Developing an Explanatory Model for the Firm Investments in Submarine Optic Telecommunication Cables

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Developing an Explanatory Model for the Firm Investments in Submarine Optic Telecommunication Cables Developing an explanatory model for the firm investments in submarine optic telecommunication cables A case study of the investment behaviour to the Netherlands and Spain R. Kamerling Developing an explanatory model for the firm investments in submarine optic telecommunication cables A case study of the investment behaviour to the Netherlands and Spain by Rens Kamerling Student number: 4097408 in partial fulfilment of the requirements for the degree of Master of Science in Complex Systems Engineering and Management at the Delft University of Technology, to be defended publicly on 05/06/2018 Graduation committee Chair: Prof. Dr. B.A. Van de Walle, Faculty of TPM, section Policy Analysis First supervisor: Dr. A.F. Correljé, Faculty of TPM, section Economics of Technology and Innovation Second supervisor: Dr. M.L.C. de Bruijne, Faculty of TPM, section Multi-Actor Systems External supervisor: R. N. Barker, MSc. Ministry of Economic Affairs and Climate Policy of the Netherlands, department Telecom market ii Acknowledgements This thesis is the final deliverable for the completion of the Master program Complex Systems Engineering and Management (Before: Systems Engineering, Policy Analysis and Management). It is the end result of my research at the Ministry of Economic Affairs and Climate Policy of the Netherlands and the Delft University of Technology. This work is intended for everyone who is interested in the investment behavior of firms in submarine communication cables. Writing this Master Thesis proved to be challenging in terms of effort, persistence and knowledge. I would not have been able to complete this document without the help of a number of people, both personally and professionally. In respect to my commission I want to thank my first and second supervisors Aad Correljé and Mark de Bruijne from the Delft University of Technology. Meetings with them gave me a lot of new insights and motivation. Their feedback also helped me to structure my research problem and to improve the quality of my research. Next I want to thank the colleagues of the Telecom Market department of the Ministry of Economic Affairs and Climate Policy for giving me the opportunity to perform my graduation project in the Ministry. In particular I want to thank my external supervisor Robert Barker. I would not have made it without his feedback and support. I also really enjoyed our conversations about telecommunication and politics. Furthermore I would like to thank the chairman of my graduation committee, Prof. Bartel van de Walle, for his input and guidance during the meetings. Lastly I would like to thank my family and friends. My parents have always (financially) supported no matter what, I am very grateful for that. Also, thanks to my roommates, friends and sister who have made my study in Delft unforgettable. Rens Kamerling The Hague, May 2018 Image frontpage: Sps-cables.com iii iv Summary of the thesis There is an increasing demand for transit data worldwide, due to development in mobile computing and cloud services. (SubOptic; Submarine Telecoms Forum, 2016). For countries it is important to be well connected in the global internet infrastructure. High quality connections improve the performance of a country (OECD, 2003). About 95% of all the data transit in the world flows through submarine communication cables and therefore this type of infrastructure is important. The submarine optic cables that land in the Netherlands were constructed between the years 1996 and 2001. This means that new investments are required in the near future, because the average lifespan of a cable is 25 years. Therefore the Ministry of Economic Affairs and Climate Policy of the Netherlands is interested in the factors that influence the potential investments of submarine communication cables to a country. This information is useful evaluate policy options for submarine communication cables. The research question in the thesis is: ‘What factors explain the investment decisions in submarine communication cables? The thesis creates an explanatory model which explains firm investment behaviour in submarine communication cables. First a brief introduction to the history, the technology and the repair construction and repair operations of submarine communication cables is created. Also an overview is created of the interconnectivity market. This is the basis for the rest of the analysis since it identifies the investors. Secondly the research framework was created. As a first step interviews were conducted with governments, interest groups and investors. Based on the outcomes of the interviews and industry documents a research framework was created by combining different theories that can explain the investment behaviour of firms. The chosen theories are; the resource-based view, transaction cost theory and the transaction cost regulation. The first theory, resource-based view, explains the behaviour of firms based on their individual resources. This perspective was very useful to understand the business model and investment strategies of telecom operators. This theory however could not explain the business model and behaviour of platform companies. That is why complementary to the resource based view the transaction cost theory was applied. With the use of this theory more understanding was created about the investment in submarine cables by content and application providers, which is part of a vertical integration strategy. The theory also highlights the effect uncertainty has on investment decisions of telecom carriers and content and application providers. Thirdly the transaction cost regulation theory analysed the particular nature of the interaction between investors and governments. From every sub-analysis factors were obtained based on the theory. These factors explain a part of the investment behaviour. The factors that together explain the investment behavior are put together to make a first version of an explanatory framework that explain firm investment behavior. The first version of the framework was validated via a small, focused comparative qualitative case study which compared the relative attractiveness between the Netherlands and Spain. In the last step of the research the developed framework and the comparative qualitative case study between the Netherlands and Spain is used as validation. It also v to provides policy recommendations for national governments and thus the Ministry of Economic Affairs and Climate Policy. Below three sub questions of the thesis are answered: - How does the interconnectivity market work and which actors are active on this market? In the interconnectivity market companies sell and buy data transit services. The two types of market players that invest in submarine cables are internet service providers, such as British Telecom and Verizon and content and application providers (CAPs) such as Facebook and Microsoft. Most of the data transit flows through submarine communication cables. The technology of the submarine telecom systems is changing rapidly. Due to new types of modulation, improved signal repeaters and ‘purer’ fibres the capacity increased rapidly. However to even further increase capacity different types of multi-cored fibres and new types of modulation will be required in the future. In recent years most telecom operators chose to upgrade the dry plant of the cables system. However there is a technical and economic limit to these upgrades. Therefore new investments in the wet plants of submarine communication cables will be required. - Which factors influence investments in submarine communication cables? Table 0 on the next page lists all the factors that influence investments in submarine communication cables to a country. The list provides an overview of the factors that can be influenced by the government and the factors that cannot or barely be influenced by the government. There are regulatory, geographical, demographical and asset specificity issues. Content and application providers and telecom operators consider the factors of different relative importance. CAPs prefer to diversify their supply chain between their data centres. Telecom operators have different investment strategy and connect regions with a large demand for data transit to sell data transit services. - Which of the factors can be influenced by the Ministry of Economic Affairs and Climate Policy to facilitate investments in submarine communication cables to the Netherlands? The explanatory model that was developed in this study shows that national governments, like the government of the Netherlands, have a limited amount of policy options to influence firm decisions to invest in submarine communication cable landings. Table 0 shows the factors that can be influenced by a government. The first policy option is to increase or decrease the ‘guaranteed maintenance zone’ for submarine cables. In the case of the Netherlands the government could restore the minimum maintenance zone from 500m to 750m on both sides of the telecom cables. The current maintenance zone of 500m is below the international industry standards. This created a disagreement between the Ministry and different telecom operators. The telecom operators argue that they cannot maintain and repair some of their cables which cross a windfarm at sea due to the decreased maintenance vi zone. Therefore the reduction of the maintenance zone might have a deterrent effect on willingness to invest in submarine telecom cables to the Netherlands, since there is a higher risk involved for
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