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10 January 2013
| Guy Matthews
A major subsea cable project sunk without a trace in 2012, raising the question: is there about to be a subsea construction lull? Guy Matthews investigates.
Submarine cable venture Pacific
Fibre was formed at the beginning of 2010 with the aim of
building a new network between Australia, New Zealand and the
Its backers claimed the cable had every chance of success,
offering much needed diversity on an increasingly important
route dominated by ageing infrastructure.
The 5.12Tbps, 13,000km cable was scheduled to be ready in 2013,
connecting the three countries and offering five times the
capacity of the Southern Cross cable system.
The venture has now folded, not because its basic aims were
flawed or unrealistic, but because it was simply unable to
attract enough funding to make the project happen.
The failure of Pacific Fibre does not suddenly bring
intercontinental cable building to a hard stop. Other major
projects around the world are going ahead, even if not quite at
the rate of the last few golden years that have seen so much
ambitious and bold building occur in practically every corner
of the planet. But it does raise questions about the financing
of cable projects looking forward.
In tough economic times, when credit is tight, is it getting
harder to pull together the money needed for new projects, even
where they appear justified, perhaps even necessary? And what
does this say about the future of international capacity
pricing and diversity from the point of view of the cable
"Part of the problem is a lingering concern in the mind of
banks over what happened a decade ago," believes Alan Mauldin,
research director with independent analyst firm TeleGeography.
"There is money to be had, but on terms that are more stringent
than they used to be."
He believes that lots of would-be backers of new cable systems
now want to see construction costs totally covered by
pre-sales, if at all possible, thereby minimising their
exposure. But as he points out, it can be a substantial
challenge to line up enough customers two years in advance of a
cable's launch to covers its astronomic capex demands.
"I talk to the financial community and ask them what they think
has changed, and from their point of view it remains a very
capital intensive business, but one where the returns are not
that attractive at the moment thanks to strong price erosion,"
he claims. "Submarine cables are just not an easy way to get
rich any more."
To look at the headlines would
suggest that there's plenty of remaining appetite, at least in
certain parts of the world.
But it is arguably getting harder than ever to pick the cable
projects that have every chance of going ahead from those that
are mere whimsy and bravado on the part of the chronically over
ambitious. There are, for sure, quite a few projects on various
drawing boards at the moment, but a lot of these exist as
little more than PowerPoint presentations.
Some are viable and backed by people who have done their
homework. But the more imaginative ones, based on scanty and
poorly conceived plans, are starting to muddy the waters a bit
for the wider industry.
There is, says Mauldin, still the age old dichotomy between the
virtues of a consortium of multiple and often incumbent-led
interests, and a private build sponsored on a more
"We've seen a lot of recent major projects built by
consortiums - WACS, ACE, GBI, EIG, IMEWE - where the
risk is spread over several parties, making it easier to get
backing," he points out. "With the exception of Asia, where
this model is booming, we're seeing less of these big
consortium projects now. Most currently underway are private
builds, backed by one or two names. It's harder to get money
for these though. Building cables is expensive, as everybody
It is of course important to discern between projects that have
collapsed, never to resurface, and those for which funding has
merely been held up.
"RFS [ready for service] dates are often getting pushed back
which tells you that financing has not been sufficiently
secured yet to proceed," says Mauldin. "You see announcements
saying 'We've got a contract', but actually quite a bit more
closure is needed on the finance side before building actually
For a commercially funded private cable, as opposed to a
government sponsored one, it may be harder these days to get
financing for a brand new route that does not yet have a subsea
cable than it is for an established route, because
an established route has historical data that enables easier
extrapolations for future growth – the sort of
extrapolations that banks and venture capitalists
Seaborn Networks is constructing a new cable to follow the
increasingly in-demand route between booming Brazil and the US.
CEO Larry Schwartz believes that the proven importance of this
route made it all the easier for Seaborn to raise the relevant
cash, versus a 'risky' fresh route between Brazil and a whole
He also believes that challenge of getting funding is not
always just a simple matter of getting the right message across
to some third party banks, but of arguing a successful fiscal
case within a larger telecoms organisation.
"Within operators, it's getting harder to justify funding a new
consortium cable build, like ours between the US and Brazil.
These operators are probably more focussed right now on a
Brazil enterprise strategy, rather than on being wholesale
submarine cable operators. But if they come to us, they'll get
consortium-like pricing without the hassle of being in a
Leigh Frame, chief operating officer of Alcatel-Lucent
Submarine Networks, rejects the notion that the apparent
slowdown we are seeing in larger projects is any more than a
temporary blip, to be entirely expected.
"Getting funding closed can take a two to three-year timescale,
which sometimes means that one project does not dovetail
exactly with another - but I'm picking up a consistent appetite
for large-scale projects from the investment community," he
says. "There's money there for good projects."
Failure to launch, he says, can be
for all sorts of reasons other than failed finance: "Perhaps
pre-sales weren’t in place quickly enough," he
suggests. "Consortiums will tend to get the financing lined up
slower because there are more names to get agreement
Like Mauldin, he fears there are a lot of people out there from
the 2000 era of bust and glut who inevitably bring a level of
caution with them – but not necessarily a fatal
caution. "What we all learned back then is not simply that
'large scale equals bad’," he believes.
"It’s probably more that the first cable on a
route will make money, but a second one on exactly the same
route is not going to make the same return.
There’s always room for something
that’s different to the rest."
So is there always money for the right project, whatever the
wider climate? Schwartz of Seaborn believes that any submarine
project that can demonstrate that it is tied in with well
planned terrestrial development at its end point is a winner.
"Pent up demand is the main driver for our cable," he says.
"It’s in essence a response to the dramatic influx
of capital that has gone into Brazil’s
communications sector over the last few years and is forecast
to continue, and what that implies for future demand on our
We’ve seen unprecedented terrestrial developments
in mobile, 4G, at metro level, in data centres, and broadband
penetration relevant to our route. It’s a route
that by 2015 will need additional capacity, and probably needs
more than one new cable other than ours."
Maya Glick is senior project director for Israeli operator
Bezeq International, the company behind the JONAH cable
connecting Tel Aviv with Bari in Italy. She agrees that
premeditated terrestrial tie-in is crucial for successful
financing. She says Bezeq International has been busy expanding
its domestic infrastructure to prevent internet traffic
congestion, upgrading the core layer of its domestic backbone
and adding a data centre facility at JONAH’s Tel
Aviv landing station.
"We anticipated growth in international telecoms traffic demand
in Israel for internet bandwidth, mobile telephony and data
services usage, and identified the business potential in a
market eager for competition," she says. "As the largest player
in the ISP market in Israel, we had an interest in opening the
international telecoms market in Israel to competition."
Global ICT provider Fujitsu has been involved in the subsea
cable industry since 1969, when it developed
Japan’s first coaxial subsea cable system. A
spokesperson for the company believes that fewer large subsea
cable projects over the next couple of years may simply be
supplanted by more small projects: "Big pipe projects tend to
come first, and be followed by regional cable projects," he
"Especially in the last two years, there have been many big
projects in Asia, and so we’d expect that a number
of regional cables should be on the table within another a few
Another key driver for new cable builds has always been the
need for added diversity. In fact fresh capacity is probably
dwarfed as a motivator for new systems by the requirement for
choice and the resilience that goes with that. The ideal new
cable offers a unique angle, like a new route making it
unlikely that we will see too many new builds on well worn
paths, such as between Japan and the United States, for a few
But given the changing profile of
cable system investors that we have seen in the past two years,
almost anything is possible. The old 100% equity
consortium-style model where all funding comes from the various
traditional telcos parties backing it is by no means dead, no
deader than the limited equity model where one or two investors
put money up and raise the rest from debt.
"There are still consortium projects involving traditional
carriers, but this is not the only way to build a cable these
days," says Simon Webster, head of submarine networks with
vendor NEC. "You’ve now got new types of investor,
including Google and Facebook, as well as investors completely
new to the market like Chinese carriers, and telcos from oil
and gas states in the Middle East, as well as African
If we are indeed in a subsea construction lull, then what
effect might this have on capacity pricing? New cables usually
have the consequence of reducing pricing, so will fewer
projects even mean price rises?
Probably not, as the current mass upgrading of older cables
across the world will have the compensating effect of
unblocking a fresh wave of price erosion.
But of course new cables have other advantages for the buyer of
capacity other than price drops, tending as they do to take
advantage of a new generation of equipment which comes in at a
higher bit rate. As 100G becomes more commercialised over the
next few years, the price of 100G hardware will no doubt drop,
along with the price of capacity that gets passed to the
Perhaps whether we are in a subsea project lull or not, the
buyer of capacity will still find themselves in a win-win
Indian entrepreneur, Neil Tagare, the man behind
Flag – the world’s first
privately-owned submarine cable system – is
planning a new build to add one more option to the much
favoured and evidently lucrative 'Asia to Europe via the Middle
The new cable, his third subsea project, is planned to land in
Singapore, Indonesia, Thailand, Malaysia, Myanmar, Bangladesh,
Sri Lanka, India, Pakistan, the UAE, Oman, Yemen, Djibouti,
Kenya, the Maldives, Saudi Arabia, Egypt, Malta, Israel,
Algeria, Tunisia, Greece, Turkey, Lebanon, Cyprus, Italy and
It will most likely find itself in direct competition with
another new build on a comparable route – SeaMeWe5.
While the two systems will share certain landings and be
competing for the same customers, they could not be in much
more marked contrast. SMW5 will be, like its cousins before it,
built by a major subsea consortium, versus the more
entrepreneurial backing of Tagare.
Tagare has been openly critical of SMW5’s business
model, saying it discriminates against competitors and rides
roughshod over regulatory barriers. He also feels that the
consortium model ultimately keeps the price of 100G technology
His model, by contrast, will be about 'low margins and high
volumes’, he claims, favouring carrier customers
on tighter budgets than those who can afford to belong to