Betting On Big, Wet Pipes

 
 
By eweek  |  Posted 2001-08-20 Email Print this article Print
 
 
 
 
 
 
 

TyCom's timing couldn't be worse - or better.The submarine network supplier - turned operator - last week cut ribbons on its $4.4 billion global undersea network, vowing that a year from now it will be the largest such network in the world, connecting 30

TyComs timing couldnt be worse - or better. The submarine network supplier - turned operator - last week cut ribbons on its $4.4 billion global undersea network, vowing that a year from now it will be the largest such network in the world, connecting 30 cities over 56,000 mostly nautical miles.
By then, it will have so much more gigabit-per-second capacity than any other submarine player that it could snatch most of the new data business from international carriers and global corporations and be flying high.
Or, it could have trouble finishing its network, having lost a key trans-Pacific partner - or find that even if it does, demand wont be great enough to fill its pipes and generate profits. Last week, TyComs equal partner in its trans-Pacific route, FLAG Telecom, pulled out. That means TyCom shoulders the entire cost of the project - but it also has virtually no competition for trans-Pacific traffic at terabit speeds. "TyCom should be able to clean up in terms of market share because it has last-to-market advantage," said Michael Ruddy, managing director of undersea cable market research of Terabit Consulting. In the submarine world, the most recently built system has the latest technology, fastest speeds and lowest per-unit costs. TyCom would have 5 terabits to 8 terabits of capacity, some 10 times the capacity of Global Crossing or other players. According to Ruddy, the trouble is that "the undersea market hasnt done too well" since TyCom announced its intentions in early 2000.
But that has both bad and good for TyCom. If TyCom had remained just a supplier of amplifiers, cable and equipment for submarine networks, it would be in a serious slump like the other vendors, Ruddy said. Instead, it announced in mid-1999 that it had taken an equity stake in Telefonicas South American network and planned to build its own network - a decision that prompted Global Crossing to sue TyCom for changing from a builder of its network to a competitor. That suit is still pending. "TyComs decision seems rather prescient, looking back," said Ruddy, who nonetheless believes there was a conflict of interest on TyComs part. At the time, TyCom was criticized for turning away from a cash cow - supplying gear and cable-laying ships to the growing number of companies that wanted to lay a soggy global footprint. But since then, the supply business has dried up, carriers have consolidated and submarine projects have failed. That leaves TyCom as the only company laying a trans-Pacific route this year. 360networks had planned one, but is now planning to reorganize under a Chapter 11-bankruptcy filing. With FLAG Telecoms bailout, that leaves a Japan-U.S. consortium with the second biggest pipes across the Pacific. 360networks, FLAG Telecom, Global Crossing and Level 3 Communications all have networks across the Atlantic, but none have a capacity greater than 2 terabits. TyCom officials touted their solid financing last week as they celebrated several new connections - to Amsterdam, Netherlands; Frankfurt, Germany and Paris - from the previously connected cities of New York and London. While filling multiple terabits of capacity might be problematic for a while, the submarine world doesnt have the glut of bandwidth of the terrestrial long-haul market. In fact, it has grown only 2 percent as fast, said Gene Hunt, director of marketing communications of TyCom. The economics are looking better, Hunt said. A year ago, TyCom projected that its network would cost $5.7 billion. Now, its projecting from $4.3 billion to $4.4 billion. "Were getting much better prices from components and systems manufacturers like Lucent [Technologies], Ciena and Agere [Systems]," he said. TyCom acquired some of the best undersea research scientists in the world in 1997 when its parent company, Tyco International, bought the submarine division of Bell Labs from AT&T. According to Hunt, TyCom has three sources of cash that point to a happy ending: First, $2.2 billion from an IPO last year. That money was stowed away as cash, so isnt affected by the downturn of TyComs stock, which now sells for about $12, down from a 52-week high of $46. Second, Tyco International has extended a $1.25 billion line of credit at favorable interest rates. "We dont think were going to have to use that," Hunt said. Third, despite the loss of FLAG Telecom as a partner, TyCom has solid deals worth $2.1 billion to supply submarine equipment to other carriers, including SingTel of Taiwan and Bezeq of Israel. The company hopes to land a $1 billion-plus deal later this year to connect an Indian carrier to Indonesia and Guam. "Were very conservative about adding to our backlog only jobs with solid financing," Hunt said. However, Terabit Consultings Ruddy sounded a warning. TyCom has an equity stake in Singtel, so it cant count that arrangement as a full-revenue deal, he said. "When your shares have sunk as low as TyComs, you do need a strong source of financing. Their list of customers is a lot smaller than it was a year or two ago. I wouldnt say their list is that impressive - but then, no ones is." Still, Ruddy remains bullish on TyCom, noting that as its own supplier it cuts out the middle man, so can expect greater profit margins when and if international carriers start filling up those wet pipes. "Theyre both supplier and operator. Its a unique concept. They should be able to offer a lower price per unit and get good margins. Theyve almost been lucky that the submarine cable market has taken such a downturn."
 
 
 
 
 
 
 
 
 
 
 

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