submarine telecoms INDUSTRY REPORT 2012

 1 Submarine Cable Industry Report Issue 1 July 2012

Copyright © 2012 by Submarine Telecoms Forum, Inc.

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Submarine Telecoms Forum, Inc. 21495 Ridgetop Circle Suite 201 Sterling, Virginia 20166 USA www.subtelforum.com

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 2 Disclaimer: While every care is taken in preparation of this publication, the publishers cannot be held responsible for the accuracy of the information herein, or any errors which may occur in advertising or editorial content, or any consequence arising from any errors or omissions, and the editor reserves the right to edit any advertising or editorial material submitted for publication. If you have a suggestion, please let us know by emailing [email protected].

 3 Table of Contents

1.0 Introduction 13 2.0 Worldwide Market Analysis and Outlook 14 2.1 Connecting the Unconnected 14 2.2 Overview of Historical System Investment 15 2.3 2008 to 2012 Systems in Review 16 2.4 Systems Investment Beyond 2012 17 2.5 Decommissioning 18 3.0 Supplier Analysis 20 3.1 System Suppliers 20 3.2 Upgrade Suppliers 20 4.0 Ownership Analysis 23 4.1 Financing of Current Submarine Systems 23 4.2 Financing of Proposed Submarine Systems 23 5.0 Recent Events and Potential Impact on Submarine Cables 26 5.1 Macroeconomic Environment 26 5.2 Cable Protection Rules and International Water Rulings 26 6.0 Technology 32 6.1 Overview 32 6.2 Upgrades 32 6.3 Terminal Equipment 32 6.4 Wet Plant 33 6.5 Other Advances 34 7.0 Regional Market Analysis and Capacity Outlook 36 7.1 Transatlantic 36 7.1.1 Bandwidth and Capacity 36 7.1.2 New Systems 38 7.2 Transpacific 39 7.2.1 Bandwidth and Capacity 39 7.2.2 New Systems 41 7.3 North America-South America 42 7.3.1 Bandwidth and Capacity 42

 4 7.3.2 New Systems 43 7.4 Sub-Saharan Africa 46 7.4.1 Bandwidth and Capacity 46 7.4.2 New Systems 48 7.5 South Asia and Middle East 48 7.5.1 Bandwidth and Capacity 48 7.5.2 New Systems 51 7.6 Australia and New Zealand 53 7.6.1 Bandwidth and Capacity 53 7.6.2 New Systems 54 7.7 Polar Route 55 8.0 Conclusion 58

List of Figures Investment in New Submarine Fiber Optic Projects, 1987-2012 15 Investment in New Submarine Fiber Optic Projects by Region, 2008- 16 2012 Proposed Submarine Fiber Optic Projects 17 Credible (“High-Activity” and “Medium-Activity”) Proposed 18 Submarine Fiber Optic Projects by Region Financing of New Submarine Fiber Optic Systems, 2008-2012 23 Financing of Credible (“High-Activity” and “Medium-Activity”) 24 Proposed Submarine Fiber Optic Projects Forecasted Lit Capacity Requirement vs. Current Demonstrated 37 Design Capacity of Transatlantic Systems Forecasted Lit Capacity Requirement vs. Current Demonstrated 39 Design Capacity of Transpacific Systems Chinese International Internet Bandwidth by Operator, Year-End 2011 42

List of Tables Civilian-Inhabited Sovereign States and Territories Without 14 International Fiber Optic Connectivity as of Mid-2012 Market Share for Supply of New Submarine Fiber Optic Systems, 20 2012 and Beyond

 5 Key Submarine Upgrade and Redeployment Projects for Equipment 21 Suppliers Existing Transatlantic Cable Systems 36 Proposed Transatlantic Cable Systems 38 Existing Transpacific Cable Systems 40 Proposed Transpacific Cable Systems 41 Existing US-Brazil Cable Systems 42 Proposed Latin American Systems 43 Existing West African Systems 46 Existing East African Systems 46 Proposed Sub-Saharan African Systems 48 Existing South Asian Intercontinental Systems 51 Proposed South Asian Intercontinental Systems 51 Existing Australia and New Zealand Systems 53 Proposed Australia and New Zealand Systems 54 Proposed Polar Systems 55

List of Sponsors Alcatel-Lucent alcatel-lucent.com 19 AP Telecom aptelecom.net 22 Cyta Global cytaglobal.com 25 Great Eastern Group greateasterngroup.com 31 Huawei Marine Networks Co., Ltd. huaweimarine.com 35 SubOptic suboptic.org 8 TE SubCom subcom.com 45 Telecom Egypt telecomegypt.com.eg 52 Terabit Consulting terabitconsulting.com 12 WFN Strategies wfnstrategies.com 57

 6 Foreword

or a number of years SubOptic has been looking to undertake interim activities between our conference events, which are typically held Fevery three years, to provide a better service to our entire community of interest.

Whilst we have maintained the interval between our events at a period long enough for there to be significant developments to discuss, we have long recognised that an annual report which provides a snapshot of the state of the many sectors within our industry, could be of major interest and value to our entire community, especially if it were to be freely available.

We are therefore very happy to support this initiative from Submarine Telecoms Forum along with Terabit Consulting, which we hope will provide a good, credible indicator of how the industry is developing to meet new challenges, both from the demand and the supply areas, and from external factors both natural and manmade.

There are, of course, risks in trying to produce such a report, and I am sure there will be some discussion as to whether it is totally accurate or whether it has managed to capture the key activities and decisions which are helping to shape our industry, which is so critical to the economy of the globe.

We think, however, that the debate that such a report will stimulate could be good for the industry and help to raise our profile amongst the many outside our immediate community, who still do not recognise how important Undersea Fibre Optic Communication cables are to our global economy.

And of course there will always be the next Annual Industry Report where such matters can be adjusted as the inevitable changes occur. There will also be next spring, SubOptic 2013 in Paris, where the industry as a whole comes together to discuss and debate the future of our industry, which will form the foundation, we hope, for future Annual Industry Reports.

Well done to Submarine Telecoms Forum for taking this initiative.

Fiona Beck President of the SubOptic Executive Committee and President and CEO of Southern Cross Cable Network

 7 The Premier Event for the Industry

For full details go to www.suboptic.org Executive Summary

s the world has become increasingly connected since the dawn of the internet age in the mid-1990s, there has been a massive Aundertaking to “plug-in” every nation. As of mid-2012, only 21 nations and territories remain isolated from fibre optic connectivity, though projects are underway in many of these markets at the time of this writing. Since 2008, the submarine cable market has been in a new cycle, the third of the fiber optic era, dominated by carriers investing in developing markets such as Africa, India, and China. Approximately $10 billion worth of investment in new projects has occurred during this five- year period, and there are currently $25.6 billion in new projects being actively pursued by various sponsors.

Although market share was somewhat uneven in recent years, the near- term outlook is more equitable, with each of four major new-system suppliers garnering a 20 to 25 percent share of credible projects in the near-term. Meanwhile, capacity upgrades have become one of the most important aspects of the industry, providing a consistent source of growth.

Carriers, both in consortia and on their own, have been the greatest source of capital for cable projects, but private investors have returned and government/Development Finance Institution (DFI) interest is steadily growing.

Macroeconomic shocks have had remarkably little impact on demand for international capacity for the end user, but at the carrier level, the ability to purchase bandwidth and invest in new systems has been impacted. The most profound impact of macroeconomic developments on the demand for new systems has been the tightening of capital from the project finance community. Other events such as the strengthening of cable protection laws and the growing importance of the United Nations Convention on the Law of the Sea have also impacted the submarine cable industry.

Advances in optical transmission technology have recently returned to a more natural pattern after the burst of the dot-com bubble. Many technologies offering the ability to increase data rate, channel count and overall capacity have come to market. Owners and purchasers of submarine cable systems must consider potential upgrades, new terminal equipment technology, new wet plant technology, and several other recent advances.

 9 Breaking submarine investment into regions provides useful market insight. The transatlantic market is overwhelmingly wholesale-oriented and will soon have gone ten years without a new, direct cable system between North America and Europe. It has become commoditized and democratized, but its reputed oversupply is not as dire as widely claimed. The business case for a new transatlantic wholesale cable continues to be a tough sell to financiers; to differentiate themselves, new projects rely on low latency, renewable energy sources, and the expansion of connectivity beyond North America and Western Europe.

The transpacific market suffered a shock with the activation of three new systems between 2008 and 2010, and without new deployment, a transpacific capacity shortage is a real possibility within three years. China and Japan will be the pillars of East Asian bandwidth demand as next-generation intra-Asian systems (SJC, ASE, and APG) will change transpacific market dynamics.

The North America-South America capacity market is heavily dependent on three cables: GlobeNet, SAM-1, and South American Crossing, but a wave of at least eight new projects hopes to change this dynamic. Latin America still commands some of the highest premiums of any capacity market, with 10 Gbps wavelengths between Brazil and the United States remaining well over $100,000 per month. The Brazilian market has also been targeted by developers of interregional systems that hope to reroute the region’s traditional Miami-centric traffic patterns away from the United States and toward other markets.

Total international Internet bandwidth in Sub-Saharan Africa is 300 Gbps as of 2012. The design capacity of systems in service as of year-end will be 15 Tbps on Africa’s west coast and 7.5 Tbps on its east coast.

India’s international bandwidth demand, which exceeds 1 Tbps as of 2012, is the primary driver of the region’s submarine investment and Indian bandwidth demand to the United States has grown considerably, with India having become United States’ leading voice correspondent. Despite decreases in extreme poverty and the expansion of the middle class, Indian income inequality remains a significant obstacle to growth of the country’s telecommunications and Internet markets. Although growth in Indian Internet bandwidth has been strong, the sustainability of this demand will be dependent upon increases in subscribership (particularly for broadband services) which will only be possible through an expansion of consumer spending power.

 10 Egypt has historically been the submarine industry’s chokepoint of most concern, but due to political instability, sanctions, latency issues, and advantages of submarine systems over international terrestrial projects, there is no clear alternative to the Suez region. The Europe-Asia route has historically been dominated by consortia although Reliance Globalcom, Tata Communications, Bharti Airtel, Seacom, Gulf Bridge International, and Orascom have opened the route to competition.

Australian international bandwidth demand already exceeds 1 Tbps and is expected to grow more rapidly than other regions. Pacific Fibre has faced a variety of obstacles: a risk-averse financing environment; a dominant competitor that was able to single-handedly alter the dynamics of the marketplace, making business plan forecasting extremely difficult; and the defection of Pacnet. Nevertheless, given the region’s advanced broadband initiatives, there is expected to be a government-led and popular outcry for additional intercontinental bandwidth within two to three years.

Finally, in the Arctic, advancements in technology coupled with changes in climate have made previously unthinkable projects increasingly credible, and with the new wave of interest, the submarine cable industry risks becoming the battleground for a Polar proxy war led by three of the region’s dominant powers: Canada, Russia, and the United States.

 11 Intelligent intelligence - go beyond the numbers! The Undersea Cable Report 2013 From Terabit Consulting Publication Date: September, 2012 The most diligent quantitative and qualitative analysis of the undersea cable market - 1,600 pages of data, intelligence, and forecasts that can be found nowhere else. Terabit Consulting analysts led by Director of International Research Michael Ruddy tell you what’s real and what’s not, where we’ve been and where we’re headed. YOUR KEY TO UNDERSTANDING AND HARNESSING THE $20 BILLION UNDERSEA MARKET OPPORTUNITY

The Undersea Cable Report capitalizes on Terabit Consulting’s global on-site experience working with carriers, cable operators, financiers, and governments in over 70 countries on dozens of leading projects (e.g. AJC, BRICS, EASSy, Hibernia, SEAS, TBI) - a world of experience, at your fingertips in a single resource!

The Undersea Cable Report 2013 is your single source of information for top-level decision- making - with the most detailed profiles, data, market analysis, and forecasts available.

• 680+ detailed undersea cable profi les • accurate, reliable data • Capacity demand, capacity supply, and capacity pricing • valuable intelligence • Ownership, system supply, fi nancing, and project costs • innovative modeling • The upgrade market • thoughtful insight • Global, region-by-region, and route-by-route analysis • global perspective

• Reliable, detailed forecasts • respected expertise

Limited time re-introductory offer to celebrate the return of the Undersea Cable Report! Reserve your copy today. SAVE 50% UNTIL SEPTEMBER 7, 2012 Single-user license $10,995 limited-time re-introductory offer $5,500 Multi-user site license $24,990 limited-time re-introductory offer $12,495 Global organizational intranet licenses also available For more information visit www.terabitconsulting.com 1.0 Introduction Welcome to the first edition of the Submarine Telecoms Industry Report, which was authored by the submarine industry’s leading market analysis firm, Terabit Consulting, with research overseen by Terabit’s director of international research, Michael Ruddy. It serves as the final chapter in a trilogy of products beginning with the Submarine Cable Map and including the Submarine Cable Almanac.

The Submarine Telecoms Industry Report features in-depth analysis and prognoses of the submarine cable industry, and serves as an invaluable resource for all who are seeking to understand the health of the submarine industry. It examines both the worldwide and regional submarine cable markets, including issues such as the new-system and upgrade supply environments, ownership, technologies and geopolitical/economic events that may impact in the future.

In this report, Terabit Consulting identified more than $25 billion in new projects that are currently being actively pursued by their sponsors. Of those, more than $5 billion worth of new projects are considered to be in an advanced state of development and well-positioned for near-term deployment.

While the crystal ball will rarely be completely clear, one fact remains – that our 150+ year old international enterprise continues to be a thriving, exciting and ever-evolving industry.

Our aim is to make this information as timely and available as possible. As always, we feel that an informed industry is a productive industry.

 13 2.0 Worldwide Market Analysis and Outlook

2.1 Connecting the Unconnected The drive to connect the unconnected continues unabated. In recent years the submarine industry has expanded its efforts to provide ubiquitous global coverage, and this trend is expected to continue in the near-future. As of mid-2012 only 21 civilian-inhabited sovereign states and territories were not served by international fiber optic connectivity; however, credible submarine projects have been initiated in many of these markets.

Civilian-inhabited sovereign states and territories without international fiber optic connectivity as of mid-2012

Somalia (including Somaliland) Africa Saint Helena, Ascension, and Tristan da Cunha (British Overseas Territory) Christmas Island (Australian External Territory) Asia Cocos (Keeling) Islands (Australian External Territory) Caribbean Montserrat (British Overseas Territory) Saint Pierre and Miquelon (French North America Collectivité d’Outre-mer) Easter Island (Chilean Special Territory) South America Falkland Islands (British Overseas Territory) Galapagos Islands (Ecuadorian Province) Cook Islands (Self-Governing State in Free Association with New Zealand) Kiribati Nauru Oceania Niue (Self-Governing State in Free Association with New Zealand) Norfolk Island (Australian External Territory) Palau

 14 Pitcairn Islands (British Overseas Territory) Solomon Islands Tokelau (New Zealand Dependent Territory) Oceania Tonga Vanuatu Wallis and Futuna (French Collectivité d’Outre-mer)

2.2 Overview of Historical System Investment By year-end 2012 there will have been $56.1 billion worth of investment in fiber optic submarine systems, comprising 1.253 million route kilometers. Over its 25-year history the market will have averaged $2 billion worth of investment and 48,200 kilometers of deployment per year.

Investment in New Submarine Fiber Optic Projects, 1987-2012 (Including Projects Under Construction) ($Millions by RFS Date)

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 1 1 1 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 8 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1

 15 Submarine cable deployment can be broken down into three distinct cycles:

1. The first, lasting ten years from 1987 to 1997, marked the advent of transoceanic fiber optic communications and a predictable, consortium-dominated market.

2. The second cycle was characterized by unprecedented levels of investment from 1998 to 2002, fueled by the dawning of the Internet and WDM eras and the arrival of speculative investment, followed by a disastrous market collapse that led to what was effectively a five- year dormancy of the market.

3. The third cycle, lasting from 2008 to the present, represents the era of carrier-dominated investment in developing markets. To date, most of that investment has been directed toward Africa, India, and China.

2.3 2008 to 2012 Systems in Review During the five-year period from 2008 to year-end 2012 there will have been approximately $10 billion worth of investment in new projects, for an average of $2 billion and 54,000 route kilometers per year. More than two thirds of that investment has been in three regions: Sub-Saharan Africa, South Asia and the Middle East, and the transpacific, with most investment targeted toward the “anchor” markets of South Africa, India, and China respectively.

Investment in New Submarine Fiber Optic Projects by Region, 2008-2012

Latin North America America/Caribbean 3% 4% South Pacific 4% Australia 4% Africa East Asia 32% 8%

Europe/North Africa 9%

Transpacific South Asia/Middle 17% East 19%

 16 2.4 Systems Investment Beyond 2012 Terabit Consulting identified a total of $25.6 billion in new projects that are currently being actively pursued by their sponsors. These projects were each classified into one of three categories: “High Activity,” “Medium Activity,” and “Low Activity” based on various criteria including supply contracts, funding, licenses, carrier commitments, market opportunities, marine surveys, desktop studies, and feasibility studies.

The analysis found that approximately $5 billion worth of projects can be considered to be in an advanced state of development (“High Activity”) and an additional $15 billion have made significant progress (“Medium Activity”). A further $5.6 billion worth of projects were confirmed as being under serious consideration but had yet to demonstrate their true credibility.

Terabit Consulting also classified more than $25 billion worth of projects as either officially or effectively “cancelled.”

Proposed Submarine Fiber Optic Projects (Excluding Systems Under Construction) ($Millions)

$16,000

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0 High Activity Projects Medium Activity Projects Low Activity Projects

Credible proposed investment, i.e. projects falling into the “High Activity” and “Medium Activity” categories, is characterized by the what would be the greatest geographic diversity of investment in the submarine market since its inception, with at least three-quarters directed toward developing markets and new routes.

 17 Credible (“High-Activity” and “Medium-Activity”) Proposed Submarine Fiber Optic Projects by Region

Europe/North South Pacific North America Australia Africa 2% 0% 5% 3% South Asia/Middle East 6% Latin Multi-regional America/Caribbean 7% 21%

Africa 8% Polar Route 16% Transatlantic 9%

Transpacific East Asia 11% 12%

2.5 Decommissioning The decommissioning of the TAT-8 transatlantic cable in 2002 marked the first major retirement of a fiber optic system. TAT-8 had been the first transoceanic fiber optic cable to enter service, 14 years earlier, and the advent of WDM systems in the late-1990s made its continued operation an unworkable proposition; well before its retirement, new capacity could effectively be purchased; new capacity could effectively be purchased on a DWDM system at a cheaper price than TAT-8’s per-unit operations and maintenance costs. TAT-8’s deactivation was followed by a wave of retirements that led to the decommissioning of almost all PDH and SDH repeatered systems, and even some WDM-based cables (most notably, Gemini). By 2010 most major candidates for retirement had been removed from service. Consequently as of 2012 most of the existing global undersea network is, with limited exceptions (most notably some redeployed systems), theoretically capable of supporting DWDM transmission rates far in excess of original target design capacities.

 18 Realizing the potential of a connected world Realizing the potential of a connected world 3.0 Supplier Analysis

3.1 System Suppliers The outlook for supply contracts is significantly more equitable than in recent years. The concentration of market share between 2008 and 2012 was led by Alcatel-Lucent, which captured half the market, and TE SubCom, with more than a third. Huawei Marine Networks, meanwhile, made notable inroads during its initial years in the marketplace.

Based on the market share of credible awarded contracts, each of four major new-system suppliers would have a near-term market share of between 20 and 25 percent.

Market Share for Supply of New Systems, 2012 and Beyond

Market Share, Market Share of Credible 2008-2012 Awarded Contracts Alcatel-Lucent 50% 20% TE SubCom 34% 25% NEC 7% 23% Huawei Marine 4% 23% Fujitsu 2% 4% Others 3% 4%

3.2 Upgrade Suppliers Capacity upgrades have become one of the most dynamic aspects of the submarine cable industry. Beginning in the late 1990’s few, if any, systems were equipped to their full design capacity at RFS; instead, owners consciously planned to install additional terminal equipment as market conditions dictated. Improvements in transceiver technology often make it possible to provide capacity beyond initial design capacity, even as systems grow older. Any optically amplified system can potentially be upgraded beyond its design capacity, and those installed from 1999 onwards are excellent candidates. More significantly, provision of terminal equipment for upgrades does not require investment in repeater design, cable manufacturing, or cable ships; this has resulted in many suppliers beyond those traditionally engaged in provision of submarine cable systems entering the market for terminal equipment upgrades. This

 20 dynamic may be uncomfortable for some suppliers, but has let to some striking benefits for system owners.

The upgrade market and its technology suppliers are a relatively new niche to the industry, increasing the utility and longevity of a number of submarine cable systems. Several key submarine upgrades and redeployments have been accomplished in recent years, encompassing in scope both regional and transoceanic systems.

The upgrade market, meanwhile, will arguably be the most consistent source of growth and has been targeted by four equipment suppliers, in addition to the traditional submarine system suppliers.

Key Upgrade and Redeployment Projects for Equipment Suppliers

Ciena Southern Cross Cable Network, TGN Atlantic, Japan- US Cable Network, North Asian Loop, Australia-Japan Cable, FLAG Europe-Asia Infinera Pacific Crossing-1, North Asian Loop, Transatlantic cable, MedNautilus, Kodiak-Kenai, Pacnet Mitsubishi Asia-America Gateway, TAT-14 Xtera EAC/C2C, AC-1, Gulf Bridge International, GlobeNet, Arcos, PAC, SHEFA-2, GOKI, Columbus-2, Columbus-3, Gemini Bermuda, C-BUS, East-West Cable

 21

4.0 Ownership Analysis

4.1 Financing of Current Submarine Systems The financing of current submarine systems consists of consortium, carrier, investor and government backed models. Projects led by carriers predominate, but private investors have returned and government/ Development Finance Institution (dfi) interest is steadily growing. Also, despite global financial uncertainty, there are $8 billion worth of credible investor-led project finance opportunities on the table in the submarine market.

From 2008 to 2012 four-fifths of projects were financed by carriers, either alone, in small groups, or in large consortia, as private investors remained cautious. Governments and development financial institutions increased their share of funding to 5 percent of all projects.

Financing of New Submarine Fiber Optic Systems, 2008-2012

Government/DFI 5% Investor 14%

Consortium 49%

Carrier 32%

4.2 Financing of Proposed Submarine Systems Of the $20 billion in credible projects, roughly half would be financed by carriers, and interest among government and DFI sources is increasing. Notably, 40 percent, or $8 billion of credible proposed projects would be financed by private sources, although privately-financed projects also show the greatest risk of not coming to fruition.

 23 Financing of Credible (“High-Activity” and “Medium-Activity”) Proposed Submarine Fiber Optic Projects

Other (Research Networks, Suppliers, Government/DFI etc.) 6% 5%

Carrier Investor 16% 40%

Consortium 33%

 24 5.5x8.5 _Cytaglobal_subtel_forum2012.pdf 1 06/07/2012 2:32 �� 5.0 Recent Events and Potential Impact on Submarine Cables

5.1 Macroeconomic Environment The global economic environment’s impact on the submarine industry is increasingly complex. At the end-user demand level, macroeconomic shocks have had remarkably little impact on demand for international capacity. At the carrier level, however, they have unquestionably impacted carriers’ ability to purchase bandwidth as well as carriers’ propensity to invest in new systems. But the most profound impact of macroeconomic developments on the demand for new systems (i.e. from the supplier perspective) has been the tightening of capital from the project finance community.

Increasingly, the industry has sought to temper this effect by looking to more stable, alternative sources of capital, particularly from development financial institutions, and by shifting its attention toward areas of growth in the developing world. Nevertheless the submarine industry will undoubtedly feel the impact of the European sovereign-debt crisis, most immediately in the growing reluctance of the private finance community to fund submarine projects.

5.2 Cable Protection Rules and International Water Rulings The rules governing the survey, installation, maintenance and repair of submarine cables within territorial waters are defined by the sovereign state governments concerned. Within Exclusive Economic Zones (EEZ) and out into international waters they are covered by the United Nations Convention on the Law of the Sea (UNCLOS). In the EEZ, the UNCLOS Articles 58 & 113 – 115 apply; in international waters the relevant the UNCLOS Articles are 86, 87 & 112 – 115. To date 162 countries plus the European Union have signed the convention, although a number have still to ratify it. Most notable of these is United States which only recognizes the UNCLOS as a codification of “customary international law”.

In the past decade the importance of international submarine cables to world trade and individual country economies has grown exponentially, as connection to the internet has become a prerequisite for conducting business. Major disruptions to the submarine network and the failure of the internet, as exemplified by the Hengchun subsea earthquake, off Taiwan, in 2006, has increased pressure on governments around the world to recognize the importance of submarine cables and the need to improve legislation for their implementation and protection.

 26 At the 65th Session of the UN General Assembly, on 29th of March 2010, the Secretary-General addressed the subject of the world’s submarine cable networks. In his report he stated: “Submarine cables. A need has been expressed by some States, including in recent workshops, to con- sider gaps in the existing legal regime regarding submarine cables at the international and national levels, in particular in the implementation of article 113 of the United Nations Convention on the Law of the Sea. Views have been expressed that the current legal regime is not adequate with respect to the operation of, and threats to, submarine cables. In particular, a need for a code of best practices with regard to the laying and repair of submarine cables and the conduct of cable routing surveys was mentioned, among other things. In that context, a need for capacity building activities facilitating the review of the legal regime and possible gaps therein could be considered.”

Following this report, in 2010, the International Cable Protection Committee (ICPC) announced that it had changed its rules to allow national governments and companies that were key players in the submarine cable industry to be represented within its membership. The ICPC’s stated objective in making this change was to foster improved co- operation between government and industry, which was deemed essential to enhance the security of submarine cables worldwide.

From studies conducted by ICPC and others, following such disruptions as the Hengchun earthquake, a key factor that emerged was that national governments were often in the critical path for the installation of and remedial work to submarine cables. It was therefore anticipated that having governments represented within the ICPC would facilitate improved education and awareness, strengthening of legislative protections and rights for cable owners, in accordance with the UNCLOS. The latter was considered essential to help eliminate permitting delays and to facilitate provision of urgent assistance in the event that the security of a submarine cable was threatened by illegal action.

In December 2010, the United Nations General Assembly approved an Omnibus Resolution on the Oceans and Law of the Sea. For the first time this resolution recognized the critical importance of submarine cables to the global economy and the security of nations. It also recognized that they are susceptible to accidental and intentional damage. The resolution was originally proposed by the Singaporean Government and was supported by diplomats from other countries who had been briefed by their respective ICPC Members.

 27 Importantly, the resolution called for states to take measures to protect cables, in accordance with international law. It encouraged greater dialogue and cooperation between states and relevant regional and global organizations to promote the security of the critical communications infrastructure. However, the UN process requires unanimity among all member countries for any provision to be included, and further hard work was required to educate the diplomats as to the importance of the resolution language on submarine cables.

In the autumn of 2011, the nation members of the UN met once again to define the Omnibus Resolution on Oceans and the Law of the Sea. The result of this meeting was another positive step forward. In the 2011 Omnibus Resolution on Oceans and the Law of the Sea, for the first time, the inclusion of the word “repair” was agreed by all nations to be included in the text concerning maintenance of submarine cables. However, the proposed language on expediting repairs in the EEZ was diluted in order to be acceptable to some nations. The agreed language states that repairs should be completed in accordance with international law without reference to maritime boundaries. The resolution strongly encourages nations to implement or update national laws to protect cables in fulfilment of national obligations under the UNCLOS.

The relevant language from the 2011 Omnibus Resolution on Oceans and the Law of the Sea is as follows:

PP22: Recognising that fibre optic submarine cables transmit most of the world’s data and communications and, hence, are vitally important to the global economy and the national security of all States, conscious that these cables are susceptible to intentional and accidental damage from shipping and other activities, and that the maintenance, including the repair, of these cables is important, noting that these matters have been brought to the attention of States at various workshops and seminars, and conscious of the need for States to adopt national laws and regulations to protect submarine cables and render their wilful damage or damage by culpable negligence punishable offences,

OP 121a: Calls upon States to take measures to protect fibre optic submarine cables and to fully ad-dress issues relating to these cables, in accordance with international law, as reflected in the Convention;

OP 121b: Encourages greater dialogue and cooperation through workshops and seminars among States and the relevant regional and global organizations

 28 on the protection and maintenance of fibre optic submarine cables to promote the security of such critical communications infrastructure;

OP 121c: Encourages the adoption by States of laws and regulations addressing the breaking or injury of submarine cables or pipelines beneath the high seas done wilfully or through culpable negligence by a ship flying its flag or by a person subject to its jurisdiction, in accordance with international law, as reflected in the Convention;

OP 121d: Affirms the importance of the maintenance, including the repair, of submarine cables, undertaken in conformity with international law, as reflected in the Convention; This language clearly and specifically encourages Nation States to adopt laws and regulations addressing obligations to enact modern domestic laws under UNCLOS article 113 and for the first time uses the word “repair” in the text.

However, as the final language on repair is the result of compromise required by various nations, it is understood that ICPC will continue to support continued efforts by Singapore and other like-minded nations in an attempt to expand the language in the resolution to include expeditious repairs when the UN meets again to define the Omnibus Resolution on Oceans and the Law of the Sea in 2012.

The Australian Government has been an early adopter of legislation related to submarine cables, it was one of the first signatories to the UNCLOS, which came into force in 1994, and is the first government to become a member of ICPC. The Australian Telecommunications Act (1997) covers under Schedule 3A all the principles of the UNCLOS; in particular, Schedule 3A empowers the Australian Communications and Media Authority (ACMA) that administers the act to establish Protections Zones around submarine cables. However, the 1997 Act is designed only to address international and domestic submarine ‘telecommunication’ cables. At the time of its drafting the legislators did not have in contemplation the offshore Oil & Gas industry that has since emerged. Much of the continental shelf around Australia is rich in oil and natural gas and over the next decade, major offshore production facilities will be constructed, outside of territorial waters but within the Australian EEZ. Submarine fibre optic cables, between these platforms and the main land will be essential to their operation. The Australian Government has enacted legislation to cover these offshore production facilities in the form of the Offshore Petroleum and Greenhouse Gas Storage Act (2006) (OPGGSA); unfortunately, once again it does not address submarine cables. The OPGGSA is administered

 29 by the Department of Resource, Energy and Tourism. The Australian Government has a dilemma to resolve in the next year or so as to which legislation should be applicable to these types of cables and how this will apply if the cable is owned by an Australian carrier providing a service to the Oil & Gas company or the cable is an integral part of the offshore facility owned and operated by the Oil & Gas company.

Like Australia, many nation states have, or are in the process of, dividing their EEZ into leasable blocks for Oil & Gas exploration and later production. The challenge in drafting the legislation for the necessary leases and licences will be to protect the rights of the lessee while maintaining the requirements of the UNCLOS to allow submarine cables free access to cross these blocks and permit maintenance and repair of cables within the blocks, when required. The Australian Government may well be leading the way in developing appropriate legislation to protect submarine telecommunications cable and will shortly need to re- address this legislation, as it relates to submarine cable for the offshore Oil & Gas industry. Therefore, an opportunity exists for rest of the world to consider the Australian approach, learn from it and where appropriate adopt their rules and regulations.

 30

6.0 Technology

6.1 Overview Advances in optical transmission technology experienced a brief hiatus in the aftermath of the dot-com bubble, but have recently returned to a more natural pattern. The period from 2009 to 2010 saw many lab experiments demonstrating increases in data rate, channel count and overall capacity, so it is no surprise that three years later we see many of these capabilities coming to market. Owners and purchasers of submarine cable systems must consider potential upgrades, new terminal equipment technology, new wet plant technology, and several other recent advances.

6.2 Upgrades Upgrades may utilize 10Gb/s, 40Gb/s or 100Gb/s transmission technology. 10Gb/s transponders may be used when low cost or rapid deployment is required; typically from 1 to 1 ½ times the original design capacity may be achieved; for example a system designed for 32 waves per fiber pair might be expanded to 40 or 48 waves. 40Gb/s upgrades have been offered for several years, but are rapidly being overtaken by 100Gb/s upgrades. 40Gb/s upgrades may deliver 2 to 2 ½ times the original design capacity; it is not usually possible to replace each 10Gb/s channel with a 40Gb/s channel, thus the improvement factor is less than 4. 100Gb/s upgrades have recently been announced, with the potential to achieve 4 times the original design capacity on some wet plant.

Owners may choose from these solutions to meet their specific needs: maximizing capacity, rapid deployment, lowest cost or some combination. The exact results depend on amplifier bandwidth, equalization, the chromatic dispersion map, and other factors. A typical upgrade will involve tests to characterize a fiber pair followed by trials of the equipment before a supplier commitment is made. Many upgrade designs now permit new channels to be added alongside existing channels, avoiding the need to remove existing terminal equipment from service.

6.3 Terminal Equipment Both 40Gb/s and 100Gb/s terminal equipment is now being offered by system suppliers. 10Gb/s continues to be offered to support existing customers and where market demand does not yet justify the jump to higher bit rates. 40Gb/s equipment is immediately available and may now be considered mainstream. There are signs, however, that 40Gb/s will quickly be superseded by 100Gb/s. The adoption of 100Gb/s technology in terrestrial networks and pressure from non-traditional suppliers

 32 will drive the deployment of 100 Gb/s technology on submarine cable systems. The use of 100Gb/s client signals will further cement 100Gb/s as the standard bit rate for the next generation of cable systems.

The advances in terminal equipment technology achieved over the last few years include:

• Coherent detection to improve receiver sensitivity • Quadrature Phase Shift Keying (QPSK) to modulate 2 bits per symbol • Increases in the baud rate to 14 or 28Gbaud (symbols per second) • Digital signal processing of the received signal to permit partial compensation of linear impairments in the electrical domain reducing the need for external dispersion compensation • Dual polarization to transmit two signals per wavelength • Frequency division multiplexing, in which two closely spaced optical channels occupy a single 50GHz channel slot • Improved Forward Error Correction (FEC) algorithms

40Gb/s systems typically employ several of these, while 100Gb/s transceivers must use almost all of them. (If all were used, the resulting bit rate would be 200Gb/s.)

To achieve high channel counts over trans-oceanic distances, some additional improvements will be added; these may include further changes to the modulation format and full compensation accumulated CD.

6.4 Wet Plant Technology Improvements in transceiver design can increase the capacity of existing wet plant. However, the most dramatic benefits can be achieved through synergies between transceiver and wet plant design. The ability to perform dispersion compensation in the electrical domain eliminates the need for dispersion management in the optical line. This in turn permits the use of high effective area, low loss fiber which reduces non-linear impairments and improves end-to-end performance. Systems using coherent detection and suitably optimized wet plant will support 80 or more 100Gb/s channels, or 8 Tb/s, per fiber pair over trans-Pacific distances.

 33 The need for additional capacity, opportunities to reduce maintenance costs, and the age of existing systems means that a new round of wet plant installation on major trans-oceanic routes will eventually be needed. When that time comes, the stage is set for capacities ten times greater than those available previously.

6.5 Other Advances Among the many changes in technology, two other advances are worthy of note. The first is a new client interface standard in the form of 40Gb/s and 100Gb/s Ethernet. As with previous generations of technology, muxponders will fill the gap between the adoption of new line side interfaces and the availability of client interfaces. Routers with 100Gb/s interfaces entered field trials by mid 2011, so widespread adoption is probably still a year or so away. Nevertheless, as 100Gb/s becomes more prevalent, 100 Gb/s Ethernet is likely to be the client interface of choice. IEEE 802ba was ratified in June 2010 and updated in March 2011. 40Gb/s and 100Gb/s Ethernet interfaces are available in formats for copper cable, multi-mode fiber and single mode fiber.

The second advance of note is Reconfigurable Optical Add Drop Multiplexers (ROADM). ROADM have seen adoption in terrestrial networks and are naturally suited to managing capacity on a trunk and spur configuration commonly encountered in submarine networks. The risks and challenges associated with any new wet plant technology should not be underestimated, however ROADM is a technology that bears watching.

 34

7.0 Regional Market Analysis and Capacity Outlook

7.1 Transatlantic

7.1.1 Bandwidth and Capacity No transoceanic market has experienced a more precipitous decline in investment than the transatlantic market, which is currently enduring its longest deployment drought in history. Between 1993 and 2003, a new transatlantic cable system entered service every ten months, on average. By the time the next transatlantic cable system is activated, the market will have gone more than a decade without a new, direct cable system.

Existing Transatlantic Cable Systems

RFS System Owner(s) Atlantic Crossing-1 1999 Level 3 (AC-1) 1999 Columbus-3 International consortium of carriers Yellow (Level-3) / 2000 Atlantic Crossing-2 Level 3 (AC-2) 2000 Atlantis-2 International consortium of carriers 2001 FLAG Atlantic-1 (FA-1) Reliance Globalcom 2001 Hibernia Atlantic Columbia Ventures Corp. 2001 TAT-14 International consortium of carriers 2001 TGN-Atlantic Tata Communications 2003 Apollo Cable & Wireless / Alcatel-Lucent

The seven lit DWDM systems between North America and Europe are owned by six entities: Apollo SCS Ltd. (a joint venture between Cable & Wireless Worldwide and Alcatel-Lucent), Level 3 (formerly Global Crossing, which operates two systems), Hibernia Atlantic (an 85-percent owned subsidiary of Columbia Ventures), Reliance Globalcom, Tata Communications, and the TAT-14 consortium. Consequently, the transatlantic market can be described as an overwhelmingly “wholesale” market, where operators have opted to lease capacity from network operators (as opposed to making direct investment in their own capacity infrastructure).

 36 A number of events have brought about the commoditization of bandwidth between most European and North American endpoints. In the late-1990s, hundreds of fiber pairs were deployed to metropolitan areas on both continents, making point-to-point connectivity both economical and practical, and at the same time retail markets were fully liberalized. Then, more importantly, in the early-2000s the dot-com bubble burst drove many cable operators into bankruptcy, allowing investors to acquire transoceanic networks at pennies on the dollar and unleashing a downward price spiral that saw erosion of up to 75 percent per year and the “dumping” of bandwidth onto the market. In the same decade, new industries emerged offering data center and content delivery services that further streamlined international connectivity for both operators and end-users. By the mid-2000s transatlantic bandwidth had become extremely cheap (sometimes cheaper than its construction cost) and end- to-end services between North America and Europe were efficiently and competitively managed, to the point where even small- and medium- sized enterprises could be characterized as viable bandwidth clientele.

Forecasted Lit Capacity Requirement vs. Current Demonstrated Design Capacity of Transatlantic Systems

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200 s bp T 150

100 Demonstrated design capacity of existing transatlantic systems: 49.5 Tbps 50

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

As of mid-2012, lit transatlantic capacity was approximately 15.6 Tbps and demonstrated design capacity was 49.5 Tbps, for a fill rate of 32 percent. Although 40G and 100G upgrade technology promised vast design capacity increases in theory, the practical implementation of the

 37 technology in ten- to fifteen-year old systems has not shown uniform success, and even the most optimistic estimates of transatlantic design capacity using existing systems do not exceed 80 Tbps. Consequently, the required level of lit transatlantic capacity is forecasted to exhaust the design capacity of existing systems within three to four years.

7.1.2 New Systems Consortia of operators were rumored to have been considering the construction of a TAT-15 system as early as 2002, and the first ten years of inconclusive discussions seem to have served primarily as an ongoing pressure tactic on wholesalers to lower prices. With price erosion having leveled off at between 10 and 15 percent annually and the long-term viability of TAT-14 in question, a clearer case can be made that tier-one operators ought to invest directly in their own infrastructure rather than continue purchasing bandwidth from wholesalers.

Planned Transatlantic Fiber Systems (Europe to the Americas)

System Owner(s) ACSea-EUR Cable System Telebras Emerald Express Emerald Networks Europe Link with Latin America (ELLA) Research community Project Express Columbia Ventures Corp. International consortium Transatlantic Consortium System / TAT-15 of carriers WASACE Cable WASACE North Company

Although financiers have shown continued commitment to submarine investments in general, they have shown a strong aversion to the transatlantic bandwidth market since its meltdown and subsequent commoditization in the early-2000s. In an effort to attract private investment and overcome this commoditization, the three new announced North America-to-Europe projects each draw on special characteristics to differentiate their bandwidth offerings. Hibernia Atlantic’s Project Express hopes to shave five to ten milliseconds off of current roundtrip transatlantic latency, with a target of 59 ms between New York and London and the

 38 hope of attracting the patronage of the high-frequency trading (HFT) community. Emerald Networks’ Emerald Express would also offer low latency but would position access to Icelandic data centers, powered by low-cost, renewable energy, as a cornerstone of its market strategy. A third project, WASACE Europe, would be a follow-on phase of development for the ambitious WASACE network, with earlier phases connecting Africa, South America, Central America, and North America; WASACE would thus promote its wide geographic reach as a differentiator. Despite these strategies, each of the proposed wholesale projects will face an uphill battle without strong commitments from tier-one operators, particularly if forced to compete against a next-generation consortium-led system.

7.2 Transpacific

7.2.1 Bandwidth and Capacity The demonstrated design capacity of existing transpacific systems is just above 40 Tbps, and although additional capacity may be possible with 100 Gbps line rates, the length of transpacific spans is expected to pose a practical obstacle to the full realization of targeted upgrade capacities. It is therefore a genuine possibility that lit capacity requirements will exceed the design capacity of existing systems within three years. Given the extended time-to-market of transpacific networks, any new project will likely need to be finalized before year-end 2012.

Forecasted Lit Capacity Requirement vs. Current Demonstrated Design Capacity of Transpacific Systems

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bp 150 T

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Demonstrated design capacity of existing transpacific systems: 40.8 Tbps 50

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 39 The transpacific market suffered a shock with the activation of three new systems between 2008 and 2010. Each of the three new systems targeted its own market segment: Trans Pacific Express (TPE) catered to China’s transpacific demand; Asia-America Gateway (AAG) was the first cable to connect North America directly to Southeast Asian markets; and Unity/ EAC Pacific, led by Pacnet and Google, positioned itself as a complement to data center infrastructure in the United States and Japan. Between 2008 and 2010 the number of active transpacific systems increased dramatically, from four to seven. Furthermore, the Unity/EAC Pacific project, with more than two-thirds of its capacity controlled by non-operators, opened up the Japan-US wholesale market, which until then had been dominated by TGN Pacific and Pacific Crossing-1. As a result, transpacific prices fell by as much as 50 percent in one year.

Existing Transpacifc Cable Systems

RFS System Owner(s) 2000 Pacific Crossing-1 (PC-1) NTT International consortium of 2001 China-US Cable Network carriers International consortium of 2001 Japan-US Cable Network carriers 2002 TGN-Pacific Tata Communications International consortium of 2008 Trans Pacific Express (TPE) carriers International consortium of 2010 Asia-America Gateway (AAG) carriers Pacnet / Google / Bharti 2010 Unity / EAC Pacific / Global Transit / KDDI / Singtel

China shows the strongest prospects for growth in the region and already claims the status of being the world’s largest broadband market: the country has ten times more fixed broadband subscribers than India and surpassed the United States in 2008. The number of fixed-broadband subscribers is expected to exceed 200 million within two years. ADSL remains the country’s dominant fixed-broadband technology, although the Chinese government has called for increased FTTH investment and

 40 current fiber deployment already totals more than 8 million kilometers. Japanese bandwidth demand, meanwhile, remains the largest in the region and is 50 percent larger than China’s, although for the near future the transpacific bandwidth demand of the country’s leading operators NTT and KDDI will likely be accommodated by their investments in the PC-1 and Unity systems, respectively.

7.2.2 New Systems Most of East Asia’s 20 largest operators will have equity in next- generation intra-Asian submarine capacity infrastructure by 2014 following the expected activation of the Southeast Asia-Japan Cable, Asia Submarine-cable Express, and Asia Pacific Gateway systems. The mesh of connectivity provided by the networks will allow the region’s largest capacity purchasers to have more cost-effective access to each of the competing transpacific systems.

Planned Transpacific Fiber Systems

System Owner(s) International consortium of China-US-2 carriers International consortium of Malaysia-US carriers International consortium of Trans Pacific Express (TPE) Expansion carriers International consortium of Thailand-US carriers

China’s international Internet bandwidth was 1.4 Tbps as of year-end 2011. Although China Telecom and China Unicom have respective shares of 13 and 26 percent in the Trans Pacific Express system, sources indicated that the confirmed design capacity of the system as of 2012 was only 2.5 Tbps. If further upgrades cannot be effected, China Telecom’s allotment of design capacity will be less than half of its total international Internet bandwidth demand as of year-end 2011. Furthermore, China Mobile is reportedly seeking its own investment-level transpacific bandwidth. As a result, a new China-US system is expected to enter service in 2015.

 41 Chinese International Internet Bandwidth by Operator, Year-End 2011

China Mobile Other 83 Gbps 30 Gbps

China Unicom China Telecom 467 Gbps 810 Gbps

7.3 North America-South America

7.3.1 Bandwidth and Capacity The North America-South America capacity market is heavily dependent on three cables: GlobeNet, SAM-1, and South American Crossing.

Existing US-Brazil Cable Systems

RFS System Owners 2000 Americas-II Consortium 2001 GlobeNet Brasil Telecom (Oi) 2001 SAM-1 Telefonica 2001 South American Crossing (SAC) Global Crossing

Latin America has commanded some of the highest premiums of any capacity market, with 10 Gbps wavelengths between Brazil and the United States still well over $100,000 per month.

Pricing on the North America-South America route is as much as ten times higher than transatlantic pricing. This is due in large part to the three wholesalers’ relatively tight control over the marketplace, as well as

 42 unforeseen bandwidth growth in the region’s major markets, especially Brazil.

The Brazilian telecommunications market is strong, with high levels of investment on the part of Oi and foreign investors including Telefonica, America Movil, Vivendi, and Portugal Telecom. The Plano Nacional de Banda Larga (PNBL), administered by state-owned Telebras, aims to provide 1 Mbps high-speed Internet connections for between USD$8 and USD$20 per month and has attracted commitments from most major operators. The country’s economic growth has been strong and more equitable than in other developing markets, resulting in a larger addressable base for telecommunications and Internet services, and the 2014 World Cup and 2016 Summer Olympics are expected to result in even greater increases in bandwidth demand.

7.3.2 New Systems According to most of the sources interviewed for this analysis, two major North America-Latin America projects are in advanced planning stages: AMX1, led by America Movil, and Transamericas Broadband Infrastructure, led by a consortium of operators and investors. America Movil is one of the world’s five-largest mobile operators in terms of subscribers, and its Claro subsidiary operates throughout Latin America; its takeover of Telmex was approved by Mexican regulatory authorities in 2010, giving it control of the Brazilian fixed-line and long-distance operator Embratel (as of 2010 Claro was Brazil’s second-largest mobile operator and Embratel had a majority share of the country’s international long distance market). TBI, meanwhile, is reportedly led by AT&T, Google, France Telecom, and least a dozen Latin American operators, possibly including Telefonica, which is also considering the construction of the Pacific Caribbean Communications System to the northwest corner of South America.

Proposed Latin American Systems

RFS System Owners 2013/14 America Movil-1 (AMX1) America Movil 2013/14 Pacific Caribbean Consortium Communications System (PCCS)

 43 2013/14 Transamericas Broadband Consortium Infrastructure (TBI) 2014 Atlantic Cable System Telebras / Odebrecht / (ACSea) Angola Cable 2014 BRICS Cable Imphandze Subtel Services (S. Africa) 2014 Seabras-1 Seaborn Networks (USA) 2014 South Atlantic Express eFive (S. Africa) / Globenet (SAEx) (Oi) 2014 WASACE WASACE Cable Worlwide / Aterios Capital

The Seabras-1 project was unveiled in March of 2012 by Seaborn Networks, a group of Boston, USA-based businessmen; unlike other Latin American cable projects, Seaborn-1 would connect only the United States and Brazil. The project would pursue a “carriers carrier” business plan, and given the relatively high concentration of Brazilian market share in the hands of a few operators (especially Oi and Telefonica, which operate their own networks), this strategy is not without risks. A May, 2012 announcement that Tata Communications would become an “anchor tenant” on the system was a significant step forward although Tata is not currently a major player in the region’s end-user markets. Nevertheless, if Seabras-1 or similar investor-led projects such as Project Express or Emerald Express succeed, it could embolden future “carriers’ carrier” projects in other regions.

In addition to the three major projects that would primarily target the North America-South America route (i.e. AMX1, Seabras-1, and TBI), a growing list of projects would attempt to capitalize on Brazil’s economic emergence in order to promote ties to developing economies including sub-Saharan Africa and BRICS markets. Some of these would also link Brazil, the world’s largest Portuguese-speaking country, with the world’s third-largest Lusophone community, which is located in Angola. The overall strategy of these projects, which include the Telebras’ Atlantic Cable System (ACSea), the BRICS Cable, South Atlantic Express (SAEx), and WASACE, would be to capitalize from the perceived shift in the balance of power away from the traditional G7 economies.

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www.youtube.com/user/SubComChannel 7.4 Sub-Saharan Africa

7.4.1 Bandwidth and Capacity Until 2009, Sub-Saharan Africa was served by only two fiber optic systems: SAT-2 and SAT-3. SAT-2, which entered service in 1993, bypassed the west coast of the continent and terminated in South Africa. SAT-3 and its partner cable SAFE were activated almost a decade later, finally bringing the first fiber connectivity to Sub-Saharan countries other than South Africa.

On the eastern side of the continent, the coastline between South Africa and Djibouti remained the longest expanse of coastline in the world without fiber, prompting a memorandum of understanding for the consortium-led EASSy project in 2003 and the development of private and government-sponsored projects (Seacom and TEAMS, respectively) when the consortium encountered delays. By 2010 each of the three east coast projects had entered service and two private west coast projects, Glo-1 and Main One, were also activated. In 2012 connectivity to west coast countries was further expanded by the consortium-led WACS and ACE projects.

Existing West African Systems

RFS System Owners 1993 SAT-2 Consortium 2002 SAT-3/SAFE Consortium 2010 Glo-1 Globacom 2010 Main One Main Street Technologies 2012 Africa Coast to Europe (ACE) Consortium 2012 West Africa Cable System (WACS) Consortium

Existing East African Systems

RFS System Owners 2009 East Africa Marine System TEAMS Ltd. / Etisalat (TEAMS)

 46 2009 Seacom IPS / Remgro / Herakles / Convergence / Shanduka 2010 East African Submarine Consortium Cable System (EASSy)

Sub-Saharan Africa has 47 markets and dozens of operators with international bandwidth demand, none of whom are dominant on a continental basis, and many of whom were until recently paying inflated satellite capacity prices – so the buildout of multiple fiber systems on each coast may not have been as irrational as many observers assert.

Although the design capabilities of sub-Saharan Africa’s submarine cable systems will greatly exceed demand for the foreseeable future, the dynamics of the African telecommunications market allow it to support multiple submarine cable projects. Submarine connectivity offers the most cost-effective solution for the continent’s major markets, and most African operators are financially healthy and willing to invest in or purchase submarine cable capacity.

Prior to the buildout of next-generation African fiber between 2009 and 2012, most sub-Saharan African operators were limited to either unreliable, expensive satellite bandwidth or overpriced capacity on the monopolistic SAT-3 system. Operators’ investments in the next-generation fiber provides them with many times more bandwidth at a fraction of the cost they had been paying.

Although the African market may be fertile ground for multiple submarine cable projects, governments’ investment in incumbent operators and those operators’ control over international gateways and terrestrial infrastructure make it difficult for wholesale cable projects to succeed without the equity participation of operators within each landing country.

The perceived overbuild of Sub-Saharan African capacity is not similar to the overbuild of capacity on the transatlantic route in the late-1990s.

Unlike the transatlantic route, only two of the next-generation African systems are considered to be investor-led (as opposed to consortium- or carrier-led), and both reportedly received commitments from operators prior to their construction. Any bankruptcies of African cables would have a more limited impact than in the North Atlantic, due to the more direct participation of operators in submarine infrastructure. Furthermore

 47 the complexities of the African market make the commoditization of international capacity in the region unlikely.

7.4.2 New Systems The success of the newest African cables will be dependent upon the buildout of infrastructure throughout the terrestrial network, particularly at its extremities: backhaul and local access. Currently, both are generally controlled by former monopolies; their insulation from competition has arguably been the biggest obstacle to the full exploitation of next- generation international bandwidth.

For there to be significant South Atlantic demand between Africa and South America, there may need to be greater progress in economic development, geopolitical relations, Internet routing patterns, and Internet content development; in the meantime there is a more immediate opportunity for single-system connectivity between Africa and the United States.

At least four credible proposals are on the table for connectivity between Sub-Saharan Africa and South America; the most successful of these will focus on providing connectivity onward to the United States.

Proposed Sub-Saharan African Systems

RFS System Owners 2014 Atlantic Cable System (ACSea) Telebras / Odebrecht / Angola Cable 2014 BRICS Cable Imphandze Subtel Services (S. Africa) 2014 South Atlantic Express (SAEx) eFive (S. Africa) / Globenet (Oi) 2014 WASACE WASACE Cable Worlwide / Aterios Capital

7.5 South Asia and Middle East

7.5.1 Bandwidth and Capacity India, with international Internet bandwidth in excess of 1 Tbps as of 2012, is the leading generator of bandwidth demand in South Asia and the Middle East. India’s demand far exceeds the combined demand of the

 48 next four largest bandwidth markets, which in descending order are Saudi Arabia, the United Arab Emirates, Pakistan, and Iran.

As of 2012 India is the United States’ leading voice correspondent, with the number of international minutes between the two countries far in excess of the second- and third-place correspondents, Mexico and Canada. Direct and connecting international Internet bandwidth between the two countries is greater than 500 Gbps.

In less than ten years, between 2002 and 2010, the Indian middle- and upper-class (characterized as households with incomes in excess of USD$4,000 per year) grew from 13.8 million households to 46.7 million. Extremely impoverished households earning less than $1,000 per year fell from 65.2 million to 41 million. Yet despite the country’s income gains, middle- and upper-class households still account for less than 20 percent of the population. The size of the country’s so-called “in-between class,” classified as those households with income of between $1,000 and $4,000 per year and thus considered to be relatively poor but not explicitly living in poverty, has remained steady at more than three-fifths of the population. Specifically, as of 2010 there were 140.7 million households in the “in-between class,” representing 61 percent of all Indian households.

Although mobile voice services are affordable – Indian ARPU is among the lowest in the world at approximately 113 INR (USD$2) – broadband Internet services have failed to achieve significant penetration outside of the country’s upper class. A primary obstacle is the country’s low computer ownership, at only 6 percent of households. Affordable ADSL packages exist but fiber-based broadband services are significantly more expensive than in the rest of the world; the country’s largest Internet service provider recently launched a fiber-to-the-home service priced at INR 2,999 (USD$53) per month for the lowest bandwidth of just 1 Mbps. On the mobile side, 3G adoption has been weaker than expected, and has been affected by widespread consumer complaints about high prices, weak coverage, incompatible handsets, and “bill shock.” The latter was experienced by “a majority of customers who are subscribing to 3G,” according to telecom analysts at Goldman Sachs. The analysts observed that watching one hour of a sporting event via 3G typically costs 300 INR (USD$6), far in excess of what most consumers were willing to pay.

The concentration of Europe-to-Asia cable systems in the Gulf of Suez was a concern of telecommunications operators since the 1990s. Fears of catastrophic cable outages were realized multiple times, most notably

 49 in 2008 when Sea-Me-We and FLAG cables were cut simultaneously, prompting speculation of a political or military conspiracy. Frustration increased when Egyptian authorities delayed the landing of new cable systems in order to allegedly accommodate surveillance requirements put in place by the Egyptian Office of Military Services and Reconnaissance. Cable operators’ concern was further heightened by the political uncertainty accompanying the Egyptian Revolution of 2011. Simultaneous cable outages in Egypt have resulted in the loss of as much as 80 percent of India’s international bandwidth.

Various routings have been constructed or proposed in order to compete against cables passing through Egypt. One of the first submarine alternatives was the SAT-3/SAFE project which in 2002 provided the first Europe-Asia connectivity via South Africa but with greater latency. Fiber optic systems connecting India eastward started to appear at approximately the same time but created an equally-risky chokepoint in the Strait of Malacca. Then in 2011, largely as a result of political uncertainty in Egypt, plans were finalized for multiple terrestrial networks bypassing Egypt to the east including Europe Persia Express Gateway (EPEG), Regional Cable Network (RCN), and Jeddah-Amman-Damascus-Istanbul (JADI Link). Notably, options for American operators wishing to bypass Egypt are restricted by U.S. Government-imposed economic sanctions against Iran, Syria, and Sudan so that American operators wishing to invest in projects bypassing Egypt are effectively limited to two relatively narrow passages across the 4,700-kilometer expanse between western Sudan and eastern Iran: a 200-kilometer-wide corridor in the Kurdish-inhabited area along the Iraq-Turkey border, and a 400-kilometer-wide corridor through Jordan which would require a submarine connection via Lebanon, Israel, or the Gaza Strip.

In the mid-2000s it appeared that the string of Sea-Me-We systems, led by most of the dominant operators along the route, would continue. In 2007 the Sea-Me-We-5 consortium held a meeting in Gibraltar but BT, which had originally emerged as a leading proponent of Sea-Me-We-5, reportedly called for the dissolution of the consortium when it perceived that France Telecom was not fully committed to the project and would instead be devoting its effort to the I-Me-We project. By the following year Sea-Me- We-5’s members had chosen between either I-Me-We and Europe India Gateway, with the majority opting for the latter. Although both I-Me-We and EIG encountered difficulties in their development, EIG’s were more severe and when the system was activated in 2011 its connections through Egypt remained incomplete.

 50 Existing South Asian Intercontinental Systems

RFS System Owners 1997 FLAG Europe-Asia (FEA) Reliance Globalcom 1999 Sea-Me-We-3 Consortium 2002 i2i Bharti Airtel 2002 SAT-3/SAFE Consortium 2004 TGN-TIC Tata Communications 2005 Sea-Me-We-4 Consortium 2006 Falcon Reliance Globalcom 2009 Seacom / TGN Eurasia IPS / Remgro / Herakles / Convergence / Shanduka 2010 I-Me-We Consortium 2011 Europe India Gateway (EIG) Consortium 2012 Gulf Bridge International Gulf Bridge International / (GBI) / MENA Orascom Holdings

7.5.2 New Systems Bharti Airtel, China Mobile, China Telecom, France Telecom, Saudi Telecom Company, and Singtel have been identified as the leaders of the new Sea-Me-We-5 consortium, which is reportedly considering options to bypass Egypt. The project would be the first Sea-Me-We endeavor with strong influence from Chinese operators, and would compete against the roughly one dozen international cables already serving India, as well as two other proposed systems: the BRICS cable, which would be the first system to provide a direct link between India and the United States, and the proposed “Tagare Cable.”

Proposed South Asian Intercontinental Systems

RFS System Owners 2014 BRICS Cable Imphandze Subtel Services (S. Africa) 2014 Sea-Me-We-5 Consortium 2014-2015 Tagare Cable Neil Tagare / Consortium

 51 Unique Geography Wholesale Solutions

EGYPT

[email protected] 7.6 Australia and New Zealand

7.6.1 Bandwidth and Capacity The rollout of the $40-billion Australian National Broadband Network (NBN) is well underway, with more than 3.5 million residences and businesses set to be connected to fiber by 2014 and fiber connectivity for more than 90 percent of the population by 2021. The NBN, with its promise of 1 Gbps connectivity to the home, has the potential to be a severely disruptive technology from the perspective of bandwidth demand.

Four operators, Telstra, Optus, Telecom New Zealand, and Vodafone Hutchison, control over 90 percent of the consumer market in Australia and New Zealand; the success of any long-haul submarine system serving either of these markets will likely be dependent on the participation of one of these four operators.

As for submarine cable capacity, Telstra has AJC and Endeavour; TNZ and Optus have Southern Cross. The major only operator without a direct investment in transpacific infrastructure is Vodafone Hutchison, which indicated in late-2011 that it intended to switch its capacity from Southern Cross to Pacific Fibre. Consequently, the region’s three largest operators largely control the dynamics of both demand for and supply of international bandwidth.

Existing Australia/New Zealand Intercontinental Systems

RFS System Owner(s) 1997 Jasaurus International consortium of carriers 1999 Sea-Me-We-3 International consortium of carriers Southern Cross 2001 Cable Network TNZ / Singtel Optus / Verizon (SCCN) Australia-Japan 2002 International consortium of carriers Cable (AJC) 2008 Endeavour Telstra Pipe Pacific 2009 TPG Telecom Cable-1 (PPC-1)

 53 7.6.2 New Systems Pacific Fibre has faced a variety of obstacles: a risk-averse financing environment; a dominant cable system that was able to single-handedly alter the dynamics of the marketplace, making business plan forecasting extremely difficult; and the defection of Pacnet.

The business plan of Pacific Fibre were impacted by other cable operators’ simple ability to “move the goalposts,” particularly with respect to the pricing of capacity. The financing of any private cable system is increasingly difficult in the current economic environment, but Pacific Fibre’s head-to- head faceoff with incumbents was exceedingly challenging.

Once the next-generation networks begin to achieve significant levels of penetration, government support and popular expectations for Australia’s NBN and New Zealand’s Ultra Fast Broadband Initiative will likely lead to demand for more abundant international bandwidth in order to ensure a quality experience for the networks’ customers. Because the majority of international demand in the region is still directed toward North America, it is expected that there will be a strong business case for a new transpacific system to Australia and New Zealand in the near-future.

Sources have indicated that the Pacific Transit Cable, first proposed approximately 12 years ago as a South Pacific link between Australia, New Zealand, and Chile, is once again under consideration.

Proposed Australia/New Zealand Intercontinental Systems

System Owner(s) Australia-Singapore Cable (ASC) Leighton Contractors Telecom Australia-Singapore Submarine JPC International Cable (ASSC-1) Matrix Cable System Expansion Matrix Networks Pacific Fibre Pacific Fibre Ltd. International consortium of car- Pacific Transit Cable riers Southern Cross-2 TNZ / Singtel Optus / Verizon

 54 7.7 Polar Route Long considered outside the realm of practical possibility, the concept of a trans-Polar cable has never been more credible with respect to each of the major considerations: technology, economics, and geopolitics. Cable projects have been proposed by investors from each of the three largest powers present in the Arctic, although each has varying degrees of support from their home governments. Given the strategic importance of the Arctic region with regard to petroleum and gas deposits, freshwater, seafood, and transport, it is expected that government support for each prospective project will increase, with the projects allowing for increased influence in the region and also expanding surveillance capabilities.

Proposed Polar Systems

RFS System Owners 2014 Arctic Fibre Arctic Fibre, Inc. 2014 Arctic Link Kodiak-Kenai Cable Co. / Khanjee Holdings 2014 Russian Optical Trans Government of Russia / Polarnet Arctic Cable System Project Ltd. (ROTACS)

The Arctic Fibre system, led by Canadian investor Douglas Cunningham, would connect Japan, Alaska, and the United Kingdom via northern Canada, with the possibility of future expansion to China. The project would provide a route between North Asian and European markets, avoiding what company representatives identified as “problematic areas” including the Luzon Strait, the South China Sea, the Suez Canal, and the Mediterranean. A low-latency path of 168 milliseconds would be created between London and Asian destinations including Tokyo, Seoul, and Shanghai. The project would also seek government support to provide connectivity to Arctic communities in both Canada and Alaska as well as the proposed Canadian High Arctic Research Station.

Arctic Link, led by the Kodiak-Kenai Cable Company and Khanjee Holdings, was originally proposed as an extension of a proposed Alaskan domestic network, Northern Fiber Optic Link, which unsuccessfully applied for stimulus funding under the Broadband USA component of the American Recovery and Reinvestment Act. The project would connect Alaska to the United Kingdom and Japan.

 55 ROTACS and its predecessor, Polarnet, have been under consideration since at least 2002, and can be considered as the first serious proposal for Arctic connectivity, having completed route surveys in 2003. The project was effectively shelved between 2005 and 2011, but comments from the Russian government in 2011 indicated that the system, connecting England, northern Russia, and Japan, would receive its support.

 56 innovative. independent. inspired. 8.0 Conclusion With $10 billion of new investment over the last five years, the submarine industry successfully recovered from its crisis period of 2003 to 2007 (when the market contracted to one-eighth of its value over the preceding five years). $20 billion worth of credible projects are on the drawing board; the question that will shape the industry is: are they quality projects?

On paper, it would seem that most of them are. Developing markets, long deprived of affordable and abundant international bandwidth, continue to be targeted and Latin America has been of particular interest in an effort to compensate for more than a decade without a new Brazilian intercontinental system. Bold new endeavors to transit and serve the Arctic are gaining credibility. Vast interregional systems look to interconnect markets that could previously only reach each other via costly transit paths through developed markets.

On the one hand, the industry seems to be returning to its roots as carrier participation is the new key to project success. On the other hand, new players continue to appear. Google confounded market observers in 2007 when details of its investment in a transpacific cable began to emerge. Five years later Facebook has entered the fray, and a new wave of over-the- top (OTT) content providers seem ready to use international bandwidth infrastructure to directly tackle one of the major threats to their business models: poor network performance.

As with all industries, the global economic crisis has slowed the development of many projects, not only those seeking private financing but operator-led systems as well. However the case for increased connectivity and a new way of connecting markets is a viable one and solid opportunities exist, particularly with the right local partners.

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