Subsea Special: Will the subsea cable market sink or swim?
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 United States.
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 customer?
"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."
Getting off the drawing board
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 entrepreneurial basis.
"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 knows."
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 begins."
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 appreciate.
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 new continent.
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 consortium."
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."
Throwing caution to the wind
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 from.”
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 route.
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 believes.
“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 years.”
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 years.
A changing profile
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 countries.”
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 customer.
Perhaps whether we are in a subsea project lull or not, the buyer of capacity will still find themselves in a win-win scenario.
Asia to Europe - the battle is on
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 East’ route.
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 France.
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 artificially high.
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 incumbent-dominated consortiums.