Tuesday, 19 March 2019

Good Times Now, but Will They Continue?

John Manock, Editor, SubCableWorld for Submarine Networks EMEA 2019
Monday 25 February 19

The submarine fiber optic cable market is undergoing a period of extraordinary strength.  For the past five years it has seen unprecedented growth and that growth should continue for some time.  The market also is undergoing changes that were unimaginable two decades ago.  The Over-the-Top (OTT) content providers have taken a leading role in the development of new cable systems.  Technological advances have resulted in cables capable of undreamed-of capacity.  Investment capital is flowing into the market.  Internet demand has become insatiable.  It is a market that many companies want to be a part of.   SubCableWorld has been serving the submarine fiber optic cable industry for more than 20 years and has become the definitive information resource for understanding the industry.  We provide an unrivaled, nuanced in-depth analysis for our network of subscribers using a strong foundation of data collected over two decades and forecasting models that have proven themselves during that time…

The submarine fiber optic cable market is undergoing a period of extraordinary strength.  For the past five years it has seen unprecedented growth and that growth should continue for some time.  The market also is undergoing changes that were unimaginable two decades ago.  The Over-the-Top (OTT) content providers have taken a leading role in the development of new cable systems.  Technological advances have resulted in cables capable of undreamed-of capacity.  Investment capital is flowing into the market.  Internet demand has become insatiable.  It is a market that many companies want to be a part of.  

SubCableWorld has been serving the submarine fiber optic cable industry for more than 20 years and has become the definitive information resource for understanding the industry.  We provide an unrivaled, nuanced in-depth analysis for our network of subscribers using a strong foundation of data collected over two decades and forecasting models that have proven themselves during that time.  
 
While the submarine cable industry has always been a technological marvel, has not always been an industry with a history of market success.  In the early days of telegraphy and plain old telephone service, cables were more government assets than profit-making operations.  Even in the early days of the submarine fiber optics industry, cables had little circuit capacity and were limited to a handful of applications.  When the market collapsed in 2002, bankruptcies were all too common and investors fled the market.  
 
Little of this changed even when the Internet emerged.  While the Internet and World Wide Web provided new ways of doing business and email changed the way the world communicated, demand for bandwidth remained modest.  The earlier collapse of the submarine fiber optic cable market seemed to reinforce the belief that significant profits were not forthcoming even with this new technology.  
 
We did not know at the time that major changes were just around the corner.  As the submarine cable market began to pull itself out of the 2002 collapse, the world discovered streaming video.  Now, much of the world’s population gets its entertainment video from the Internet rather than television.  This was followed by countless other new applications made possible by the Internet and bandwidth demand soared.  The result is that submarine cables are now a profitable business and many investors want to be involved.  
 
The market conditions in the submarine fiber optic cable industry are pretty straightforward.  These can be summarized in the following:
 
Skyrocketing demand for Internet bandwidth
Costs of new cable systems have come down
The need for redundancy is increasing
The need to reach isolated populations is recognized as a priority
Investment money is flowing in from carriers, Over-the-Top (OTT) content providers, data center operators, governments, private investors, etc.
 
All of these and other factors are pushing the market forward at a speed that has not been seen since the huge boom in cable building that occurred from around 1997 through 2001.  
 
Meanwhile, the factors that traditionally constrained growth are weakening against this onslaught by the drivers.  
 
2018 was a record-breaking year in so many ways.  Among the accomplishments during 2018 were:
 
27 supply contract awards were announced totaling over 100,000 kilometers of cable
49 new cable projects were announced totaling over 150,000 kilometers of cable
Seven intercontinental cable systems entered service in 2018, totaling over 500 Tbps of design capacity
Eight additional transcontinental systems were contracted for in 2018, totaling well over 600 Tbps of design capacity
 
This current growth period began in 2014 when several fundamental changes occurred in the market: specifically the global demand for streaming video and the sudden availability of financing at levels never seen before.  This resulting in demand (based on kilometers of cable called for in announced supply contracts) for the five-year period from 2014-2018 coming in at annual levels almost exactly double those of the previous five-year period.  
 
 
 
Meanwhile, the amount of capacity that these new cables are capable of handling has increased has risen to levels making them almost unrecognizable compared compared to those of only five years ago. Just to illustrate the scale of advances in the new cables, the design capacity of transoceanic cables ordered in the 2014-2018 period is approximately 5.62 time greater than those ordered in the 2009-2013 period.  
 
 
One concern about all this new capacity is that it will create a glut in the marketplace; thus driving down prices and stifling demand for new cables – in other words, a repeat of the conditions that led to the collapse of the market in 2002.  
 
There are reasons to doubt this scenario, however.  
 
First, submarine cables do not sell out their entire design capacity.  Few if any are ever upgraded to their full capacity and can operate profitably even selling a relatively small percentage of that capacity.  After a period of years, the economics of the operations and maintenance (O&M) costs of older cables make it more attractive to own capacity on new cables.  So the actual amount of capacity that the market will need to absorb is less than the design capacities of the cables.  
 
Second, in 2002, as we alluded to, there was little bandwidth demand.  Today, with demand for bandwidth skyrocketing and no reason to believe that the trend will change, the market is essentially absorbing as much capacity as the submarine cable industry can provide.  And with new, high-bandwidth services such as virtualization and the Internet of Things, as well as 5G technology to deliver these services, on the verge of major deployment, all indications are that the market will continue to absorb enough of this new capacity to make owning cable systems profitable.  
 
In summary, the submarine fiber optic cable industry has been stable and healthy for the past five years.  All of the conditions appear to be in place for the industry to grow in the next five year.  With vast sums of money being invested, submarine cables will continue to be built to meet exploding Internet bandwidth demand.  At this time, the only factors that appear capable of interrupting this growth would be global economic or geopolitical turmoil.  
 
Find out more:
 
SubCableWorld joined Submarine Networks EMEA as a Media Partner for Submarine Networks EMEA. The event, organised by Total Telecom, will return to the Business Design Centre in London on 18th and 19th February. 

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