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A Wired, Wired World
More and bigger submarine cable systems are reaching the shores of more countries than ever before
Vesna Tomic, Contributing Writer
Not since the first transatlantic telegraph system was built between New York and London some 130 years ago has there been such a surge in demand for capacity across both the Atlantic and the Pacific. Driven mostly by data traffic--both corporate and Internet (more than 86 percent of the world's Internet hosts are located in North America and Western Europe)--investment in fiber optic transoceanic systems between North America and Europe surpassed US$4.1 billion by the end of 1998, according to Pioneer Consulting LLC (Cambridge, Mass.). But this could be only the beginning. Pioneer predicts at least $6.3 billion more will be invested in these systems during 1999 and 2000.
Western Europe accounts for more than 26 percent of all outgoing international circuits in the United States, according to Pioneer. The majority of these circuits are between the United States and the United Kingdom and between the United States and Germany. A large amount of corporate data traffic travels among these three countries. That means continued interest in large submarine fiber projects--and the infrastructure needed to support them--this week at Telecom 99 + Interactive 99.
In the past decade, 11 submarine fiber optic cables have been laid across the Atlantic. "Nobody in 1988 could have predicted the future demand that would be driven by the Internet when [AT&T's] TAT-8 was being planned." says Michael Ruddy, senior fiber optic analyst at Pioneer. Further, Ruddy believes that even the systems now planned or under construction will not satisfy future demand.
Although the transatlantic telecommunications market has the strongest demand of any submarine route in the world, other routes are also experiencing significant growth. According to Pioneer, transpacific capacity is increasing at rates exceeding 100 percent per year. In 1999 and 2000, investment in new transpacific systems will be US$2.2 billion for each year, for a total new investment of $4.4 billion, almost 70 percent more than the $2.65 billion invested from 1988 to 1998.
New transpacific cable systems are being built to meet demand as the Internet explosion continues in the Asia-Pacific region. These new systems, which will each cost about $1 billion, are China-U.S. Cable Network, Japan-U.S. Cable Network, Pacific Crossing 1 and Southern Cross Cable Network. Yet even as these cables are laid, capacity is snapped up. AT&T's TPC-5, for one, is sold out.
Another fast-growing Internet and data market is Latin America. To address the need for capacity to Latin American and multinational customers, the Pan American Cable System began commercial operations in early February 1999. The cable connects the U.S. with Central and South American countries for the first time. It has been touted as the most advanced and largest fiber optic cable ever in the region.
MCI WorldCom Inc. is the single largest investor. The other partners include, in order of their investment, Telef¢nica de Peru, Telecom Italia SpA (Rome), Andiantel, Pacifictel of Ecuador, CANTV (Venezuela) and Telecom Colombia. The cable provides the first undersea fiber optic service to the north and the west coasts of South America, and runs from the U.S. Virgin Islands to Aruba, Chile, Colombia, Ecuador, Panama, Peru and Venezuela.
Analysts see MCI WorldCom's move as a further step in its aggressive global strategy to address the needs of the Central and South American telecom markets. MCI WorldCom de Venezuela and Empresa Brasileira Telecomunicacoes S.A. (Embratel, Rio de Janeiro), the Brazilian long-distance company part-owned by MCI, are also investors in the cable.
Embratel will use the cable to extend its international fiber network to countries on the Pacific coast of South America. It is the first international South American expandable cable to use the Synchronous Digital Hierarchy (SDH) protocol, initially equipped to provide voice, data and video capacity of 2.5 Gbit/s, equivalent to 60,480 single voice channels. The cable reaches 7,000 kilometers in length at a cost of US$214 million.
The growth in capacity no longer has service providers thinking in terms of one ocean. FLAG Telecom Ltd. (London), the first fiber optic system to circle the world, mostly underwater, became operational in November 1997. (FLAG stands for Fiberoptic Link Around the Globe.) After several years of planning, the 27,000-kilometer cable system-stretching from the United Kingdom to Japan, with landing points in almost a dozen countries-was built by the targeted date and within its capital budget. FLAG is the first cable financed outside the conventional framework of carrier consortia, albeit with the carrier participation of Bell Atlantic Corp.
FLAG's strategy is to try to hit the market at the right time, stay focused on expansion and attempt to customize by region, according to Ed McCormack, FLAG's chief financial officer. "FLAG has the technology and the price point to be competitive for some time, and it is crucial to our strategy to deliver lower unit costs," he adds.
In early 1999, FLAG announced a joint venture with Global Telesystems Inc. (GTS, McLean, Va.) to develop a new transatlantic cable system. FLAG Atlantic-1, the name of the project, expects ultimately to be able to carry traffic at 1.28 Tbit/s, twice the capacity of AT&T's TAT-14. To further illustrate the technological progress of today's cable systems, FLAG Atlantic-1 has 2,000 times more capacity than TAT-8, which handles traffic at 560 Mbit/s. (TAT-8 will be decommissioned next year.) For starters, however, FLAG Atlantic-1 will offer services at 160 Gbit/s. Its first portion will cost about US$1 billion to construct. Commercial service is expected to be launched next year.
Another new cable system operator is Global Crossing Ltd. (Hamilton, Bermuda). The company's goal is to cover 100 cities by the year 2001. Since its initial public offering (IPO) in August 1998, the company has raised more than $3.5 billion through the capital markets, project financing and equity from partners.
Jack Scanlon, vice chairman of Global Crossing, says the cash flow is already positive, though there are still massive capital investment requirements. "It is important to be profitable as you continue to build more cable systems, since we plan to go back to the public markets for more financing."
The company owns and operates four submarine cable systems: Atlantic Crossing 1 (AC-1), Mid-Atlantic Crossing, Pacific Crossing (PC-1) and Pan-American Crossing (PAC); and two terrestrial systems, Pan-European Crossing (PEC) and Global Access Limited, Japan (GAL). All together, they cover three continents and are active in markets that account for 80 percent of the world's international traffic. As of February, Global Crossing had confirmed it had commitments for US$1.052 billion in purchases of capacity on its network through the end of the fourth quarter 1999.
GAL, Global Crossing's joint venture with Marubeni Corp. (Tokyo), will build a high-capacity fiber optic network of about 1,300 route-kilometers connecting Tokyo, Osaka and Nagoya with the cable stations of PC-1. Operations are expected to commence this December.
The Technology Curve
With technology continuing to increase capacity and reduce costs, the economic life of cable systems is always under pressure. The cost of an OC-3 (155 Mbit/s) is expected to fall an average of 50 percent per annum from 1996 to 2000, according to Pioneer. The challenges for new cable systems will be to build systems that are technologically advanced while offering attractive prices to customers. The life cycle of these cable systems will reflect future bandwidth demands: Therefore, scalable technology solutions will be key to a company's success.
Cable systems "better have relationships with vendors so they can correctly time the next step regarding technology choices," warns Scanlon. "A wrong decision can drive your company into a downward spiral."
Global Crossing has a broad agreement with Lucent Technologies Inc., under which it will receive priority access to the company's advanced optical technologies as they are developed, as well as financing for Pan European Crossing, for which Lucent will supply optical fiber and opto-electronic equipment. Lucent also agrees to provide financing for future systems, if it is chosen as a supplier for those systems.
Customers have also benefited from the speed-to-market factor, which independent systems like Global Crossing are addressing. The last consortium cable, TAT-12, took four years to build to supply capacity on the U.S. to U.K. route. Global Crossing's cable system was in place in about 20 months. |
