| Submarine Bandwidth 2004 Executive
Summary |
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After a four-year downturn, the submarine cable industry is still
struggling to find stable ground. Increases in demand for bandwidth, while
significant, have not offset a substantial collapse in prices. The prolonged
downturn has forced dozens of carriers to restructure their operations and
finances, often under Chapter 11 bankruptcy protection. Virtually every
cable operator has declared bankruptcy or undergone some type of financial
restructuring. While a few companies have exited the wholesale bandwidth
market, the pace of consolidation has been too slow to have any softening
effect on the competitive environment in the near term.
Submarine Networks, the first volume of International
Bandwidth 2004, quantifies past, present, and future subsea capacity
supply and demand; offers a primer on bandwidth products, contracts, and
technology; reviews data on cable construction, upgrade, and maintenance
costs; and presents detailed analysis and data for circuit and wavelength
pricing. The report also includes detailed, two-page profiles of 76 undersea
cable networks (the online edition contains 100 more profiles in a
searchable database). The second volume of International Bandwidth,
Terrestrial Networks, extends the analysis and statistics to
long-haul networks on land.
Supply
Most of the new submarine cable systems that entered service in recent
years did so with initial capacities far below their designed limits. At the
end of 2003, the proportion of lit-to-upgradeable capacity on major cable
systems was just 11.3 percent, as opposed to 64 percent in 1996 (see Figure
1. Submarine Cable Lit and Maximum Capacities, 1996-2004). With no new
construction or upgrades occurring on the major submarine cable routes, all
new cable builds are occurring along under-served routes. For example, FLAG
Telecom’s FALCON project and the Tata Indicom India-Singapore cable will
provide a significant capacity boost to India, a country with historically
constrained access to international bandwidth. Several smaller cables are
scheduled for the Persian Gulf and the Caribbean. In addition, plans are
underway for a major East African system, which would provide several
countries with submarine cable connectivity for the first time.
Capacity Prices
The international bandwidth market has been caught in a deflationary
spiral for more than five years. Business restructuring has done little to
halt the decline in prices—if anything, it has added fuel to the fire by
facilitating further rounds of price reductions. The long-haul bandwidth
market has not yet emerged from this cycle of cost cutting and subsequent
price cutting.
STM-1 lease prices are the most useful common denominator for comparing
pricing trends across regions. Average London-New York STM-1 circuit prices
declined from $6,039 per month in the first quarter to $4,461 in the fourth
quarter of 2003. The rate of price erosion has actually slowed on this route
somewhat in the past two years—the median STM-1 circuit price had plummeted
65 percent in 2001 and 70 percent in 2000. The median price of an STM-1
lease on the major trans-Pacific route between Los Angeles and Tokyo fell 56
percent in 2003 to approximately $16,625 per month. Circuit prices between
the U.S. and Latin America have been relatively stable by the standards of
the undersea capacity market. Median STM-1 lease prices between Miami and
São Paulo fell by a relatively modest 17 percent to $49,000 per month during
2003. The undersea cable market in Asia has been in the throes of a
ferocious price war. STM-1 monthly lease prices between Hong Kong and Tokyo
dropped 54 percent in 2003.
An ominous trend is emerging on the trans-Atlantic route: carriers that
have restructured under Chapter 11 bankruptcy protection are beginning to
underprice their financially solvent rivals. In the fourth quarter of 2003,
trans-Atlantic STM-1 lease prices from carriers that had emerged from
bankruptcy were 50 percent lower than prices charged by more financially
stable carriers—approximately $3,000 per month compared with $6,000 per
month. No such trend can yet be discerned on other major undersea routes,
but many other trends first seen in the Atlantic have ultimately been
repeated in other markets.
Demand
TeleGeography’s bandwidth demand analysis presents original research
findings on how bandwidth buyers have deployed new capacity into their own
networks (voice, Internet, and non-Internet data networks) and at what pace.
These bandwidth usage data indicate that network deployments have been
growing rapidly—particularly for the Internet, which accounts for roughly 85
percent of submarine bandwidth usage. After increasing by a “mere” 33
percent in 2002, new deployments of bandwidth for usage in international
Internet backbones grew by 99.8 percent in 2003—a substantial
re-acceleration. Thanks in large part to surging Internet bandwidth usage,
capacity purchases appear set for double-digit growth in 2004. At these
growth rates, inventories of lit bandwidth would run out by 2006 or 2007 on
most major routes. Submarine cable owners will likely respond to expanding
demand by upgrading existing cables rather than building entirely new
systems. Sufficient unlit capacity exists on most routes to last into the
next decade (see Figure 3. Anticipated Supply Requirements).
Though robust Internet traffic growth continues to draw in submarine
bandwidth for use in international Internet backbones, demand increases will
not result in another frenzy of cable construction. Instead, most suppliers
will intervene by lighting wavelengths and fiber pairs on an as-needed
basis. Cable operators can take this incremental approach to supply
expansion because their cables are engineered with a vast pool of potential
but unlit capacity from which to draw. Thus, even when lit capacity and
demand finally come into balance, a significant overhang of potential
capacity will remain. With few supply constraints in sight that might place
upward pricing pressure, circuit prices will continue to fall towards—and,
in some cases, below—costs. For providers of submarine bandwidth, the race
to the bottom endures. |
