Submarine systems supply market rebounds
The submarine system supply business has always been a cyclical industry. Nevertheless, the big boom and bust in the early years of this new century have left an indelible mark on the submarine cable industry.
Longstanding suppliers have left the submarine business (i.e., KDDI-SCS and Pirelli), reducing the number of competitors in the repeatered systems market from six to four. The remaining suppliers have seen production capacity closed down and staff downsized. They are fighting fiercely for new business and to expand into nontraditional marketplaces (e.g., oil/gas platforms, homeland security, and scientific observation). New entrants are also beginning to make their mark.
Global cable production capacity has been reduced to around 100,000 cable-km per year and should be enough to meet expected demand. However, cable production could become a bottleneck if a number of systems come under contract at the same time.
The number of cable ships available to install and maintain undersea networks has also been reduced by more than 50%. The ironic result is that these reductions in marine and cable production capacity may result in shortages and competition among purchasers to reserve production-line capacity to meet construction schedules.
Total worldwide investment in submarine fibre-optic cable systems peaked in 2001 at US$16 billion and hit its low mark in 2004 (since 1987 when the first data is available) at US$380 million. According to data presented by Julian Rawle, managing partner with Pioneer Consulting, at Terrapinn’s annual Submarine Networks World conference in Singapore, if the remainder of 2006 continues as predicted, supplier revenue will exceed US$1 billion with some 32,000 route-km under contract.
In the previous 5 years, Alcatel has clearly been the dominant player in the supply of submarine fibre-optic cable systems. Alcatel’s new 1620 Light Manager terminal gives Alcatel a modern, high-density, third-generation forward-error-correction-based terminal. Tyco’s recently announced third-generation terminal is expected to provide the company with similar capabilities and similar cost advantages. NEC and Fujitsu continue to be strong competitors in the turnkey supply of both repeatered and repeaterless systems.
Despite a surplus of capacity on some routes (e.g., transatlantic), the growth of global bandwidth demand promises to reduce this surplus in the medium-term future. Bandwidth demand will also continue to provide an impetus to build new cables in the short term on routes that are currently underserved (e.g., those lacking route diversity, restoration capacity, or competition) and on some new routes that are not currently served by high-bandwidth undersea cables.
Optimistic demand forecasts for undersea capacity stem from observations that the world’s population of Internet users exceeded 1 billion this past year and that broadband access users exceed 100 million just in North America and Asia. Of greater importance perhaps is that broadband penetration in Asia is only approximately 3% and continues to have a strong growth rate. The left side of the figure shows Pioneer’s forecast of growth in demand for undersea capacity segmented by region on intra-regional routes. The right side of the figure shows the same forecast on inter-regional routes.
On a worldwide basis, Pioneer Consulting expects that demand for capacity on international submarine cables will grow by an average of 40% per year between now and 2013. This increase will be driven in part by continued growth in the world’s Internet user population but will be mainly dependent on increased demand resulting from the commercial deployment of new “bandwidth-hungry” applications over FTTX, xDSL, and mobile broadband access networks.
Since DWDM systems are frequently deployed without their full capacity utilised, over the lifetime of a cable system a constant question in the minds of systems operators is whether and how to upgrade their fixed investment in the cable.
Overall, Pioneer Consulting estimates that about 16% of the world’s submarine fibre-optic cable capacity is currently lit. (This compares with an estimate of 13% from the last worldwide study in 2001.) The fact that so much capacity remains unlit indicates that the opportunities for system upgrades in the upcoming years are large. In addition to the obvious candidates for this business, companies dedicated to repeatered long-haul upgrades (Azea) and repeaterless upgrades (Xtera) have survived the downturn and appear to have gained a measure of marketplace acceptance. Other new entrants include telecom industry giant Huawei, which has the ability to more than nibble away at the market share of traditional submarine system suppliers.
The pace of technological innovation in undersea systems has slowed appreciably. The multiterabit capacity available in even transoceanic cables seems to be capable of supplying the needs of customers for the next few years. Due mostly to the intense pressure of low bandwidth pricing, the R&D efforts of the major suppliers have focused on reducing the cost per bit through less expensive terminal equipment. The ever-present requirement to qualify all submarine-deployed components for extremely high reliability has also come into a renewed focus due to the removal from the market of many qualified component (pump lasers, optical couplers, etc.) supply facilities.
Suppliers of equipment for the repeaterless marketplace have also come under extreme pricing pressure, especially with the availability of inexpensive metro optical transmission gear being adapted to submarine application. The latest technical innovations, though, have allowed the development of commercial unrepeatered systems to operate 10 Gbit/s WDM systems over a transmission distance of 450 km using Raman amplification.
While the financial community has been reluctant to invest in submarine cable systems for many years, recent news has demonstrated a softening in this position. Though no longer blinded by the prospect of unbridled growth, sound business plans have been put forward.
As an example, a group led by Ashmore Investment Management has recently purchased the assets of Asia Netcom, including paying US$233 million for the company’s pan-Asian network, EAC (purchased from Global Crossing for US$120 million). Ashmore had previously purchased the debt for the C2C cable network as well.
A second form of project funding is found with VSNL’s recently announced plan to expand its undersea network by connecting its assets in Singapore to those in Japan with a new cable. This system, as well as systems built by Reliance/FLAG, is entirely funded via internal resources.
In addition to private equity funding, systems are being developed by traditional carriers and funded through a hybrid consortium model often with a multitiered finance mechanism. Additionally, at least two consortia are currently in discussions to construct a new trans-Pacific network.
With a healthy outlook for capacity upgrades and new systems due to the bandwidth juggernaut, the submarine system suppliers have survived the recently dismal marketplace and emerged to find another round of investment and demand waiting for them.
Most participants in this market are highly sensitised to its past history of rabid investment followed by painful consolidation, and they would like to see a rational market in this next cycle. However, economic theory is always complicated by personal and national egos, greed, and fear. The resulting gamesmanship will keep everyone in the industry busy for the next few years-but it is also sure to fuel further rounds of unrealistic expectations and broken dreams.
Howard Kidorf is a managing partner with Pioneer Consulting (www.pioneerconsulting.com).