Alchemy – Reversed then Restored
ing with price elasticity to stimulate further demand – led to a period of sustained and reliable market growth. This trend continued right through to the 'co-axial technology crunch' of circa 1980, and then accelerated further as single-wavelength optical systems offered undreamed-of capacity. The pace of acceleration picked up even further with low cost DWDM upgrades, increased globalisation, seemingly limitless technology and, latterly, the internet and dot-com era. Systems were initially equipped with 2% to 5% of their ultimate upgraded capacity, with even that initial capacity only partly sold, and carrying decades of future O&M commitments.
By Steve Wells, Ian Fletcher and Basil Demeroutis
the market to that change.
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Many outside observers have remarked that the bursting of the dot-com bubble caused a sudden re-adjustment of The theme that we develop here is that the major market demand forecasts. It is of course tempting simply to lay change has been caused by the interruption of the 'virtuthe blame on the dot-com collapse – existing installed caous circle', where transport is now bles could meet new, dramatically such a small part of the total price The process by which systems are lower demand for many years to paid by the end user that demand come, particularly with ever-iminitially conceived is largely a can no longer be stimulated by proving DWDM technology. At international transport price cuts mystery to those of us who have a superficial level, this analysis alone – that is, elasticity has efhas its merits. However, to fully not done it. It may be a single fectively gone and further price understand the cause of this marcuts lead simply to proportionately brilliant flash of inspiration ket change and the impact it has reduced revenues. This point was had on our industry, we must first or a natural succession from bound to arrive sooner or later briefly characterise the market due to the success of the installed a previous series of cables – or that existed prior to the change. global networks in shifting the mysterious mutterings in dark th capacity pricing bottlenecks back In the early 20 centur y, transtowards the regional and lastsmoke-fi lled rooms. oceanic voice communication mile areas of the national feeder was achieved mainly by HF radio networks. at huge cost per channel. The subsequent installation of early cables enabled operators The complex interplay of elasticity between pricing, supply to begin developing an international business; however, and demand has thus far led to price declines of the order use by the public at large was still restricted by high pricof 50% per year on many routes. But the turning point has ing. A key feature of this phase was that even allowing for now occurred. For the near future, new capacity will contechnology development - for example, a shift from co-axial tinue to be obtained largely through the upgrade of existcables to optical fibres - demand exceeded supply. For each ing cables at upgrade prices, and not through installation major route, a consortium of top-tier telecom operators of new cables. Even for new cables, there is no longer any would jointly fund and project manage the next cable on reason to assume that capacity pricing will be that much the basis of mainly pent up demand in the market, based cheaper, due to the specific mix of fixed and capacityon their own in-house forecasts. Each cable filled rapidly dependent cost elements in new cables. Technology has and was superseded by a larger capacity cable within five become just one of the necessary factors enabling price years. The 'virtuous cycle' – reduced unit pricing interact-
he trick went like this – use half a billion dollars to buy a truck full of gold, then convert it into a transparent form of sand, stretch it out for many thousands of kilometres and then throw it all in the ocean. It would have been an even better trick if done the other way around. The collapse of capacity prices and the scarcity of investment capital have together led to unprecedented pressure on the cost optimisation and robustness of business plans for new networks. This ar ticle will approach the problem from both sides - how to minimise the cost of a new network, and how to raise the funds to build it. We first review the key cost elements and their minimisation in the light of clearly defined availability and performance objectives. Then we address the process of raising capital, how investors analyse proposals, the key elements of a good business plan and some examples of what is currently going on in the market. In the last five years, we have witnessed the biggest change in our industry since long-haul voice cables were first conceived around 50 years ago. It may seem strange to make that claim, in the light of recent technological developments, however we hope to provide some insights by illustrating the symptoms and the underlying financial causes that lead inevitably to our current market conditions. It is really the story of the sudden transformation of international capacity, from a specialised premium product to a cheap open-market commodity, and the reactions of
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