Latency Special: The great battle for the transatlantic corridor

19 March 2013 | Richard Irving

Hibernia Networks and Perseus Telecom are locked in a bitter battle for control of the transatlantic corridor. As Hibernia grapples with the politics of using a Chinese equipment supplier, Richard Irving asks what happens next.

News that Hibernia Networks is to delay the launch of an ultra fast link between London and New York until the fourth quarter of 2014 at the earliest is set to throw the battle for supremacy of the transatlantic ultra-low latency market wide open.

Hibernia, which eventually hopes to lay the first new cable on the bottom of the Atlantic sea bed for more than a decade, is locked in an increasingly tough duel with Perseus Telecom, a rival operator backed by Reliance Globalcom, to provide the fastest link between the world’s two largest financial centres.

Hibernia confirmed to Capacity this month that it has stopped work on a new $300 million cable, known as the Hibernian Express, while the company digests a US House Intelligence Committee report that has branded Huawei, a key partner in the project, a national security threat.

The committee recommended that federal agencies avoid using Huawei equipment and that US companies seek alternative telecom equipment suppliers for future projects. The ruling is a double blow for Hibernia, which was not only relying on Huawei for 4,600km of state-of-the-art fibre optic cable and other amplification and transmission equipment, but also for around $250 million in financing to support the new build.

Meanwhile Perseus says it is pressing ahead with a plan to re-route part of the FLAG Atlantic-1 North cable (FA-1) to bring the fibre closer to New York’s financial markets. Chief executive Jock Percy says the move will put clear distance between Perseus and its rivals in the so-called “race to zero” – the dash to become the fastest network provider across the Atlantic. “At the end of the day there can only be one winner”, he says.

Winner takes all
High-level sources at both Hibernia and Perseus are at pains to stress that relations between the two ultra-fast network providers are cordial.

However, observers with detailed knowledge of the sector suggest that escalating rivalry between the pair highlights the stark reality that only one dedicated ultra-low latency network provider is likely to survive in the cut-throat transatlantic market. And like the clients they serve, there are no medals for coming second.

A buy or sell order currently takes around 64.5 millieseconds (mS) to course from London to New York. Hibernia reckons to have mapped out a new route on the floor of the ocean that will slice 500km off the current fastest route, bringing speeds down to below 60 mS. It won’t give a more precise number because, it says, that would instantly give Perseus a target to aim for.

Perseus, meanwhile claims to have already broken through the 60mS barrier by putting new optical electronics at either end of FA-1 and by switching from fibre to much faster wireless technologies at both landward ends of the network.

Furthermore, it promises to slice another 3 mS off the route later this year when it completes a project to re-route the last few hundred miles of the cable off the coast of Nova Scotia. One industry insider suggests that the work could cost as much as $50 million.

The move sets the scene for a high-stakes game of one-upmanship between Perseus and Hibernia where success or failure could rest on a single millisecond. As the chief technology officer of one leading telecoms provider explains: “There isn’t room in the Atlantic market for two systems to charge the kind of premiums that Hibernia and Perseus need in order to claw back a decent return on their investments. The universe of potential customers is too small.”

For one thing, there aren’t as many deep-pocketed trading firms willing to pay any price for super-fast connectivity as many people had surmised: extensive investigations by Capacity put the number at as few as 12-15 – considerably below the “few hundred customers ” that many analysts have suggested in the past.

Moreover, there are already no fewer than twelve transatlantic cables already spanning what traders euphemistically call “the pond” and it is estimated that these cables are running at less than one fifth of their potential capacity.

The market dynamics certainly do not support a new build based on the supply of new bandwidth alone. However, a simple rule drives the ultra-low latency market: speed trumps all. And in that spirit, says analysts, everything in the transatlantic market is to play for.

Observers believe that Hibernia might still be sitting on the faster route, even after Perseus tweaks the FA-1 cable. However, Perseus may not need to proceed with any additional work at all if Hibernia cannot rescue Express.

And, conversely, it may not want to go ahead with an expensive deployment if Hibernia can persuade enough potential customers that it can not only get the funding for Express, but blow FA-1out of the water in terms of speed.

Those same industry watchers are convinced that Perseus might be delaying work on FA-1 until the outlook for Hibernia becomes clearer. “The sub-marine world is a very small world. Let’s just say that there is some skepticism in the market as to whether Perseus can get US landing permits finalised in time to meet the 2013 deadline that it has set itself for the roll out of the FA-1 upgrade”, one source with detailed knowledge of the situation says.

Meanwhile Hibernia, which expects to decide by the end of March whether to terminate its contract with Huawei and start from scratch with a new equipment supplier, is adamant that its route cannot be beaten.

It also cautions that Perseus is playing hard and fast with the rules of engagement by comparing its network, which is part-wireless and part-fibre (and therefore faster but less reliable) with its own all-fibre link (which will come with so-called “five-nine’s quality of service guarantees).

The wireless alternative
Crucially, the shift towards wireless connectivity affects more than just issues of reliability. Although wireless networks can be as much as a third faster than fibre-based rivals, they struggle to carry anything more than around 150 Megabytes per second (Mbps) of capacity.

But because the need for speed is so great in the world of electronic trading, many firms are ditching data-hungry strategies and coming up with far leaner trading algorithms to maximise the speed advantage that wireless alternatives can offer.

That could play havoc with Hibernia’s business model. “If you’re going to spend $300 million on an entirely new cable, you’re going to need to sell multiple 10 Gigabyte per second (Gbs) circuits to at least 50-60 different players at a very high premium to get a decent return on your investment. If there’s only 12-15 potential customers out there, and they only want 150 Mbs of capacity each, then I would question whether your numbers are going to stack up”, one London-based ultra-low latency expert says.

And if that wasn’t bad enough, sources hint that Perseus could trigger a pre-emptive price war that could scupper Hibernia’s efforts to seek new financial backers. “If both systems nominally offer the same latencies then Jock will have a keen price advantage because he will have spent less than Hibernia on network infrastructure and he will therefore need to charge less to recover his costs”, a person familiar with Perseus’s thinking says. “Jock developed a very keen interest in the battle between Southern Cross and Pacific Fibre”, the source adds forebodingly.

Last August, Pacific Fibre, a New Zealand-based start-up collapsed after it failed to raise A$400 million to finance a new fibre optic cable linking Auckland to Sydney and on to Los Angeles. Southern Cross, which owns New Zealand’s only fibre link to the rest of the world, cut prices and upgraded the service as Pacific Fibre executives started to hit the road in search of funding, undermining its business case.

Meanwhile Hibernia is unfazed at the threat of a price war: “That scenario would only be of concern if Perseus could match Express in terms of speed”, says Mike Saunders, vice president of Business Development. ”It can’t. Express will be built and it will be the fastest link across the Atlantic – of that there is no doubt.”

As the war of words continues, the pressure on each side to put up or shut up intensifies. Frasier Bell chief executive of BSO Networks articulates the frustration that many in the industry are beginning to feel: “People don’t really care when you start to market the potential speeds that you might be able to deliver in the future – it just lacks credibility. What they are interested in is what you can deliver in the here and now. It’s one thing to say you can beat a benchmark latency number. It’s quite another to go out and do it.”

It’s a criticism that Mike Saunders accepts stoically. “I think with hindsight we should have probably got further down the road to construction before going public, but we had spent 7-8 months surveying the route and we were absolutely certain that it couldn’t be beaten.”

Official business
For now, Hibernia’s top priority is to try to seek further clarification from US officials as to whether the House Intelligence Committee ruling applies to “dumb” cable, or just transmission and amplification equipment.

Hibernia’s Saunders confirms that while the company had been monitoring the mood of the US government for some time, the reaction among US carriers was more of a surprise: “We met with several carriers the day after the report came out and it was made very clear to us that they would not be able to utilise capacity on our network for fear of losing contracts with federal agencies.” Saunders says that Hibernia held further talks with a number of US carriers in early January but had failed to make any headway.

Hibernia has already received detailed tender proposals from Alcatel Lucent and TE Subcom and expects to decide by the end of March whether to part company with Huawei.

Saunders also confirms that Hibernia has appointed Macquarie Bank to find new financial backers to replace Huawei’s $250 million commitment. Macquarie, which is known in financial circles as the “millionaires factory” in deference to the number of aggressive investment bankers that have made their fortunes at the firm, is arguably one of the leading players in infrastructure finance.

Tellingly, Hibernia Networks completed a $52.5 million refinancing in the middle of January. While the move is entirely unrelated to Hibernia’s Express venture, the company will have been required to disclose any material risks to its underlying business, which would appear to suggest that its backers are comfortable with the developing situation in the US.