The new bandwidth barons: buying binge shifts global fiber assets from American to foreign ownership

America's Network, Feb, 2005 by Grahame Lynch

It was a phone call to President George W. Bush that sealed it. The Federal Bureau of Investigation was opposed. So was the Central Intelligence Agency. As was the Department of Defense.

But the phone call placed by then-Singapore Prime Minister Goh Chok Tong in late 2003 to Bush swung the deal. Global Crossing, the fiber network connecting numerous points within the U.S. to Europe and Latin America, would be sold to Singapore Technologies Telemedia for $250 million, a fraction of the $54 billion it was worth at the height of the tech boom. Bush acquiesced in the interests of a competing economic goal: spreading the free-trade mantra.

And so continued the great American telecom infrastructure sell-off.

Just late last year, another multi-billion dollar fiber network, Tyco Communi-cations Network, was sold to VSNL, the telecom unit of India industrial conglomerate Tata Group. Earlier, FLAG Telecom (a business venture initially conceived by Nynex and, later executed by Bell Atlantic) was sold to Reliance Group, another India industrial conglomerate. And Asia Global Crossing, majority owned by Global Crossing and Microsoft, was transferred to China Netcom, a state-owned agency in communist China.

Some independent observers see grounds to question the sell-offs. Michael Backman, a fellow at the EC-ASEAN Management Center in Paris, points to the fact that Global Crossing is now owned by a company controlled by Singapore's government. "Are such investments always motivated by commercial considerations alone, or might there also be some political or strategic motivation as well?" Backman asks. "To what degree are they stand-alone entities, or do they gather information to be passed back to the Singapore government? This is the legitimate concern of many."

Concerns about national security or potential misuse of commercial intelligence aren't necessarily misplaced. Much Department of Defense bandwidth usage traverses international networks, even if via U.S. carriers. Just recently, Defense acquired 40 Gbps of capacity for use in Europe from MCI, but this will often traverse networks in foreign hands. Singapore might be a close ally, but China clearly is not. Indeed, China is publicly identified as a strategic rival to the U.S.

However, the executives involved provide a countervailing view, suggesting such concerns are misplaced.

STRICT SECURITY

Global Crossing says it now has arguably the most stringent security procedures of any U.S. network provider, an onerous regulatory imposition that it has now turned into a unique selling proposition. Anthony Christie, executive vice president and chief marketing officer, says that Global Crossing negotiated and implemented an exhaustive network security agreement in response to U.S. government concerns.

"This agreement covers a range of physical, logical, information and security concerns," Christie says. "Importantly, we have an external consultant approved by the Department of Defense who audits our compliance."

The agreement is quite precise in its obligations. All staff undergoes security training, while those with access to the network are screened under U.S. government procedures. The agreement specifies security procedures for the routing of traffic and is subject to oversight by a security committee whose members are approved by DoD.

"We had to assure (DoD) that all was well. Given the extraordinary geopolitical times, there was quite a lot of concern about Singapore majority control," says Christie.

The new owner of Global Crossing's Asia assets, Asia Netcom, expresses similar sentiments. Although now owned by a mainland Chinese company, Asia Netcom's chief executive, Bill Barney, says his firm is a "Bermuda-based company" that is "independently Western-managed." China Netcom is hardly the typical secretive Chinese government state agency, either. Its board of directors includes News Corporation's Rupert Murdoch and Goldman Sachs' Mark Schwartz.

Both Global Crossing and Asia Netcom executives say they have won the confidence of security-conscious customers. Global Crossing provides services to some U.S. defense customers and the United Kingdom foreign office, while Asia Netcom provides the same service for the Australian embassy network.

ECONOMIC ISSUES

But there is also the nature of the economic giveaway of this capacity to consider. Billions of dollars of U.S.-funded infrastructure have been sold for an average of five to six cents on the dollar to companies that could conceivably use their cheap capacity to launch more bandwidth price wars and further undermine the economics of the international telecom order.

Firms such as Global Crossing, Tyco and MCI faltered because of their poor corporate governance and their questionable understanding of the economics of bandwidth. There's little evidence that the new owners of this infrastructure are inherently superior custodians.

Global Crossing's ultimate owner is a case-in-point. Temasek Holdings is the highly secretive $60 billion investment arm of the Singapore government, with a wide range of investments in banks, hotels, airlines and media. Neither Temasek nor its telecom unit, STT, are publicly listed, and several observers have decried their lack of transparency and accountability.