Strategising for submarine telecoms: Can submarine telecom overcome its current problems and hit growth once more? - PTC Roundable

Telecommunications International, Feb, 2002 by Stephen McClelland

The submarine telecom community faces arguably the most challenging times of its entire history. After a period of boom, the industry has seemingly entered a downturn affecting everyone in the value chain of telecom service delivery from suppliers to carriers. As difficult times bite, the market has proved to be cut-throat. There is a probable near-term oversupply of capacity and an overbuild of new facilities at least on the major trans-oceanic routes. New speculative projects barely entering service are unable to fund their debt obligations themselves from service revenues. Investors have lost substantial capital, and funding sentiment has dramatically swung against the industry. No one doubts that the submarine telecom community is vital to global telecom structures, and that at some stage it will return to a positive future, but few people dispute the problems that currently beset the industry. "We are in a post-bubble crisis...the bubble has been deflated by excessive debt and a perception of overcapacit y in this marketplace," states Alan Robinson, vice president of global operations engineering service at Cable & Wireless, and President of Sub-Optic 2004.

Jayne Stowell, vice chairman of Axone Networks, an operator planning a Europe -- Middle East -- India submarine network, argues that a cable manufacturing boom and a technology explosion -- as a result of developments like DWDM providing higher capacities -- propelled the industry into an unsustainable supply and demand scenario: "Supplier developments were enabling a ten times increase in global capacity at the same time as user demand has only been doubling in the same period -- the theorised price elasticity of demand was not there."

But suppliers argue in turn that they were following market demand. "This demand was the market condition at the time," states Jean Godeluck, president of Alcatel submarine networks activity, the largest equipment vendor in the industry. Similar feelings are shared in the financial community that has supported several of the new ventures coming to fruition. "The rush to get money in the whole dot-com industry meant that people were a bit too generous with their chequebooks and anything with a technology flavour would be funded," points out Scott Davies, executive director with Australia's Macquarie Bank, a major player in submarine telecom finance. "There was hysteria in the marketplace, and the financial sector is as guilty and as much to blame as anyone else." And in a debt-based environment, there ore unpleasant realities to be addressed. "We have all learnt that 'Cash is King'," argues Fiona Beck, president and CEO of Southern Cross, a trans-Pacific cable system.

There is clearly no one reason specifically to blame. "If you ask 'did the community overbuild?', then the answer is 'yes' it did," points out Mike Downie, CEO of Global Marine, a supplier that provides marine services to the industry. "But it is difficult [to blame] individual players in the game, because that is like blaming individual gladiators for fighting each other...we had deregulation and at the same time technology development. With new players entering, the game, the result was inevitably overbuild. But if you were a gladiator in the game, would you have acted any differently?"

"There was a snowball effect [after FLAG was deployed] and I don't think the markets appreciated the impact of the evolution of technology," points out Ed McCormack, COO of FLAG Telecom that broke the mould by building privately-financed cable systems outside the traditional operator community in the mid-1990s.

Some experts point to a historic boom-bust cycle in the industry where demand and supply were temporarily mis-matched but in due course where the imbalance was quickly corrected and the industry once again embarked on a growth phase. The mismatch tends to occur at times of technology development that enable submarine telecom systems to deploy vastly greater capacity or where new and unexpected demand (for example, internet traffic) suddenly surges forward. "The industry has had a history of a boom and bust cycle," states Southern Cross' Fiona Beck.

But Scott Davies questions the future existence of such a cycle, but not its desirability: "[In fact] financiers like nothing more than boom and bust cycles, because they represent predictability and therefore are in some sense a licence to print money. This takes place across many different markets, such as property." Rather Scott Davies is concerned about other scenarios the sector may face - perhaps it may come to resemble the airline industry - mired in a perpetual struggle to keep pace both with capital demand (in a capital-intensive industry) and revenue generation. In this event, he argues, future financial participation would continue to be problematic.

Other observers would argue the presence of unrealistic business plans and a rush to finance them based on expectations that all entrants could replicate the profitability of the market based on the incumbent players. The rush created a me-too attitude in the marketplace. "We have ourselves to blame, and the price is going to be very painful," argues long time industry player Eugene Sekulow, who as president of NYNEX International was the corporate sponsor of FLAG. Axone's Jayne Stowell agrees: "There will be pain, but we will have to get through it. Solid, sustainable business models will be built - particularly on currently under-built routes. There will be a better reality [at the end of this]."