New submarine cable systems are presenting investment opportunities
12 April 2016 | Strategy
After a period of stagnation, submarine cable seems to be undergoing a resurgence of investment, with a significant number of new cables being installed or in planning globally. The requirement for new cables is being driven by continued traffic increases and by significant changes in global international traffic make-up. Growth in broadband coverage, take-up and usage continue to increase Internet traffic, however, the impact of developments in the distribution strategies of content and application providers is poised to become the key driver of growth in the near future.
What is driving the requirement for more international cable capacity?
Global international traffic is dominated by data, with voice only accounting for approximately 0.05% of all traffic. We distinguish between Internet bandwidth and private network bandwidth. Internet bandwidth is the traffic generated via broadband provider networks by end users of Internet services, some of which involves accessing international sites. Private network bandwidth is the traffic generated by non-public networks such as links used by multinationals, content providers, and research and educational networks.
While bandwidth used for the public Internet has accounted for the majority of international bandwidth usage for well over a decade, a significant shift is now underway. Although Internet traffic continues to grow, capacity on private networks (led by the major content providers) is growing more quickly and is forecast to exceed Internet traffic in the near future.1 As a result, the feasibility of new submarine cables is contingent on the data centre locations of the major content providers.
The outlook for existing cables
Improvements in DWDM technology, the shore-based equipment which converts electrical data into high-speed optical signals suitable for fibre, has helped existing cable operators substantially increase the capacity of existing routes so as to squeeze more life out of existing systems. However, overall capacity will “top out” on older cables and on many routes total capacity will still not be sufficient for demand.
The design life of submarine cables is around 25 years. While it is very unlikely that cables will be retired immediately on their 25th birthday, they will eventually be withdrawn as maintenance costs increase and competitors offer more for less, enabled by developments in low-loss fibre and other technology improvements.
We understand that the major content providers are “shopping” for dark-fibre circuits between their major data centres and are consequently driving demand on some routes, preferring fibre pairs on newer systems.
What should potential investors consider?
In our experience, investors need to consider the countries where landing stations are proposed and carry out a detailed review of the market context (with a particular focus on the countries themselves and other neighbouring countries to landing stations on the proposed cable). Investors will also need to analyse pricing trends for international connectivity on sea routes together with the regulatory frameworks for landing stations and access to local terrestrial networks and onward international connectivity.
The demand for international bandwidth depends heavily on the market in each country. Key will be the projections of Internet and private network demand. Internet demand is correlated with the total population served by the landing station. Private network demand is a function of the international connectivity requirements of content providers and businesses located in the landing station country and neighbouring countries that may use the cable as private network connectivity between their locations.
Investors need to focus on the locations of content providers’ major existing and planned data centres in their analysis. Ireland has seen two new transatlantic cables land on its shores in the last 12 months which we understand is due to the density of content provider data centres in the country and the requirements of content and application providers such as Apple, Facebook and Google.
Any new cable will also need to be considered in the context of existing and planned cables in the relevant waters and the new cables’ positioning should be compared to these.
In addition, investors should carry out a detailed review of route planning activities completed, construction and maintenance agreements signed with third parties and subcontractors, the associated network operational and capital expenditure forecasts and the risks to the proposed construction programme.
Finally, investors need to consider connectivity to the terrestrial networks and the potential of diverse fibre routes from the landing station to local data centres and other national and international interconnection locations, such as Internet exchange points.
Analysys Mason has significant experience advising investors, governments and public bodies on the commercial and technical aspects of submarine cables, data centres and the Internet generally. For more information about our services, please contact Patrick Kidney.
1 See http://www2.telegeography.com/download-global-bandwidth-research-service-executive-summary;
https://www.nanog.org/sites/default/files/06-Stronge.pdf, p. 24
https://www.ptc.org/assets/uploads/papers/ptc16/SUN_TeleGeography%20WS.pdf, p. 49
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