The submarine cable industry has gained momentum in the past few years. According to Terabit Consulting’s Submarine Telecoms Industry Report, the cable market contracted to one-eighth of its value during 2003-07 as compared to the preceding five years. During the period 2008-12, the segment witnessed about $10 billion of investments in new projects (at an average of $2 billion and 54,000 route km per year). Over two-thirds of this investment originated from sub-Saharan Africa, South Asia and the Middle East.

Global submarine cable deployment took place broadly in three stages. The first stage, between 1987 and 1997, witnessed the introduction of transoceanic optic fibre communications and a consortium-dominated market. The second stage, between 1998 and 2002, was characterised by large investments in bandwidth, driven by the introduction of the internet. The market witnessed a major downturn during this period, after which it did not witness any activity for five years. The third phase, 2008 to the present, has seen carrier-dominated investment in developing markets. So far, the majority of this investment has been directed towards Africa, India and China.

Going forward, Terabit Consulting has identified a total investment of $25.6 billion in projects that are under way. These projects have been classified into the high-, medium- and low-activity segments, based on supply contracts, funding, licences, carrier commitments, market opportunities, marine surveys, desktop studies, feasibility studies, etc.

According to the report, projects worth about $5 billion are at an advanced stage of development (high activity) and those worth an additional $15 billion have made significant progress (medium activity). Projects worth another $5.6 billion are under consideration.

Region-wise markets

Transatlantic

As per the report, the transatlantic cable system market is essentially a “wholesale” market, where telecom operators lease capacity from network providers instead of making direct investments in building their own infrastructure. As of mid-2012, the lit transatlantic capacity was about 15.6 Tbps, while the demonstrated design capacity was 49.5 Tbps, for a fill rate of 32 per cent.

The existing transatlantic cable systems include the Atlantic Crossing-1 (owned by Level 3 Communications); Columbus 3 (owned by a consortium of international carriers); Yellow (Level 3 Communications); Atlantis 2 (an international consortium of carriers); FLAG Atlanta 1 (Reliance Globalcom); Hibernia Atlantic (Columbia Ventures Corporation); TAT-14 (an international consortium of carriers); TGN-Atlantic (Tata Communications); and Apollo (Cable & Wireless and Alcatel-Lucent).

The seven lit dense wavelength division multiplexing systems between North America and Europe are owned by six entities – Apollo SCS Limited (a joint venture between Cable & Wireless Worldwide and Alcatel-Lucent), Level 3 Communications, Hibernia Atlantic (an 85 per cent owned subsidiary of Columbia Ventures), Reliance Globalcom, Tata Communications, and the TAT-14 consortium.

Several transatlantic optic fibre systems (between Europe and the Americas) have been planned for the future. These include the ACSea-EUR Cable System; the Emerald Express; the Europe Link with Latin America; Project Express; the Transatlantic Consortium System; and WASACE North.

Securing finances for these projects is a major challenge. Though financiers have shown interest in investing in this space, they have been reluctant to provide funds for the transatlantic bandwidth market since the downturn and the subsequent commoditisation of bandwidth in early 2000. In an effort to secure private investments, developers of three recently announced North America to Europe projects are focusing on differentiating bandwidth offerings. For example, Emerald Networks’ Emerald Express offers low latency along with access to Icelandic data centres, which are powered by renewable energy.

Trans-Pacific

The demonstrated design capacity of the existing trans-Pacific systems is just above 40 Tbps. Between 2008 and 2010, three new systems were activated, each catering to a specific market segment. For instance, the Trans-Pacific Express catered to China’s trans-Pacific demand; the Asia-America Gateway was the first cable to connect North America directly to Southeast Asian markets; and the Unity/EAC Pacific, owned by Pacnet and Google, complemented data centre infrastructure in Japan and the US.

During 2008-10, the number of active trans-Pacific systems increased from four to seven. Further, the Unity/EAC Pacific project, with over two-thirds of its capacity controlled by non-operators, opened up the Japan and the US wholesale markets, which had been dominated by TGN Pacific and Pacific Crossing 1. As a result, bandwidth prices in the trans-Pacific region reduced by 50 per cent in one year.

The existing trans-Pacific cable systems include Pacific Crossing 1 (owned by NTT); the China-US Cable Network (an international consortium of carriers); the Japan-US Cable Network (an international consortium of carriers); TGN-Pacific (Tata Communications); the Trans Pacific Express (an international consortium of carriers); the Asia-America Gateway (an international consortium of carriers); and the Unity/EAC Pacific (Pacnet, Google, Bharti, Global Transit, KDDI and SingTel).

China is expected to witness the strongest growth in the region. Also, Japan’s bandwidth demand is the highest in the region and is 50 per cent higher than that of China. The trans-Pacific bandwidth demand of NTT and KDDI is likely to be accommodated through investments in the PC-1 and Unity systems respectively.

The report suggests that most of East Asia’s 20 largest operators will have equity in next-generation intra-Asian submarine capacity infrastructure by 2014, following the expected activation of the Southeast Asia-Japan Cable, the Asia Submarine-Cable Express, and the Asia Pacific Gateway systems. The planned trans-Pacific fibre systems include China-US-2; Malaysia-US; the Trans-Pacific Express Expansion; and Thailand-US systems. These projects will be owned by an international consortium of carriers.

North America-South America

The main cable systems catering to this market are GlobeNet (owned by Brasil Telecom), SAM-1 (Telefonica), and the South American Crossing (Level 3 Communications). Another existing cable system in the region is Americas II (owned by a consortium).

As per the report, bandwidth prices on the North America-South America route are 10 times higher than those in the transatlantic region. This is largely owing to three dominant wholesalers in the market and unexpected bandwidth growth in the region’s major markets, especially Brazil.

South Asia and the Middle East

India accounts for the majority of the bandwidth demand in South Asia and the Middle East. The country’s international internet bandwidth is over 1 Tbps (as of 2012) and its bandwidth demand is higher than the combined demand of the next four largest bandwidth markets – Saudi Arabia, the UAE, Pakistan and Iran.

Existing South Asian intercontinental systems include FLAG Europe Asia (owned by Reliance Globalcom); Sea-Me-We-3 (consortium); i2i (Bharti Airtel); SAT-3/SAFE (consortium); TGN-TIC (Tata Communications); Sea-Me-We-4 (consortium); Falcon (Reliance Globalcom); Seacom/TGN Eurasia (IPS, Remgro, Herakles, Convergence and Shanduka); I-Me-We (consortium); Europe India Gateway (consortium); and Gulf Bridge International/MENA (Gulf Bridge International and Orascom Holdings).

Bharti Airtel, China Mobile, China Telecom, France Telecom, the Saudi Telecom Company and SingTel are heading the new Sea-Me-We-5 consortium, which is reportedly considering options to bypass Egypt. The project is expected to compete with around 12 international cables that are serving India and two other proposed systems – the BRICS cable, which would be the first system to provide a direct link between India and the US, and the Tagare cable.

Key vendors

According to the report, Alcatel-Lucent and TE SubCom dominated the market in terms of receiving supply contracts between 2008 and 2012. Alcatel-Lucent had a 50 per cent market share, while the share of TE SubCom was 34 per cent; NEC 7 per cent; Huawei Marine Networks 4 per cent; Fujitsu 2 per cent; and other companies 3 per cent.

Going forward, the report expects the market for credible awarded contracts to be led by Alcatel-Lucent (20 per cent), TE SubCom (25 per cent), NEC (23 per cent), Huawei Marine (23 per cent) and Fujitsu (4 per cent).

Meanwhile, the submarine system upgrade market is expected to witness steady growth and will be dominated by Ciena, Infinera, Mitsubishi and Xtera.

Financing patterns

Currently, submarine systems are financed by various consortiums, carriers and investors, and the government. While carrier-led projects dominate the market, private investors, the government and financial institutions are considering investments in this space.

Also, despite the weak global financial scenario, the submarine market offers investor-led project financing opportunities for about $8 billion. Between 2008 and 2012, about four-fifths of projects were financed by carriers, individually, in small groups, or in large consortiums as private investors remained cautious. Governments and development financial institutions (DFIs) increased their funding share to 5 per cent of all projects. Of the $20 billion invested in credible projects during this period, about 50 per cent was financed by carriers. Also, the government and DFIs showed an increasing interest in financing such projects. Notably, 40 per cent, or $8 billion of credible proposed projects would be financed by private sources.

In all, while the industry is clearly moving forward, telecom companies need to assess the bandwidth demand before making large investments in submarine cable systems to avoid the kind of capacity glut that was witnessed in 2001.