Internet - laying more cables

Internet-led demand puts cable-laying at top of list

The world's biggest telecoms companies are rushing to add capacity on inter-continental routes, to keep up with booming demand fuelled in part by consumers downloading bandwidth-hungry video content from YouTube, iTunes and other sites over broadband networks.

Demand is also being driven by fast-growing telecom and internet markets in some developing countries, and by the need to build additional "redundancy" into the network undersea cables to protect against damage and failure.

This year, internet service was disrupted throughout the Middle East and South Asia after three undersea cables were damaged.

One of the largest undersea cable projects under way, the Trans-Pacific Express, was started in late 2006 after an earthquake in Asia disrupted regional internet service and highlighted the need for a more diverse network.

Underpinning the surge in demand is the growth of broadband connectivity. In 2001, only 30m households worldwide had access to broadband internet connections. By the end of last year that figure had grown to more than 337m households.

At the same time, growing broadband penetration and increased end-user access speeds have enabled a host of new applications and services to thrive, including online video content.

"Video is now the primary driver of internet traffic growth," notes TeleGeography Research, the Washington, DC-based telecoms consultancy.

Applications such as YouTube, the iTunes online store, and peer-to-peer applications such as BitTorrent, are helping internet users consume staggering amounts of bandwidth."

Indeed, seven years after the first boom in undersea cable construction flooded the market with excess capacity and triggered a telecoms meltdown that forced some companies into bankruptcy and others into mergers, new data from TeleGeography reveals that the business is in the midst of a new investment boom.

TeleGeography projects that at least 25 new cables, costing about $6.4bn, will be built between 2008 and 2010 and suggests this figure could increase if plans for a number of other proposed cables are firmed up.

This is happening even though industry executives acknowledge there is still substantial excess capacity on many older subsea cables. "In light of the tremendous untapped potential capacity on many submarine cables, it may seem surprising that a new submarine cable-building boom is under way," says TeleGeography.

"The reasons for cable construction are often a combination of several factors; including dwindling available capacity on some cables, a desire for wider restoration options, the need for physically diverse routes, competition, and high capacity prices in some regions of the world."

In addition, some of the cable-building activity is in areas currently underserved by submarine cables, including Africa, the Caribbean, and the Middle East and involves both international telecommunications providers and other big technology companies such as Google. Google, the internet search and advertising company, is one of six groups that announced plans to build a 10,000 kilometre high-bandwidth subsea fibre-optic cable linking the US and Japan in February.

Other partners in the $300m Unity consortium include Bharti Airtel, Global Transit, KDDI, Pacnet and SingTel.

AT&T, the largest US telecoms group, is involved in six international cable consortium projects including the Trans-Pacific Express, which it joined along with Japan's NTT earlier this year.

Other participants in that project include Verizon and a handful of Asian carriers including China Telecom, China Netcom, China Unicom, Korea Telecom and Chungwa Telecom in Taiwan.

The latest evidence of this new investment boom came with the announcement last month by Global Crossing, the New Jersey-based international telecoms group, that it has expanded capacity on its mid-Atlantic crossing undersea fibre-optic cable system.

Global Crossing said it had added capacity to meet rapidly growing demand for internet protocol and ethernet transport among its corporate and other customers, and to enhance connectivity between North America, Latin America and Europe.

"We continue to make strategic investments in network infrastructure in support of strong growth around the world," said John Legere, Global Crossing's chief executive.

"We are increasing capacity to handle our carrier and service provider customers' requirement to handle the huge demand for IP connectivity and broadband services, including emerging services such as IPTV and mobile broadband."

Alan Mauldin, research director at TeleGeography, says the increasing capacity requirements on subsea cable systems connecting the continents of the world has been driven by the emergence of content-rich network applications and the growth of the internet, which in turn, "are warranting upgrades to existing routes, as well as construction of new cables on the less served routes".

"With more than a terabit of capacity in the Atlantic, Global Crossing has experienced annual increases of more than 60 per cent in demand between 2004 and 2008," says Gary Breauninger, Global Crossing's chief marketing officer.

More generally, TeleGeography estimates that the demand for international bandwidth grew on average by 52 per cent a year between 2002 and 2007, "an indicator that the recent phenomenon of subsea capacity investment is principally demand-driven", he adds.

"We are reaching the point where demand is outstripping supply," says Mr Breauninger, who notes that as a result, Global Crossing has been able to raise prices on some routes for the first time since the telecoms meltdown.

Nevertheless, TeleGeography cautions investors that these boom conditions do not necessarily translate into more general price increases or higher profits. While carriers are selling much more bandwidth with each passing year, analysts note that more of their customers are opting for high-speed circuits, which carry a lower price per Mbps (megabits per second) of capacity.

As such, the effective price of network capacity (the price per Mbps of capacity sold) is falling more rapidly than actual circuit prices.

"Despite the improving market conditions, it is not yet clear that carriers have learned from the lessons of the last bandwidth bubble, and its subsequent bust," noted the TeleGeography report. "Demand for bandwidth remains strong, but profits remain elusive. Carriers are compelled to make considerable investments in network upgrades and new cable construction to handle growing traffic volumes; at the same time they face fierce competition and customer expectations of ever-declining capacity prices."

TeleGeography also points out that there is still substantial excess capacity on many older subsea cables.

"In light of the tremendous untapped potential capacity on many submarine cables, it may seem surprising that a new submarine cable-building boom is under way," the company says in its report.

Although there is no doubt there are some areas in need of submarine cables, TeleGeography analysts say the risk of overbuilding in some markets including Africa and across the Pacific "is very real".