Atlantic Tide Turning? by Julian Rawle, Managing Partner, Pioneer Consulting
In February 2003, when Cable & Wireless lit a handful of fibers on “Apollo”, the latest in a series of state-of-the-art transatlantic systems, the lights effectively went out and the doors were firmly closed on what had once been the most vibrant market for investment in the submarine cable industry. With so much available capacity from so many cable systems, bandwidth prices fell below cost, causing devastation in the transatlantic market and creating a knock-on effect in the regional Europe Atlantic market. More than three years later, any discussion of these markets among industry veterans remains couched with wry smiles and ironic comments. However, contrary to popular perception, the transatlantic and Europe Atlantic markets have not been stagnating entirely. First of all, there was consolidation with the decommissioning of a number of old and not-so-old cable systems whose O&M unit cost was too high for these ultra-competitive markets. “9/11” and the “War on Terror”, not to mention more natural disasters such as tsunamis, hurricanes, and earthquakes, have highlighted the vulnerability of many strategic installations, including cable landing stations and city PoP’s. Most recently, the much-hyped “Triple Play” (now also “Quadruple Play”) service offering is becoming a reality on both sides of the Atlantic, bringing bandwidth-hungry applications, such as IPTV, VoIP, MP3 downloads, Peer-to-Peer file sharing, Video Conferencing, and Multiplayer Interactive Gaming to the common man. Furthermore, 3G wireless networks are finally beginning to gain traction in the European market and 4G technologies are promising broadband wireless connectivity of up to 70 Mbit/s. While much of this potential increase in data traffic will probably carry domestic or mirrored content, there will undoubtedly be some positive impact on demand for international submarine fiber optic capacity. Undeniably, these are major potential drivers of demand for submarine fiber optic system bandwidth, upgrades, and
new installations. There are murmurings in the industry of a significant upswing in transatlantic capacity orders but the pace of growth is as yet unclear and so the timing of renewed activity in the submarine sector has yet to be determined. Nevertheless, Pioneer Consulting believes that these new market drivers are sufficiently strong to merit some research with a view to publishing concrete forecasts of the regional Europe Atlantic and transatlantic markets in a forthcoming report later this year. This article summarizes our current findings from primary and secondary sources and some initial analysis of the supply-demand balances. Market Update – “A Migration to Quality” When FLAG Telecom announced a 500%, quarter-onquarter increase in capacity sales for the first half of 2005, FLAG’s VP of Marketing, Chris Wood, attributed the increase to a “migration to quality”. He was referring to the uptake of broadband services by businesses and the virtual ubiquity of multi-megabit residential connections in North America and Western Europe. However, this description could also apply to the “purging” of the corresponding submarine fiber optic markets. Inefficient cable systems have been removed, operational costs have been slashed, and the cable maintenance market has been forced to become much more competitive and price-conscious. The cynics will say that FLAG’s announcement was merely sales hype. Pioneer would be inclined to agree with them if it were not for the cautiously optimistic feedback we have received from interviews with other industry players. Another major owner of multiple submarine cable systems told us that the majority of the RFP’s they had received in the last 6 months were for transatlantic capacity and the general consensus seems to be that transatlantic system upgrades are 2 to 4 years away.
Other cable system owners have complained to Pioneer that they are still being forced to sell transatlantic capacity at or below cost but there is also agreement that 50% annual reductions in bandwidth prices are a thing of the past. One school of thought suggests that there should be an increase in bandwidth prices as supply and demand come back into balance. This presupposes that bandwidth is a commodity like crude oil or coffee. Pioneer discounts the possibility that bandwidth prices will ever do anything more than allow operators a thin margin over cost. Volume will be the driver of future profitability and so successful operators will be those who can best leverage available economies of scale. Apparently, interest from customers in IRU’s is increasing with one operator claiming that only 50% of their sales enquiries are now for leases. Global Crossing recently stated at an Analyst Briefing that they were seeing increased demand for dark fiber from non-traditional players, such as Google, as well as from carriers whose network utilization has passed the magic 45-50% mark. Level 3 claimed in February this year that their purchase of 300 Gbit/s of capacity on the “Apollo” system, with an option for a further 300 Gbit/s, was sparked by their reaching 85% utilization of their existing 480 Gbit/s of transatlantic capacity. Level 3’s transatlantic IP traffic has increased 100% since the beginning of 2005. Moreover, they are stressing the route diversity of their transatlantic network which has alternative termination points to the usual UK-New York route. Ten out of twelve transatlantic cable landings in UK are located in the same south-western region of the country. Moreover, most of these systems provide connectivity to PoP’s in London with very little backhaul route diversity. Similarly, ten out of sixteen transatlantic cable landings in North America are located in two clusters along a 130-mile stretch of New Jersey and New York coastline, all of them serving PoP’s located in New York City.
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