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Submarine alert
Global cable industry reels from growing pains
By Grahame Lynch
he Internet bubble isn?t just distracting the U.S. stock market ? it?s also creating a frenzy in the global submarine cable industry. New infrastructure proposals have increased along with the dramatic development of terabit capacities and the promise of exponential increases in bandwidth consumption worldwide.
Global Crossing, a company that didn?t exist two years ago, is now worth $40 billion on the back of its rollout of a 97,000-mile network connecting over 200 cities worldwide. FLAG, the original Europe-Asia multi-gigabit cable, is now enhancing its trans-Atlantic capacity to 2.5 terabits. Tyco is promising similar capacity on its proposed 53,000-mile network.
Going one better, startup Pangea is promising a 3.6-terabit network. Project Oxygen ? the original global broadband cable proposal that endured much ridicule upon launch in 1997 ? said last month that it was upgrading its network to 4 terabits.
Sooner or later, the financiers will reach the ouch level.
The promised total capacity puts current actual usage in the shade.
According to latest figures from the International Telecommunication Union (ITU) and Telegeography, current trans-Atlantic data traffic measures under 14 gigabits. Trans-Pacific traffic measures 6 gigabits, while traffic between the U.S. and Latin America, Africa and the Middle East barely scrapes 700 megabits. Current plans would see well over 100 times that hitting the market in the next five years.
The proposed buildouts are providing paydirt for the handful of submarine cable suppliers in the market. Alcatel Submarine Networks? Chief Operating Officer, Jean Godeluck, describes the activity as a "endless competition."
"Every system is trying to be bigger and better than the last one. Fifty percent of our business is from customers who didn?t exist two years ago."
Despite this gold rush, most in the industry are convinced there is enough end-user demand to soak up the terabit capacities of the proposed systems.
Tyco takes new tack
in undersea theater
Tyco Systems International is plunging itself into the profitable undersea fiber optic cable system market. However, this time, the company will be the primary operator of the system, as well as its builder. To date, Tyco subsidiary, Tyco Submarine Systems Ltd. (TSSL), has built 85 undersea networks. Its 86th, TyCom Global Network (TGN), will compete for business with those networks, as well as with those that Tyco currently is building for other service providers, including a trans-Atlantic cable for Level 3.
Why is Tyco building its own network? The company won?t say, claiming it is observing a quiet period as it prepares to offer 20% of its undersea fiber optic cable business in an initial public offering (IPO) this quarter.
Analysts speculate that the potential profits just look too inviting to pass up.
"Right now, the market is crazed. It?s on fire," says Phua Young, research analyst at Merrill Lynch & Co. Inc.
Tyco is considered one of the big three undersea fiber optic cable suppliers in addition to Alcatel and Japan?s KDD. Tyco operates in more than 80 countries worldwide and is expecting to report revenues in excess of $26 billion for fiscal 2000. The company is well situated to become a cable operator, but its doing so may not be the best news for the undersea cable business, according to Michael Ruddy, senior fiber optics analyst for Pioneer Consulting.
"To me it poses a serious conflict of interest," Ruddy explains. "If I were Hybernia or Level 3, I would be thinking that they were going to give themselves a significant advantage in terms of time to market and technology."
In addition, TSSL customers that participate in Tyco?s Seahorse global operation and maintenance program also may wonder whose cable will be fixed first in the event of simultaneous cable outages.
Because it will be constructing its own cable, Tyco could "undercut" the existing undersea bandwidth market when it begins offering service, Ruddy says.
It?s also highly unlikely that other carriers would want a competitor constructing their undersea network, so Tyco?s sinking its feet into the provider side creates a duopoly of sorts on the construction side, he adds.
To make matters even worse, KDD primarily focuses its efforts on trans-Pacific cables, Ruddy says.
Tyco has one hurdle to cross in the interim ? a $4 billion lawsuit from a carrier that claims Tyco has stolen its idea.
TGN?s Phase 1 network will span more than 85,000 km beneath the sea and connect up to 25 cities worldwide. It will also offer minimum capacity of 2.56 Tbps of bandwidth. The trans-Atlantic portion of Phase 1 will be completed and operational by the end of 2001. The remainder of the first phase, consisting of the trans-Pacific and European systems, will be completed and operational by the end of 2002.
? Annie Lindstrom
For example, FLAG Telecom Asia Pacific Vice President, Owen Best, says demand will outstrip supply. "Places like Asia have been laggards in the Internet, but now they?re seeing the development of non-English content and good pricing of access in places such as Japan, Hong Kong and Singapore," he says.
Global Crossing President, Bill Carter, says trans-Pacific demand is about two years behind trans-Atlantic demand. "It will be explosive this year. Retailers will be buying at STM-4 and STM-16 levels," he predicts. Carter is skeptical of claims of capacity oversupply. "You couldn?t place a phone call into New Jersey during the recent snow storms. That was because the network was congested by everyone at home using the Internet."
John Tibbles, vice president, International Backbone Development, at MCI WorldCom agrees that the demand will justify the investment. "The next generation of mobile phones will have considerable data usage. That will spill through to our business." He also says the Asian Internet explosion will be replicated in Latin America.
But the transition to the terabit age isn?t as easy as just laying lots of cable. One prominent cable financier says that financial institutions are now developing a better understanding of what drives the submarine business and that they should begin to rigorously approve financing.
"There?s about $18 billion of loans to be completed in the next three to four years, with another $18 to $20 billion worth in the concept stage," he says.
"There?s a problem with concentration of risk. Sooner or later, the financiers will reach the ouch level.
"The danger is that increasing bandwidth demand is seen as a god-given right. In five or six years, there?ll be applications to drive the capacity but there could be an interim period of excess capacity."
One project that has been scaled down by financial reality is Project Oxygen. It originally proposed a $15 billion network connecting virtually every country on earth in an idealistic bid to create a Global Information Infrastructure. In its latest briefing to the industry at PTC in Hawaii, the concept was scaled down to about $7.5 billion. Proposed fiber rings in Africa and the Southern Pacific, plus many proposed Northern Hemisphere landings, have now been dropped.
According to Project Oxygen CEO, Neil Tagare, one of the biggest challenges for projects such as his is the lack of suppliers. The announcement by one of the big three suppliers, Tyco, last month that it would be building its own network in competition with its customers, worries Tagare (see sidebar).
"Tyco will reserve 75% of its production capacity for internal use. The price of cable will go up and there is a chance of a monopoly," he says.
Tagare says supply is limited in the sector because submarine cables traditionally have been highly cyclical and only marginally viable. "The ?90s were not good for this industry. Alcatel almost closed its operations," Tagare says.
This changed from about 1997. For example, Alcatel?s Godeluck estimates that his company?s output increased from 20,000 kilometers of cable in 1997 to 80,000 last year. But the high costs of entering the industry have deterred new market entry.
Global Crossing?s Carter is more confident about future cable supply, and refutes the idea that there will be a virtual monopoly held by Alcatel. "Pirelli, Siemens, NEC and Fujitsu all supply this industry. They?re as happy as lark that Tyco is out of the business."
Indeed, other suppliers have been quick to fill the gap left by Tyco. Both Alcatel and Fujitsu say they have no intention of following Tyco?s route and competing against their customers. But they have stopped short of endorsing Tagare?s wish that they license out their product to new suppliers.
Another problem for the new global cables are regulatory and congestion issues at shore landings. FLAG?s Best warns that there is "congestion in rights of way" on shore and that there are only "minimal" landing spots.
MCI WorldCom?s Tibbles concurs. "Back haul is equaling or exceeding the wet section on costs. Additionally, there have to be improvements on the optical interface or you end up losing all the cost advantage of the increased capacity."
Increasingly, the demand for capacity will be city-to-city rather than shore-to-shore. Oxygen, for example, is proposing distance-independent flat pricing between cities. Under its standard pricing model, an STM-1 between two landing points would cost $5 million, regardless of where they are situated.
As Ovum analyst Peter Falshaw points out, this averaged pricing model makes little sense up against the existing plethora of point-to-point systems. Oxygen has already withdrawn plans to extend cables to Australia and Africa in the face of proposed multi-gigabit point-to-point systems there. The development of bandwidth brokering and enhanced wavelength technologies could also create new price pressures as operators find new ways to extract use out of old systems.
But as MCI WorldCom?s Tibbles says, we are entering an age where the STM-64 has become a basic unit of trade. Or as analyst Terry Soja says, the last 12 years are going to be seen as the "horse and buggy days" of submarine cables. |
