, ‘Strategic Behaviour of Internet Service Providers in New Zealand and the Performance of this Market,’ March 2000. Updated document now at http://www.iscr.org.nz/f241,4849/4849_ausnz_020600.pdf

[16] KCCS Internet Hall of Shame. Page since removed

[17] Christina Enright

[18] Christina Enright

[19] Russell Brown

[20] http://www.aardvark.co.nz, 23 December 1996

[21] Steve Evans, ‘Telecom cleared over Xtra but scrutiny continues,’ The Dominion, 19 December 1996

[22] Russell Brown

[23] Ibid

[24] Aardvark News, 2 December 1996

[25] Clear announced its intention to start an Internet access service in July 1996

[26] Aardvark News, 16 December 1996

[27] Aardvark News, 18 December 1996

[28] Aardvark News, 20 December 1996

[29] Press release: ‘Web world Customers Offered $5 credit for Xtra CD,’ Auckland, 18 March 1997

[30] Aardvark News, 18 March 1997

[31] Aardvark News, 30 May 1997

[32] OzEmail was later sold to MCI Worldcom

[33] Press release from Botica Conroy & Associates: ‘Understanding the New Zealand Internet Market,’ 4 February 1998

[34] NZ Herald, 7 November 98

[35] Paraphrased from Telecom’s Xtra agony, Russell Brown, Unlimited, Tuesday, December, 1998 (with permission)