How Much is Enough?
By Robin Russell
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In my last article for SubTel Forum, written in January 2007, I discussed diversity from a somewhat abstract perspective, although in the shadow of the multiple cable outages caused by the 26th December 2006 Taiwan earthquake. Since then, we have seen quite a few announcements of new submarine cable projects in the Pacific. Some of them are rapidly approaching ready for service status. It seems appropriate, then, to address the practical question that I have been asked many times in the past year or so: Are there going to be too many cables in the Pacific?
Another way this question has been phrased is: Is the wheel turning back to the bad old days? What made the bad old days bad? When the Australia Japan Cable (AJC) network was conceived and financed, in 1999 / 2000, it was still the good old days. Demand growth forecasts soared in exponential curves, banks stood ready to lend billions of dollars, cable ships were booked solid for years and it was impossible to obtain manufacturing slots in the cable and repeater factories.
When AJC announced Ready for Service, in December 2001, things had changed quite a lot. The terrorist attacks on the World Trade Center on September 11th 2001 had dented confidence throughout the business world. After the dotcom bubble and the telecommunications bubble, the booming submarine cable market was suddenly looking like a bubble as well. By 2002, the good old days had turned into the bad old days. Part of the problem was that one of the fundamental realities of the submarine cable business had been overlooked: no matter how much capacity your cable has got, you can only put the amount you can sell in the denominator when you calculate unit costs. Essentially, all new cables, including AJC, have design capacity of at least 1,000 Gbit / sec, but that is irrelevant if it can’t be sold. Even wise old hands, who well understood this principle, were burned when it turned out that the forecasts of demand were wildly inflated. Reality based pricing In the submarine cable business, what I call reality based pricing is just a manifestation of the economic truth that price is determined by supply and demand. However, it is a special case of that economic truth. The reason it is a special case is that, with advances in cable network technology, in some smaller markets the supply from even a single cable system might as well be infinite, it is so unlikely to be utilised fully within its service lifetime. Accordingly, reality based pricing is a situation where price is determined mostly by demand. To understand what this means, consider the example of a market where the total demand for international capacity is 2 x 10 Gbit / sec wavelengths (this is not