Subsea cables: time to take stock?

The rate at which new subsea cable systems have been entering service in the last couple of years has been impressive. Whole regions of the world that previously enjoyed little or no open access connectivity now have a choice of multi-terabit systems landing on their shores, energising telecoms markets with diversity and greatly reduced wholesale pricing.

Logically, the frenzied pace of new build cannot hold up forever. It seems wise to assume that we are now due a lull in fresh projects while the world takes stock of what has been achieved, and to allow terrestrial fibre and broadband wireless developments in emerging markets to catch up.

In this way the danger of submarine diversity tipping over into outright oversupply can be offset, and the world’s heavily worked fleet of cable laying vessels taken into dry dock to be readied for the next boom with an overdue lick of paint.

The tight credit conditions prompted by global recession would seem to furnish another reason for investors in new cables to cool their heels, and perhaps even abandon some of the more aggressive and ambitious plans they announced to the world back when debt could be raised with ease.

“I don’t think the recession is going to have much impact on projects that are already in place and contracted for,” believes Alan Mauldin, research director at analyst firm Telegeography. “They’re all proceeding pretty much as planned. There’s a few that are suffering delays for other reasons, such as hold-ups in the granting of permits by the Egyptian government.”

Projects still at the stage of looking for funding are a different matter, says Mauldin: “They’ve got extra hoops to jump through,” he reckons. “Despite this, we are still seeing new projects announced, like the West African Cable System [WACS] which is apparently still going forward despite being announced at the bottom of the recession. In many cases, investors are taking a long-term view, so projects are perhaps waiting a bit, but not stopping.”

Mauldin identifies a number of projects that are set for launch in the near term, indicating that the current boom is not yet spent: “There’s a cable that will be connecting Venezuela with Cuba, and one to link Argentina with Uruguay,” he says. “There’s all sorts of things coming online in the Mediterranean and Red Sea, like IMeWe, TE North and MENA.”

He points also to the Europe India Gateway (EIG) system, likely to enter service before mid 2010, and the Google-backed Unity cable across the Pacific which is planned for launch in the early part of the year. “The Eassy cable in east Africa is probably being lit next June, along with the Main One cable on the west of Africa,” he predicts. “There’s no doubt about any of these coming to fruition.”

If there is any tailing off in major trans-continental builds after next summer, then that is to be expected, says Mauldin: “There was always likely to be a slowdown in cable activity regardless of the global economy, because there have been so many new cables recently, especially between Asia and Europe.”

Certainly sub-Saharan Africa, which by the end of 2010 will have gone from zero to a possible six major cable systems in around a year and a half, is unlikely to see fresh subsea action for a while, believes Andre Wills, managing director of ICT consultancy Africa Analysis. “Anyone looking for funding for more African cables will pretty soon find trouble getting it, because there will already be plenty of capacity to meet demand,” he says. “As a rule, the first three cables to serve a region are OK, and the next three will struggle.”

Asia in general, and the trans-Pacific route in particular, are a more intriguing and enigmatic prospect. “There’s been a huge amount of cable building activity recently in the Asia-Pacific region,” says Ian Douglas, MD of the telecoms business unit of Global Marine Systems. “That’s why we’ve got our main HQ in Singapore. We’ve worked on several major trans-Pacific cable systems over the last couple of years, for people like the Trans Pacific Express and Telstra.”

He says that Global Marine is experiencing a slight dip in Asian business about now, in the aftermath of several large systems all completing at around the same time: “That said, we’ve got several projects on the go for next year including an intra-Asia one from Singapore to Japan which I think will almost certainly go ahead,” he says. “There’s a few smaller cables happening in the Indonesia and Malaysia region. And outside Asia there are others we’re working on in the Med.”

If new build keeps up at anything approaching the rate of the last two years, then stakeholders in international communications will be watching out for the impact on capacity pricing on the major routes – their stance naturally differing according to whether they are buyers or sellers. After all, even the sniff of fresh construction, or the upgrading of existing assets, will tend to exert downward pressure on the cost of leasing bandwidth.

“Pricing always comes down in advance of new cables coming online,” says Telegeography’s Mauldin. “Just look at what has happened to pricing between the Middle East and Europe – likewise with intra-Asian pricing, such as between Tokyo and Singapore. Trans-Pacific prices have decreased a lot this year too, not just because of new cables but a lot of upgrading to older cables. Tata has been busy here.”

“Sure, more cables will have an effect on pricing,” says Douglas of Global Marine. “Look at Australia. It is an interesting microcosm of the world, where in the advent of competition, pricing has fallen heavily on the route between Australia and the US.”

Australia has displayed a voracious appetite for international capacity, likely to be stimulated further once the country’s National Broadband Network (NBN) is implemented, says Chris Kessikidis, commercial director at Australia-Japan Cable (AJC). But he believes any extra demand can be satisfied easily by existing systems. “Can Australia cope with the increased access speeds and content demand which the NBN roll-out will bring, if the NBN happens? The answer is yes,” he says.

He claims that AJC alone can, with future upgrades, deliver up to 256 10Gb wavelengths of capacity: “I estimate that between 40 and 50 wavelengths currently service Australia, from all cable suppliers combined,” he says. “So AJC alone could manage Australia’s requirements five times over. We hear that competitors’ systems can also deliver additional capacity with upgrades. These cable systems have access points in all the densely populated cities in Australia. If latency isn’t an issue, domestic backhaul costs are coming down to move traffic to the exit and entry points cost effectively. The simple truth is there is no shortage of supply if and when it’s needed.”

He thinks those wanting to take traffic in or out of Australia now have more motivation to buy rather than build: “Capex constraints and financial downturns are not the only reasons,” he says. “The biggest consideration ought to be ROI and possible consolidation of buyers – and incumbent market power. The danger of running out of buyers to take your capacity should be the biggest issue. Price is purely a function of demand, and not about how many players exist in the market. Unless of course price is artificially driven down when one of too many players in the market falls over, and their assets get sold at five cents on the dollar. We’ve seen this happen elsewhere.”

It’s not possible to talk of serious falls in the price of international capacity without evoking the spectre of the transatlantic route, which went so spectacularly from prosperity to bloodbath in very short order at the start of this decade. But already people are daring to whisper that new transatlantic cables may soon be required.

“More cables will be needed over the Atlantic at some point, that’s just a mathematical fact,” says Bjarni Thorvardarson, CEO at Hibernia Atlantic. “But there’s a problem that relates back to 2001 when there were five major cables over the Atlantic, each of which was quite capable of serving the whole market on its own. Supply exceeded demand by five or six times. Pricing went down with a blast to the point where any new build now is going to find it hard to sustain itself at those prices. Prices will need to increase substantially before any new build can happen, in my view.”

He believes that Hibernia is in the relatively advantageous position of enjoying route diversity over and above other Atlantic options thanks to the unique geographic positioning of its landing stations: “Latency and diversity are as important as capacity, and don’t forget about SLAs too,” he adds. “Does your route go down two or three times a year, or are you offering five nines?”

Thorvardarson will not be drawn into whether pricing in the Pacific is likely to go the same way as the Atlantic did eight years ago: “But I will point out that with the cost of a new Pacific cable near $1 billion, nobody wants to build one and then have to give away capacity,” he says.

Douglas of Global Marine concurs that new Atlantic cables are a matter of “when” rather than “if”: “There are those predicting that there will be new cables needed over the Atlantic by 2014,” he says. “But people have got used to very low pricing there, so it will be interesting to see what business model is adopted by any new cable. It’s not all just a matter of capacity of course – there’s other factors to take into account like the need for low latency and high resilience.”

Concerning the Pacific, Douglas says he is counting on reason prevailing over greed: “I hope everything stays rational,” he says. “All the Pacific systems we’ve seen so far have been built on sound business planning. I just want that to continue.”

Telegeography’s Mauldin does not see the imminent need for new transatlantic build as anything like inevitable: “A year or two ago people were predicting that there would be new cables needed over the Atlantic,” he says. “But less so now. There’s been a huge rise in how much capacity can be boosted beyond original designs. You’ve got systems like Hibernia now offering 40Gb wavelengths. We’ve estimated that Atlantic capacity has risen 76% since 2003 all on the back of upgrades. What was once impossible is not any more. The Atlantic already offers so much diversity that it’s hard to say when more cables might be needed.”

If improvements to upgrade technology continue, then the case for some of the cable systems that are currently planned, but on which construction has not yet started, may start to weaken.

Mauldin believes that a mixed bag of market forces may already have pulled the rug from under some ambitions: “Certainly not all plans that are out there will get built,” he says. “I don’t think we’ll see the second phase of the Trans Pacific Express system, linking Japan and the US. Reliance had planned a trans-Pacific and intra-Asia system, and a cable from Asia to Africa, that are both on hold. And the Ochre cable from Perth in Australia and Jakarta in Indonesia doesn’t look like it’s happening any longer.”

It will be reassuring for backers of existing and recently launched systems that plans for rival cables do sometimes get cancelled when the sums no longer add up.

There is enough residual memory of the subsea cable boom and bust of the early part of this decade, which was brought about largely through a defiance of commercial logic, to prevent it happening again, believes Geoff Bennett, director of strategic marketing at optical network vendor Infinera. The company has just launched new photonic integration-based technology onto the market, aimed at extending the capacity of networks, terrestrial and subsea.

“We’ve got demand-driven growth now,” he says. But he is not predicting a long lay-off between the gentle tailing off of the current building boom and the next wave of cable laying activity: “Capacity is not running out, but many operators are moving into their safety margins – needing to light new fibres or lay new cables,” he says. “The world recession has not really had an impact. Subsea is the fastest growing subset of the overall optical fibre market.”

The underlying rationale for new cable capacity, agrees Douglas, just keeps going from strength to strength: “Demand is ongoing,” he says. “Broadband traffic keeps rising, and people all over the world now want connectivity with the Web. Broadband is like power these days – you’ve got to have it. It’s a key enabler regardless of whatever is happening in the global economy.”

It seems therefore likely that any fall-off in the rate of new cable construction will be more of a gentle slowdown than a grinding halt. And if levels of global data traffic go on to rise as fast as expected, then the slowdown might prove to be no more than a short-lived breather between booms.

Plans for further cable builds

Undaunted either by the tough economic climate, or the wealth of new submarine cable systems that have come online, individual companies and consortiums of investors continue to float plans for further builds. Here is a handful of projects, the details of which have recently been announced: > A company called Millennium Telecom is planning a cable that connects India with countries such as Singapore, Malaysia and the United Arab Emirates. Millennium wants to divide the project into an eastern segment, that looks also at economies like Bangladesh, Myanmar, Thailand, Indonesia, and a west-facing segment that lands in Pakistan, Oman and Yemen on its way to the Emirates. Axiom Systems of France is to offer consulting services for the build, an estimated cost for which has not yet been discussed. The project is a joint venture between Indian state-operated Mahanagar Telephone Nigam and Bharat Sanchar Nigam – no doubt wishing to emulate the success of independent carriers such as Tata Communications, Reliance Communications and Bharti Airtel. Millennium Telecom says the cable will be completed by the third quarter of 2011 at the earliest. It also says that it is in advanced stages of negotiation with Singapore’s Singtel and Telekom Malaysia at the eastern end, as well as Etisalat, and Djibouti Telecom for the western segment, concerning landings. > New Zealand’s state-owned carrier Kordia Group says that it is close to a decision on whether to move forward on a new submarine cable to connect the country with Australia. It is still at the stage of assessing whether the project is financially viable. If the cable, called Optikor, goes ahead then work will start in the second quarter of 2010, says Kordia. There are provisional plans to hook it up with Australian company Pipe Networks’ PPC-1 cable that runs from Sydney to Guam. In a statement, Kordia says it wishes to bring “competitive pressures” to its home market and “lower prices for New Zealand businesses and broadband users”. > Cypriot carrier Cyta has extended its relationship with Syrian incumbent the Syrian Telecommunications Establishment (STE), with the pair to collaborate on the construction of a new submarine cable connecting the countries. The Alasiya system will add to the capacity between Syria and Cyprus offered by Cyta’s existing Ugarit cable system, laid back in 1995. The plan is to provide Syria with global connectivity via Cyta’s international subsea cable network. Along with upgrades to the Cadmos and Berytar submarine cable systems, Cyta is planning a high-capacity ring between Syria, Cyprus and Lebanon. > AT&T, BT, Telecom Egypt, Portugal Telecom and 13 other telecommunications firms are reported to have formed a consortium to lay a 15,000km-long cable from the UK to India with a transmission rate of 3.84Tbps.