20,000 Cables Under the Sea

Telecoms troll for market share

Theres gold under them there oceans. the submarine optical market is expected to grow 40 percent per year — to $37 billion by 2004 — as carriers scramble to lay cable across the oceans to connect the continents with ever-faster optic fiber and become true global players.

"The market is growing very fast. We see no slowdown," says Stephane Teral, director of European optical transport at RHK, the research firm that made the market estimate. "If you dont have submarine cables, a lot of your economics are going to be in trouble."

Neither the downturn in dot-com stocks nor a $1 billion lawsuit filed against Tyco by Global Crossing should slow the dash to lay cable under the seas.

Just a year ago, analysts were predicting slower sustained growth for submarine systems, with downturns in 2001 and 2003. Now, theyre seeing no downturns, and predicting sustained growth of more than 100 percent per year.

In all, some 20 submarine systems snake across the Atlantic. The Pacific Ocean is a couple of years behind in deployment, although analysts forecast that more money will be spent on Pacific projects than Atlantic projects over the next couple of years.

"Demand in both oceans is going to be quite strong," says Craig Irvine, first vice president at Merrill Lynch & Co.

By the end of next year, the capacity of lit fiber across the oceans should reach 7 terabits per second, according to TeleGeography. That will be double todays capacity, and 20 times the capacity of a year ago. Capacity should nearly double again by the end of 2002 to 12.4 terabits per second.

Five or 10 years ago, when a submarine cable was cut, the carrier would switch traffic temporarily to a satellite. But a satellite transponder can beam only about 64 megabits of information per second. "Thats peanuts compared to what we are talking about for undersea cable," says Bob Cooper at Cooper Research, consultant to industry analysis firm KMI. Indeed. The latest submarine cable to be deployed, Level 3 Communications "Yellow" trans-Atlantic cable, will max out at a carrying capacity of 1.3 terabits per second.

The trouble is, the business plans of some of the carriers vying to become the Superman of global data transit are even more optimistic than the 100 percent to 200 percent yearly traffic growth projected by analysts such as Probe Research.

If traffic growth is only robust, but not phenomenal, some of the carriers could find themselves with more bandwidth than demand.

"Weve been saying all along that traffic growth isnt going to be what they said it would be," says Hillary Mine at Probe Research.

Growth Patterns

Alcatel and Tycom, the submarine division of Tyco, share 76 percent of the market that supplies and installs the fiber-optic cables, and attaches the optical equipment. RHK puts Alcatel slightly ahead with 41 percent of the market, compared with TyComs 35 percent. Japans KDD and NEC are third and fourth with 11 percent and 5 percent, respectively. Pirelli has 3 percent, Fujitsu has 2 percent, Siemens has 2 percent and others share the remaining 1 percent.

KMI pegs the market for high-speed undersea and terrestrial networking solutions at $15 billion per year by 2002. Every global carrier — including 360networks, Deutsche Telekom, France Telecom, Global Crossing and Level 3 — wants to build a network bigger than the last. That means paying for premium fiber and terabits-per-second capacity across the oceans. So global carriers that compete viciously on the continents are forced to cooperate when it comes to submarine networks. The seabed makes strange bedfellows.

Usually, consortiums are cobbled together to share the enormous costs of transoceanic cable. Competition is less fierce on the ocean than on the land, because of the huge costs of landing stations, underwater optical equipment and the thousands of miles of fiber. Whoever pays for the installation wont realize the benefit of lower unit cost on the latest-generation fiber unless every bit of that bandwidth is filled with data and traffic, earning money.

The contracts between global carriers and installers such as Alcatel and TyCom work out to about $70,000 to $100,000 per mile for the long-haul transoceanic routes, and as much as $400,000 per mile for the shorter routes connecting several coastal cities across a sea. For example, Global Crossing paid TyCom — formerly Tyco Submarine Systems Ltd., or TSSL — $1.2 billion to install its 80-gigabit-per-second Pacific Crossing, connecting the western U.S. to Japan. At 12,000 miles for the trans-Pacific loop, that works out to $100,000 per mile.

So far, the international carriers arent making money on their investments.

"The big winners have been those selling the hardware, the boxes, and the fiber and the installation," says Roger Wery, partner at analysts Pittiglio Rabin Todd & McGrath. "Alcatel has been the great winner, making more money than any other company. The question is: Who is going to make money on the traffic itself?"

While some companies see the oceans as simply ways to connect their terrestrial networks, Global Crossing began a couple of years ago with a single major asset — one undersea cable — and has emerged as a giant player in the global market.

Earlier this year, Global Crossing agreed to buy a 50 percent ownership interest in Level 3s four-fiber-pair "Yellow" submarine system. In return, Level 3 acquired capacity on Global Crossings trans-Atlantic cable, Atlantic Crossing. Global Crossing got upgraded technology; Level 3 got backup protection by having a second system across the ocean, money to help it pay for the system and, presumably, some good will so it can share space on the next upgraded system that crosses the Atlantic.

Co-opetition Turned Sour

In April, when Viatel announced that it had bought a 25 percent interest in level 3s trans-Atlantic fiber for $150 million, Viatel Chief Executive Michael Mahoney said: "Welcome to the new world of co-opetition." Funny, though, how one $1 billion lawsuit can turn co-opetition sour.

Global Crossing in May sued its vendor, TyCom, for $1 billion, alleging that five days after it had made a $40 million down payment to TyCom on a $700 million U.S.-to-South America network, TyCom announced that it was building its own network with competitor, Telefonica. Global Crossing also claims to have been overcharged $110 million. TyCom says that the suit is without merit and that Global Crossing is trying to stifle competition.

Now neither side is talking, leading analysts to speculate that a settlement is in the works. Analysts are split on the merits, some saying that the lawsuit is a nuisance, and others saying that TyCom does appear to have a conflict of interest. Michael Ruddy, formerly at Pioneer Consulting, is in the second camp; he says Level 3 and other international carriers have cause to worry that TyCom might give its own system an advantage in technology or time to market.

The dispute points to how few choices of vendors for submarine networks are available to carriers, PRTMs Wery says. Shortly after the dispute began, Global Crossing replaced TyCom with Alcatel as its cable supplier.