The submarine cable market 2008
The demand for bandwidth continues to steadily increase. Around the world, the Internet is becoming more and more important to both the economy and society. Web 2.0 services have also fuelled the demand for bandwidth as users embrace online video, music and voice.
In response, there have been more announcements of proposed submarine cable system build-outs in recent years than in any other time since the last boom of 1998-2001. This activity in the submarine cable sector continued throughout 2008 with many cable build-out announcements coming from around the world. Network upgrades were also on the agenda for some existing systems.
The impact of the global credit crisis on the submarine cable sector in 2009 cannot yet be fully determined as many current projects are already funded. There are however many planned projects still to be funded that may well suffer as a result.
The credit crisis may well result in more collaboration, with companies working together to share building costs. The Unity Project is an example of such a model – Bharti Airtel, Global Transit, Google, KDDI Corporation, Pacnet and SingTel are sharing the cost of building an undersea cable from Tokyo to Los Angeles.
After the collapse of the previous submarine cable boom at the end of 2001, BuddeComm predicted a revival in this market before the end of the decade. The first signs began to appear in around 2004, coinciding with an increasing demand for bandwidth. We were reasonably confident in this prediction, as the submarine market is fairly predictable, due to its relatively lengthy planning and building cycles.
There was actually nothing wrong with the concept behind the dotcom era, but, as is now being demonstrated in the subprime housing market, greed can take over in the financial sector and ruin things, for a time at least.
Dotcom was all about new applications that would generate the next level of revenues for the ICT industry.
The subscription-based model for telephony and Internet services was approaching its due-by date and new models were needed. The dotcomers had the right vision at the time, but the infrastructure needed to deliver those applications was not available. And without the necessary national infrastructure the demand for international traffic declined, creating havoc in the submarine telecoms market.
But then broadband infrastructure became more available and applications such as Google, YouTube, MySpace and FaceBook became overnight successes. Then, of course, the demand for international networks returned and by 2007 new submarine networks started to appear on the agenda. On the Pacific route, for example, traffic is doubling every two years.
However, by then the telecoms business model had changed and those involved in the new market didn’t wish to operate in the international market in the same way the cosy cartels had been doing for over one hundred and fifty (!) years. But changes are also arriving in this market. For example, in relation to the proposed Unity Cable between Japan and the US, consortium members like Pacnet are allowed to operate fibre pairs independently in the system.
Companies like Google now depend for their revenue, and therefore their financial results, on people having access to good quality broadband, and that particular Internet media company – now one of the largest companies on earth – has a great deal of clout.
They are not at all interested in the old cartels; they want competition and innovation that will result in low cost access to their applications. Australia, in particular, is – due to a lack of competition in this market – suffering from relatively high international access charges. Because the Internet is an international system the telcos and ISPs who deliver local access are faced with very high international access bills, which they naturally pass on to their customers. This makes these services more expensive in Australia than in markets where there is more competition.
With its participation in the Unity Cable, Google is set to become a strategic player in the submarine business. It certainly doesn’t want to become a telco, but it is using its money and influence to steer the telco industry in the direction it wants. And, as well as being good for Google, this will also be good for future telco applications developments.
The company is in the same position regarding the US spectrum auctions, in relation to more competitive local access networks (eg wireless). The telcos would like to maintain the status quo, with them being the gatekeepers and toll collectors. But this is stifling competition and innovation, and we need companies the size of Google, News Limited and Microsoft to liberate us from the iron grip the incumbent telcos presently have on this market.
Pacnet is one of the other players in the Unity submarine consortium. This company is an international infrastructure operator, but it also has a thriving ISP business and, like Google, the latter requires good and affordable access to advance along the lines mentioned above.
The Pacnet combination of being involved in both international submarine networks and ISP business makes sense from that perspective. Over the last few years they moved their ISP business away from the consumer market to the business market and in that move they have also become a major provider of IP-based solutions, serving the carrier market as well as large enterprises and SMEs. However in coming years they may have to make a decision about which way to jump. Once the submarine business has become commoditised again it is in the interest of the ISP arm to seek the best possible deal, even though that may not be achieved through its own internationals infrastructure business.
The submarine telecoms industry is undergoing a transformation, and the two new developments around Google and PacNet are only the tip of the iceberg. Many more changes will follow and these will lead to a much healthier international telecoms environment than we have seen in the past.
Spotlight on Asia Pacific
For some years, the area of telecommunications infrastructure most in trouble across the Asia-Pacific region has been the struggling submarine cable business. In the late 1990s, companies such as Level 3, Asia Global Crossing and FLAG Telecom constructed a massive amount of capacity with billions of dollars in investments, only to find weakening demand and declining bandwidth prices.
The market moved into crisis in 2001 and major restructuring began to occur within the sector. The depressed market persisted even as prices continued to fall. The situation finally started to change in 2006, when a series of new submarine infrastructure projects for the Asia-Pacific region were announced. There were all the signs of recovery in the market with a significant increase in business activity occurring over the 2007/08 period.
It is estimated that Asia has been the recipient of about one third of the worldwide investment in submarine cabling. This has been a natural consequence of the number of islands to be joined and seas to be crossed. But more importantly, it has anticipated a massive future demand for bandwidth between the major Asian centres and between Asia and the rest of the world. And that will only be satisfied by undersea cables. While operators were re-writing their business plans as a consequence of the earlier slowdown that had occurred, it had nevertheless been self-evident that optical fibre submarine cabling would continue to play a major role in telecom infrastructure development in the Asia-Pacific region.
The general perception of a glut in bandwidth capacity on Asia-Pacific routes also caused some confusion in the market. It was certainly true that investment in submarine cables was no longer bringing the rapid returns it once did. Companies were finding it increasingly difficult to raise capital for undersea cable ventures as a consequence. At the same time, customers of undersea cable operators were finding it difficult at times to get enough capacity on Asia-Pacific undersea routes. Consequently operators built the largest possible cables to meet demand and gain a cost advantage over competitors. A combination of sluggish global and regional economies conditions, the perception of over-capacity on some routes, and questions about the level of return on investment inevitably saw a slowdown in the construction of submarine cables in the region.
The oversupply of submarine cable capacity in the region has been in the intra-regional networks rather than in the large regional and trans-Pacific cables. A significant number of new intra-regional cables have come into service over the last few years. These included FNAL (FLAG North Asian Loop), EAC (East Asia Crossing), APCN 2 and C2C, resulting in around 16Tb/s of extra capacity. Only a tiny fraction of this capacity was being used. On the other hand, the trans-Pacific routes were not seen to have this luxury of oversupply of capacity and the pressure to lay more such cables has been steadily mounting.
Despite the fact that market rationalisation was taking place in Asia, there remained a flood of capacity and regional carriers were still struggling. Cross-border capacity prices were continuing to slide throughout Asia.
The formation of Reach Ltd in 2000 saw a significant player enter the market. Comprising a 50-50 joint venture between Australia’s Telstra and Hong Kong’s PCCW, it resulted in the consolidation of a global network with a strong Asian focus. Reach gained an ownership interest in around 50 submarine cable systems. The operator signalled its intention to further consolidate its market position when, in late 2001, it acquired the Asian assets of Level 3 Communications. These included Level 3’s North Asian cable system and capacity on the Japan-US (J-US) cable system, as well as data centres in Hong Kong and Tokyo. It followed this up by signing major capacity leasing and interconnect deals with Level 3 to strengthen its global capability. However, the fragile nature of this market was highlighted when, in February 2003, Telstra and PCCW announced a dramatic write down of their Reach assets, after reduced demand and tough price competition seriously damaged revenues. The write-down totalled US$1.6 billion in value and, in Telstra’s case, an adjustment of US$546 million meant that the value of its stake in Reach had been reduced to zero.
Demand for international capacity continued to be the fundamental engine driving submarine cable system deployment in the Asia-Pacific region. The vast majority of that demand will result from data/Internet-related usage. The second ranked segment in terms of demand was corporate, but that only accounted for less than 10% of overall demand. The strong demand for bandwidth coming from India and China has resulted in a more aggressive involvement of operators from these two countries in the submarine cable market. From India in particular we have seen VSNL, Bharti Tele-ventures and Reliance Infocomm all moving into the business of international telecoms infrastructure, with a strong focus on submarine cables.
By early 2006, following several rough years, the global bandwidth market was showing signs of improved health in the form of supply equilibrium, price stability and competitor consolidation. Persistent international bandwidth demand growth has depleted the amount of spare capacity on many submarine cables. This resulted in many network operators, including VSNL, FLAG Telecom and Asia Netcom, among others, lighting additional wavelengths and fibre pairs on an ‘as-needed’ basis. This incremental approach to managing spare circuit inventories has meant that lit bandwidth supply and bandwidth demand were coming into balance. This did not mean, however, that a network construction boom was pending. Instead, operators needed to make more of what they already had. According to TeleGeography, by the end of 2006 little more than 14% of the potential capacity on major submarine cables around the world was lit.
By mid-2007, there were at least six new cable projects mooted to cross the Pacific and help meet a particular predicted shortfall in capacity between Asia and the US as Asia’s broadband usage increases. Asia Netcom CEO Bill Barney said that stocks then in existence may well be exhausted by as early as 2013 but he warned that should all six proposed cable systems come to market, competition would consign them all to failure. In September 2007, Level 3 was warning of a trans-Pacific capacity bubble by 2009, although not all carriers agreed with this view. Level 3 believed that with eight cables planned for deployment on the trans-Pacific route over a two-year period the risk of such a bubble was high. While there were real drivers for new Asia cables – revenues remained relatively high and there was an obvious need for diversity – there was also potential for over reaction. Plans already in place would see six new east-west cables – TPE, AAG, Asia Netcom, Flag, Japan-US and Unity – rolled out in 2008/09 and another two north-south from Telstra and Pipe Networks planned over the same period. From about 2Tb/s of lit capacity in place, the proposed cables were set to release as much as 6Tb/s of initial lit capacity on the market.
The level of activity in the sector may be curbed somewhat in 2009 in the wake of the financial crisis. The large telcos in Asia may take a more cautious approach to infrastructure investments.
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