Asia-Pacific undersea cable market

David Kennedy, Research Director

Recent Ovum research highlights the risks and opportunities in the international undersea cable market. David Kennedy believes that a Pacific Internet cable bubble is avoidable if the industry makes the right decisions during the next two years.

In recent years, Asia has seen fast growth in the demand for international capacity, driven mainly by consumer Internet demand. Investment in new Asian cable markets was dormant between 2002 and 2006 as a glut in capacity was slowly used up. However, during 2007 a number of new trans-Pacific and intra-Asian cable investments were announced. These Asian cable systems are scheduled to come on line during 2008-10, and will add significant new capacity.

David Kennedy believes there are several reasons for this. The rising prices in IP-bandwidth in certain markets is one of the main reasons, followed by the growing demand for additional routes (due to the disruption to networks caused by the Taiwan earthquake in December 2006). Thirdly, there have been pushes by domestic operators to secure capacity to support future broadband growth. Lastly, a small number of large carriers, aspiring to create global networks that reach most major country markets, are also investing in new cable.

Many observers are concerned about the possibility of a price crash as so much new capacity is added to the market. The fears are understandable. For example, the trans-Pacific market will see total operating capacity more than double in 2008. But demand growth is also high, and could restore utilisation in as little as three years.

Whether market disruption occurs will depend on how investors and operators act after 2008. If new systems continue to be announced and built in 2009 and 2010, and the operators start to aggressively market their excess capacity, then disruption seems more likely. However, this isn't inevitable! If a prudent approach to investment is adopted, and the new submarine cable operators marshal their capacity for their own future needs, then a smoother path is distinctly possible.

How can a bubble and price crash be avoided? The key is to take a sensible approach to investment and respond to real market conditions. Domestic operators, existing international providers and global wholesale companies all need to play their role.

The domestic operators building new cables in the region should keep the emphasis on provisioning for future domestic demand - not competing for market share in the international business. Domestic growth must discipline international investment.

Secondly, the established international operators should also avoid triggering a price war by pre-emptively dropping prices.

Thirdly, prospective investors should remain open-minded about investments after 2009, and avoid precipitating a supply overhang in the market. Securing genuine pre-sales will be the key to maintaining commercial discipline.

David Kennedy is a research director responsible for broadband and wireline research. Based in Melbourne, Australia, he co-ordinates Ovum's broadband research priorities across Australia, New Zealand, South-East Asia and Greater China.