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THE UNFORESEEN PRICE WAR

By Gary Kim

With global bandwidth requirements increasing at perhaps 70 percent a year, and some carriers estimating that bandwidth now is growing faster than Moore’s Law, a stair step increase in undersea bandwidth across the Pacific, as well as additional bandwidth on other routes, has some industry watchers wondering whether pricing stability is about to be undermined.

Consider that total demand on trans-Pacific routes stood at about 2 terabits per second at the beginning of 2008. About 1.4 Tbps of capacity was lit but not purchased. During 2008, though, lit capacity will increase to about 7 Tbps.

If total capacity more than doubles in a single year, how can that not lead to pricing pressures?

In fact, there has been little construction on trans-Pacific routes since the 2002 to 2005 pause in building, despite explosive new bandwidth demand in Asia. After the glut of new capacity built during the “Internet bubble,” carriers and investors were reluctant to build new capacity under circumstances where prices were plummeting.

So the issue now is whether carriers will be “rational” about their pricing, or whether there is danger of a new price war, says Siow Meng Soh, Current Analysis senior analyst.

With a host of international carrier groups planning new undersea cables to meet Asia’s rapid growth in broadband Internet, TeleGeography has warned the market is heading for a potential glut.

Lit capacity on the Pacific route is set to more than double by the end of 2008, TeleGeography says, with carriers attracted by the growth in demand and the existing high prices. That’s the warning sign: “high prices.” It is hard to imagine a vast expansion in capacity not wringing some of the pricing power out of the market.

The lease price of a 10Gbps wavelength circuit across the Pacific is more than 10 times greater than comparable capacity across the Atlantic, TeleGeography analyst Alan Mauldin says.

“In the face of so many new cables, the trans-Pacific market is in danger of a price collapse similar to that which has plagued trans-Atlantic cable operators,” Mauldin says.

That would be unwelcome news indeed for a capacity industry that has sighed in relief as a global bandwidth glut was “over” in 2006. Since then, supply and demand have roughly been in equilibrium, prices have been stable, and competitors have been consolidated out of existence, say analysts at TeleGeography.

As bandwidth demand growth has depleted inventories of unsold circuits on many submarine cables and on some segments of terrestrial networks, network operators have responded by increasing capacity only incrementally.

This incremental approach to managing spare circuit inventories means that lit bandwidth supply and bandwidth demand are roughly in balance, TeleGeography says.
In fact, at the end of 2006 just a bit more than 14 percent of capacity on major submarine cables was lit.

“Past precedent has dictated that prices will eventually come down,” says Eric Schoonover, TeleGeography senior analyst. “You add markets with new supply, and the price is bound to come down.”

“There’s even a risk of it collapsing,” he says, as it did in 2000.

To be sure, most carriers see the need to increase submarine capacity, as a defensive play in view of the rapidly growing demand for bandwidth in Asia, say Soh.

Since more content is now being created and hosted in Asia, it is necessary for carriers to ensure that they are prepared to handle an increase in intra-Asian capacity, not just trans-Pacific capacity.

The other observation most make is that supply disruptions caused by cable cuts and earthquakes have heightened the need for route and cable diversity. Damage to the SEA-ME-WE cable near Egypt in January 2008 or natural disasters such as the earthquake near Taiwan in December 2006 are prime examples.

There also is a greater concern over trans-Pacific routes than trans-Atlantic routes due to the limited number of cables along this route.

So there are sound reasons for building all the new capacity. In most cases, says Soh, the main motivation for members of submarine consortiums is to meet their own forecasted demand for bandwidth along key routes.

Nevertheless, the new submarine cables currently being built will be completed within the next two years, resulting in a surge in submarine cable capacity around 2010. And Soh expects subdued bandwidth prices as a direct result.

Much hinges on what “subdued” means. Wholesale prices are generally highly competitive on most major routes, and most executives either predict slightly declining prices or even price stability as a continuing trend. And Soh thinks prices might even increase in some cases. That isn’t an outcome many executives would worry about.

Slight pricing declines caused by the additional capacity likely won’t be a huge issue since that eventuality probably is baked into carrier expectations. What would be destabilizing is an unforeseen price war. FAT

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