The Submarine Communications Industry as a Global Enabler of Growth & Development, and the Path Forward

Michael Ruddy Terabit Consulting

Presenter Profile
Michael Ruddy is the director of international research at Terabit Consulting in Cambridge, Massachusetts (USA). He has authored a wide variety of industry reports including the 1,600-page Undersea Cable Report and the International Telecommunications Infrastructure Analysis. In addition, he has overseen the market and traffic studies for dozens of fiber optic projects around the world including EASSy, AJC, Seychelles-East Africa (SEAS), Hibernia Atlantic, and BRICS. Prior to joining Terabit Consulting, he was responsible for the creation of Pioneer Consultings submarine cable market research program in the late-1990s and was an analyst at Kessler Marketing Intelligence (KMI). He was also a Foreign Service Officer with the U.S. Department of State.

Michael Ruddy Director of International Research, Terabit Consulting mruddy@terabitconsulting.com

The Submarine Fiber Industrys First 25 Years

Strong track record
$56.3 billion worth of investment in new systems Billions more on network upgrades 1,250,000 route kilometers installed

90% of civilian-inhabited states & territories currently connected to international fiber

Fewer than 25 remain unconnected (out of 250+)

Average market size

50,000 kilometers of new deployment and $2.25 billion in new systems per year

Market stability seems to have been achieved, but getting to this point has not been easy

How We Got Here: An Undersea Roller Coaster of a Market

$13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Consortium Era: 1987 to 1997

($Billions)

Dot-Com Bubble

Market Dormancy

DevelopingMarket Focus

Source: The Undersea Cable Report 2013 (Terabit Consulting)

Route Kilometers by RFS Date

250,000 225,000 200,000

(Route Kilometers)

175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: The Undersea Cable Report 2013 (Terabit Consulting)

Four Distinct Cycles of Investment

Consortium era (1988-1997) - Predictable, conservative market for 10 years following TAT-8 in 1988
Dot-com bubble (1998-2002) - $25+ billion & 500,000+ km worth of new systems in less than four years, fueled by market liberalization and unpredictable Internet demand

Market dormancy (2003-2007) Market crashed due to intense competition and massive price erosion fueled by bankruptcies and DWDM. No deployment on major transoceanic routes, average project value only $23m. Factories close, ships converted, production capacity66%
Market renaissance (2008-present) - Attention focused away from transoceanic routes and toward developing markets

The Submarine Industry Since 2008: Driving Development

Strong effort to develop ubiquitous, reliable, and affordable bandwidth throughout all regions
Ending the developing worlds subsistence on low-bandwidth, high-cost satellite capacity A move toward replacing hub-and-spoke connectivity with direct intra-regional connectivity between secondary markets Transoceanic/long-haul deployment has been refocused on BICS economies
Brazil, India, China, South Africa

In the process, the submarine community has been expanded and become more inclusive, with stronger cooperation between suppliers, operators, finance & legal sectors, development institutions, and governments

The Redefined Submarine Market, 2008-2012

Between January, 2008 and December, 2012:
$10 billion worth of new systems: Average annual market of $2 billion / 53,000 kilometers (in line with historical norms), plus growing upgrade market

Striking difference: investment redirected toward developing markets 1988-2007

Projects targeting Developing Markets 36% Projects targeting Developed Markets 64%

2008-2012

Projects targeting Developed Markets Projects 22% targeting Developing Markets 78%

Investment in New Projects by Region 2008-2012

Latin America and Caribbean 3% Pacific Islands 4% Australia 4% Europe /Med 10% East Asia 12% Transpacific 17% Source: The Undersea Cable Report 2013 (Terabit Consulting) North American Regional 3% Africa 29%

South Asia and Middle East 18%

2013 and Beyond: The Pipeline of New Projects

Terabit Consulting identified 177 projects that are either under construction or proposed Total of $28.5 billion in new investment Each project was evaluated and classified based on specific criteria
including the existence of supply contracts, funding, licenses, carrier commitments, marine surveys, desktop studies, feasibility studies, credibility of investors, and market opportunity (bandwidth demand analysis)

Projects classified into four categories:

1. 2. 3. 4. Under construction/highly likely to achieve RFS in 2013 High activity with high probability of RFS in 2013 or 2014 Medium activity Low activity

The Pipeline of New Projects

$18 $16 $14 $12 $Billions $10 $8 $6 $4 $2 $0 Completed, Under Construction, or Highly Likely in 2013 High-Activity Medium-Activity Low-Activity

Source: The Undersea Cable Report 2013 (Terabit Consulting)

The Very Near Term

2013-2014
Under construction: 15 new projects underway with achievable 2013 ready-for-service dates ($1.4 billion) High activity: 24 new projects perceived to have a high probability of entering service in 2013 or 2014 ($3.1 billion)
Total of $4.5 billion = strong likelihood that the market will continue to adhere to its historical average of $2 billion in new investment over the next 2 years

Beyond 2014
Medium activity: 95 new projects ($16.8 billion) Low activity: 43 new projects ($7.2 billion)
The size of the medium activity pool is encouraging and increases the likelihood that an average of at least $2 billion worth of new annual investment will continue for the next five years.
Solid upside potential revealed by Terabit Consultings country-bycountry demand modeling.

Credible (High-Activity and Medium-Activity) Proposed Projects by Region, 2013-Beyond

Europe/Med 3% So. Pacific Trans- 2% Latin atlantic America Africa 9% 20% 9% MultiContinental South Asia/ (incl. Polar) ME 10% 13% Transpacific East Asia 11% Australia 12% 11%

Extremely diverse distribution of projects

More than two-thirds of projects target developing or unconnected/ underconnected markets Strong interest in traditional transoceanic markets
Overall: balanced, sustainable, equitable

Source: The Undersea Cable Report 2013 (Terabit Consulting)

Activated Intercontinental Undersea Bandwidth, 2007-2012

25,000
Transatlantic Transpacific Pan-East Asian

CAGR, 2007-2012 Sub-Saharan African Intercon. North AmericaSouth America Pan-East Asian S. Asia & Middle East Intercon. Transpacific 71.2% 54.2% 46.6%

20,000

(Gbps)

15,000
South Asia & Middle East Intercontinental North AmericaSouth America

10,000

41.2%
36.2% 33.1% 26.9%

5,000

0 2007 2008 2009 2010 2011 2012

Australia & New Zealand Intercontinental Sub-Saharan African Intercontinental

Australia & N. Zealand Intercon.

Transatlantic

Source: The Undersea Cable Report 2013 (Terabit Consulting)

Global intercontinental bandwidth 5-year CAGR: 36.5% (doubling every 27 months)

System Supply Landscape

Historically divided between Alcatel, SubCom, and the Japanese supply community Suppliers Market Share of New Projects,
Japanese market share was negatively impacted by fate of KDD-SCS, Hitachi Cable, OCC
Alcatel-Lucent, SubCom have retained strong positions Market share reveals an oligopoly supply environment
Excluding Subcontracts, 2003-2013
Market Share Alcatel-Lucent 47% TE SubCom 30% NEC 12% Fujitsu 4% Huawei Marine 2% NSW 2% Nexans 1% Ericsson 1% Others 2% Source: The Undersea Cable Report 2013 (Terabit Consulting)

Supply Market Considerations

New entrants struggle to overcome high barriers to entry
Particularly in the manufacture of cable

Huawei Marine Networks formed in 2008 as a joint venture

2012-2013: Huawei and ZTE attacked by critics in US and Australia Rep. Mike Rogers: If I were an American company todayand you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers privacy, and you care about the national security of the United States of America. Report released to public contained no evidence; classified annex cannot be shared publicly without risking U.S. national security (emphasis ours) Helpful to the supply oligopoly Detrimental to project developers and consumers (limits choice)

Supply Market Considerations (Contd.)

The future of the submarine supply landscape will be heavily influenced by the following:
Emergence of a Chinese supplier/supply community Future of Alcatel-Lucent Growth of equipment suppliers (Ciena, Infinera, Mitsubishi, Xtera)
Expansion of SLTE portfolios to include repeaters

An increase in repeatered cable production capacity

System Ownership Landscape

1988-2012
Supplier, 5% Government and Development Bank, 1%

2008-2012
Government Other, 1% and Development Bank, 5% Investor (Private, NonTelecom), 14% Carrier-led and Consortium, 80%

Investor (Private, Non-Telecom), 22%

Carrier-led and Consortium, 71%

Source: The Undersea Cable Report 2013 (Terabit Consulting)

Market Opportunities
Terabit Consultings modeling indicates that the strongest project-finance opportunities will fall into 2 categories:
1. Focused investments in markets where bandwidth prices remain high and the majority of retail operators have been unwilling or unable to invest in next-generation submarine infrastructure 2. Larger intercontinental investments on new, unconnected routes that address the increasingly urgent need for geographic diversity

On the developed transoceanic routes, top-tier operators will continue to remain in the drivers seat, effectively dictating the pace of new deployment

Market Opportunities (Contd.)

Submarine cable deployment between 2010 and 2020 will be driven by the BICS markets
(Although Terabit Consulting modeling also reveals an opportunity in the fifth BRICS market, Russia, for a project on its eastern shores)

Near-term interest has shifted from Africa to Latin America

High demand: Driven by organic economic growth and middle-class success in Brazil

High prices: IP transit prices remain high ($25 in Brazil, $80 in Paraguay)
Aging competition: havent been any new US-Brazil systems in last 12 years

Market Opportunities (Contd.)

Further opportunity as most of the 20+ remaining unconnected countries/territories/dependencies will probably achieve fiber connectivity within the next 5 years Additional investment opportunities present themselves in those markets that have access to only a single fiber optic undersea connection
Asia: Bangladesh, Myanmar Americas: Belize, French Guiana, Guyana, Nicaragua, Suriname Africa: Republic of the Congo, Democratic Republic of the Congo, Equatorial Guinea, The Gambia, Guinea, Liberia, Mauritania, Namibia, Sierra Leone Island economies

Market Challenges
For more than 99.7% of the worlds population, the required international fiber component is in place and capable of meeting users needs But as of 2013, the majority of the worlds population is denied access to adequate Internet connectivity

The greatest obstacles to connectivity are inland from the submarine cable landing station challenges the submarine community has so far been unable to overcome
mismanagement of international gateways lack of open-access backhaul obsolete domestic transport networks absence of broadband access infrastructure lack of computing facilities

 Global inequity in bandwidth prices

Geographic Challenges

In the US, IP transit = as low as $1 per Mbps per month

In less developed markets, IP transit can exceed $100 per Mbps per month Worlds highest intl. bandwidth prices passed along to poorest consumers User experiences in poorest countries are often impaired because ISPs avoid procuring sufficient capacity

Global inequity in bandwidth prices is also perpetuated by some regional hub operators control over neighboring secondary markets
Problematic in certain parts of Asia, Africa, and Latin America

Another key geographic challenge is diversifying away from cable choke points (exposed to political, geological, and other threats)

Choke Points posing Political, Geological Threats

Source: The Undersea Cable Report 2013 (Terabit Consulting)

Conclusions
Overall, the industry has recovered quite well from its post-dot-combubble crash

In the end, an unprecedented global network of reliable, high-capacity, low-cost pathways was constructed
Modeling indicates that a healthy market will continue and the industrys key role in global economic development will continue The undersea industry has done its part in financing and constructing bandwidth to the shores of both developed and developing markets, but significant challenges remain to ensure that the bandwidth is fully exploited

Free Submarine Telecoms Industry Report

Authored by Terabit Consulting
Published by Subtelforum Sponsored by SubOptic Available for download on Subtelforum.com and SubOptic websites

Questions/Comments