The new bandwidth bubble? Foreign barons corner the market, much to the U.S. government's dismay

America's Network, Nov 15, 2004 by Grahame Lynch

Whatever one's view on the merits of offshoring IT service and call center jobs to India and other Asian countries, one certainly cannot deny that it is a reality that it is here to stay. For example, General Electric recently indicated its intention to move 70% of its U.S. business process positions (such as engineering,. IT work and legal services) offshore, with 70% of those earmarked for India.

There's always been one big stumbling block in the India outsourcing push: What was formerly a highly regimented domestic telecom market here and a concomitant lack of international bandwidth.

That is beginning to change. Earlier this month, India's giant Tata Group launched a multi-terabit cable connecting eastern India to Singapore, where it can connect to other gigabit-grade cables that traverse east Asia on to the U.S. Other cables are planned on that same route, while others are being built out west to the Middle East and on to Europe. One of these, FLAG Telecom's 2.56 terabit FALCON cable, will likely stop in ports-of-call such as Iraq and Iran.

Another consortium cable, SEA-ME-WE 4, will connect the Middle East with India and eastern Asia. There's one very interesting aspect to all this new cable activity: none of it is American-owned. That is in strong contrast to the submarine cable boom of the late 1990s and 2000-01 period, that saw new, multi-terabit capacity connecting the U.S. to Europe, Latin America and North Asia.

The major players then were domestic operations such as Global Crossing, 360networks and Tycom. Now, much of that infrastructure is in foreign hands. FLAG Telecom passed to the control of the Reliance Group, one of India's largest conglomerates. Global Crossing is owned by Singapore Technologies Telemedia, a large government linked firm, while what was its Asia Global Crossing unit is now owned by a China government operator. Also, Tycom is up for sale, and the two likely buyers are both Indian industrial conglomerates.

OUTSOURCING IMPACT

Much of the strategic interest for buying these global cable assets lies in the outsourcing trend. The increasing use of India and nearby locations for call centers and other bandwidth-hungry activities is seen as virtually underwriting the success of these cables. Other business-case drivers are the move to liberalization in India and other regional markets, particularly the Middle East, which is making its own first ginger steps in the deregulation direction.

Of course, there is always a risk that the new Asian bandwidth barons may merely repeat the mistakes of their American forerunners.

However, there's another interesting player in this whole game that might bring some influence to bear on the market: the U.S. Department of Defense and its allied equivalents overseas. Some analysts believe that DoD is extremely nervous about using infrastructure owned by companies either controlled by or close to governments in places such as India and China.

DOD CONCERNS

DoD is already a key stakeholder in a project to extend a cable from Guam through U.S.-friendly North Pacific nations such as Micronesia and the Marshall Islands. It isn't much of a stretch to imagine that DoD could turn up as a key stakeholder in other arenas where gigabit capacities are lacking or owned by unfriendly governments.

Nevertheless, DoD is already the largest and apparently happy customer of several state-owned Middle Eastern telcos, including Batelco in Bahrain, owing to the heavy bandwidth demands of modern military practices. And a close ally, the Australian equivalent of the State Department, has no qualms about using China government-owned Asia Netcom.

Nevertheless, it's likely we will see DOD increasing its involvement in new cable builds, or at least, pushing for the Tycom assets to move into friendlier hands.

Grahame Lynch is chief executive of Decisive Publishing. Contact grahame@asia.com.