Rain, Steam and SpeedLast month Economic Development Minister Steven Joyce issued a report on the state of New Zealand’s technology sector. It says the sector is “strong” and “fast growing”.

In other words, the NZ tech express is leaving the station.

What the report didn’t say is that the engine pulling that train is a single company: Xero.

Xero on track

Yesterday Xero announced it now has 500,000 customers. At the last count the company had about a quarter of a billion in the bank.

These two numbers tell us New Zealand could soon be home to a global technology giant on the scale of Apple, Google or Microsoft.

Xero’s brand is already well-known around the world. Forbes magazine ranks Xero top of the World’s 100 Most Innovative Growth Companies.

New Zealand wins

That success is good for New Zealand. We’ve long had a reputation for developing quality software.

Thanks to Xero, we now have a reputation for developing and selling world-class technology.

We’re on the map as a nation of innovators. The world is taking notice.

Ticket to ride

If we’re smart, we can all hitch a ride on Xero’s success. The company’s emergence on the world stage gives us a once-in-a-lifetime opportunity to transform and diversify our economy. This is our chance to position New Zealand for the 21st century.

Technology engines like Xero don’t pass by often.

Growing the NZ tech sector

While there’s no room for complacency, we’re doing well. Overall New Zealand’s IT service exports grew 14 percent year-on-year in the six years ended 2014.

MBIE reports total IT exports are now $930 million. Software exports increased from $166 million in 2012 to $300 million in 2014.

Research and development spending grew at an annual rate 14 percent during the last decade. Technology related employment was up 6.5 percent.

Companies listing

New Zealand now has more than ten listed technology companies. Those tech companies now make up 10 percent of the NZX by market cap. They all export.

It’s a success story by any standard, yet New Zealand’s outstanding technology performance has a narrow base.

Xero accounts for about half of the New Zealand tech sector by market capitalisation. Last year it was behind one-quarter of the sector’s export earnings. It makes up 20 percent of the research and development spending and created one in ten of new tech sector jobs.

The fresh capital raised by Xero in 2014 was five times the total amount raised by all young NZ technology companies in 2013.

Leadership

Beyond raw numbers, Xero is showing younger New Zealand tech start-ups how to tackle problems such rapid international growth from a relatively remote base. It has put New Zealand on the map for international technology investors.

Savvy investors come to town to see Xero, that gives the next generation of entrepreneurs an opportunity to showcase their ideas to the people with money. It’s an opportunity that didn’t exist five years ago.

AWS Summit Auckland Rod Drury
Xero CEO Rod Drury at the Auckland AWS Summit

Xero’s marketplace

A sub-set of smaller start-ups is directly dependent on Xero. They are part of a vibrant marketplace that has grown up to develop products and services around the company’s accounting software-as-a-service business.

There are some 400 app partners trailing in Xero’s wake. Many are New Zealand-based.

By building tools that work with Xero, they get immediate access to ready-made customer list. That’s half-a-million potential customers from day one.

Inspiration

There’s another effect. Xero acts as a training ground for the next generation of software entrepreneurs and as inspiration for future generations.

High school students and university undergraduates can see for themselves that building a world-class technology business in New Zealand is not unrealistic. Our young entrepreneurs now know they don’t need to fly to Silicon Valley to get started.

That will please Mum and Dad. It will also please the so-called Mum and Dad investors who’ll have access to growth stocks to help fund their retirement.

If we act sensibly now, Xero’s surge today could have an effect for years to come.

It could reboot the entire economy. That’s vital. The recent fall in the dairy price underlines how important it is to move away from depending on commodities.

Beyond tech

Xero’s pay off goes well beyond the technology sector. More than one-in-five small businesses in our nation of small businesses use Xero’s software. That already makes us one of the most advanced business cultures anywhere in the world.

Thanks to Xero our panelbeaters and plumbers are online and in the cloud. They will be reaping huge efficiency gains from this long before their counterparts overseas.

Xero spin-off benefits will accelerate. Having a large slice of the nation’s companies online and in the cloud means government can move fast to modernise the way it interacts with business. We’ll be among the first wave of countries integrating our tax system with cloud accounting. We could even be first.

We’ll have experts here who can teach the world how to become more effective business owners and managers.

Leverage

Likewise New Zealand’s large business-to-business suppliers are finding ways to leverage Xero. Among others, Warehouse Stationery links direct to Xero making things easier for customers.

Paymark is working with Xero to end paper receipts. These are great for productivity. Finally we are in sight of the promised ‘frictionless commerce’.

Xero has already changed New Zealand. It’s galvanised our technology sector, inspired a generation of entrepreneurs and eased the load on small business.

There could be more. More Xeros or Xero-like companies would mean more export earnings, more high quality investment and more great, well-paid jobs. It would mean we would keep our brightest talent and attract the best brains from around the world.

Netflix tablet

Australia plans to make Netflix and other overseas-based online sellers of ‘intangible services’ pay GST (Good and Services tax).

In Joe Hockey prepares ‘Netflix tax’ BRW reports:

The cost of downloading movies, music, books and other media from overseas providers such as Apple and Netflix is set to jump by 10 per cent after federal Treasurer Joe Hockey and his state counterparts agreed these services should be subject to the GST.

Hockey told BRW the tax would be: “easy to administer and will raise billions in extra revenue”.

GST more important in New Zealand

If Australia pulls it off, there are strong arguments for New Zealand to follow.

Above all, GST is an important source of government tax revenue. In New Zealand the rate is 15 percent and GST accounts for roughly one-quarter of the total government tax take. Australian GST is 10 percent and the tax accounts for about 12 percent of revenue collected.

While forcing overseas suppliers to charge GST will bring in some extra revenue today, it will stop local suppliers from moving their businesses overseas to avoid the tax in future.

GST was first introduced in New Zealand by the Lange Labour government in 1986 as part of wide-ranging economic reforms. It has the advantage of being more efficient than other taxes, at least from the government point of view.

I’m a tax collector, you’re a tax collector

In part that’s because businesses have to act as the tax collector. But the real advantage of GST in the early days was that it was hard to avoid.

That has changed with online shopping where New Zealand consumers can bypass GST by buying direct from overseas. There’s a NZ$300 limit, mainly because the cost of collecting smaller amounts makes it uneconomic.

The mechanics of charging GST on physical goods is one thing. Clipping the ticket on sales of digital goods like MP3 files and streamed TV is technically a lot easier. Netflix has already told the Australian government it can, if asked, collect the tax.

Local TV suppliers

Forcing overseas suppliers to charge GST could[1] be good news for local online streaming TV providers because they have a cost disadvantage compared to GST zero-rated overseas rivals.

It won’t make much difference to the economies of scale that global retailers can achieve, but it could give local stores a little relief.

No doubt local streaming TV suppliers like Spark and Sky will be watching Australia’s action closely.

When it’s handy having a big, relatively powerful neighbour

New Zealand is a small country, far too small a prize for companies like Netflix to worry about.

If we had unilaterally decided to impose taxes on the likes of Netflix and Amazon, they might just decide to stop doing business here. It wouldn’t be worth their while to handle the necessary paperwork, let alone any code changes needed on their systems.

Australia is a bigger prize. If they have to make changes to keep the rivers of gold pouring in from Australia, they can do the same for New Zealand at no extra cost.


[1] It could be good news so long as customers don’t decide to buy VPN or other geo-block bypassing services then subscribe directly to the US Netflix service. There are heavy-handed legal moves under way to block this practice but that can backfire in other ways.

 

New Zealand network readiness index

New Zealand remains an also-ran in the World Economic Forum’s Networked Readiness Index thanks to being one of the most expensive countries for mobile phones.

For the second year in a row, the country ranks 20 overall on a list comparing 148 nations. New Zealand is two places behind Australia which is at 18, again the same as last year.

The index is a composite measure made up of a number of sub-indices.

New Zealand does astonishingly well in some sub-indices and just as bad in others. In almost every department the nation scores better than the average across the world’s richer nations.

The overall performance is wildly unbalanced with New Zealand ranking at 138 out of 148 nations when it comes to mobile phone affordability. And ranking at the 113 place for the cost of fixed-line broadband connections is nothing to email home about.

NZ regulation second to one

When it comes to the environment sub-index New Zealand has the second highest score behind Singapore.

Breaking that down further shows the nation’s political and regulatory score is the second highest, again behind Singapore.

New Zealand ranks six for its “business and innovation environment” index.

Infrastructure not so hot

The readiness subindex is made up of three categories: Infrastructure and digital content: affordability and skills. Across the three New Zealand ranks at 45, despite coming in a number six in the global table for skills and having a respectable rank of 12 for infrastructure. Both are badly let down by the shocking 127 place for ‘affordability’.

As the World Economic Forum’s commentary reports:

New Zealand ranks 1st for the independence of its judicial system and 1st in both the number of days and the number of procedures to start a business. The excellent skill base of its population (6th) also contributes to the country’s ability to properly use and leverage a fairly good ICT infrastructure, although it remains rather pricy (127th), constituting New Zealand’s main weakness.

The Networked Readiness Index provides a relative measure of a country’s ability to exploit information technology for economic growth and general well-being. Finland holds the top spot, while Singapore sits in second place. The USA is at seven while the UK is at nine.

Download the full report.

When I was in primary school we sang about Hot Cross Buns being “one a penny, two a penny”.

In those days, Britain still used pounds, shillings and pence. So, depending on which part of the nursery rhyme you subscribe to, the price of a hot cross bun was either 1d or 1/2d.

There were 240 pennies to the pound, so the lower price hot cross bun would be 0.2p in modern British currency. Or around 0.4 New Zealand cents.

Yesterday I picked up a hot cross bun Baker’s Delight store for $1.80.

In round numbers that’s 450 times the price of the nursery rhyme bun.

Mind you, it took a long time. According to Wikipedia, the nursery rhyme originated in 1798. That’s 214 years ago.

By my, admittedly rusty, school maths*, that represents an annual inflation in the price of hot cross buns of around 1.1%.

Did I go wrong anywhere with this?

  • I used this formula: i = ( FV / PV) (1/n) -1

There’s a reason networks are valuable. It is all down to mathematics and network economics.

There are two parts to a network. The things in the network and the links between them.

In a network with x things, adding another thing — mathematicians would call this an (x+1)th node — means there 2x extra potential connections between nodes.

Take a telephone network: a new subscriber can call all existing subscribers and they can call back.

So the number of possible connections increases with the size of the network.

If the network is commercial one with nodes representing customers and each connection has a fixed value then the value of adding one more customer increases as the size of the network increases.

For a network with x nodes, there are x(x-1) connections.

When networks get large – so large that (x-1) is more or less equal to x, the value of the network is x2 .

This is why network products and the companies selling them have what mathematicians call exponential growth.

Think of it as the difference between stuffing bank notes under your mattress and or investing it in a compound-interest account.