Will global telecom connectivity see more upheaval in 2017?
In the face of huge demand, no one doubts the subsea telecom and data center sectors are highly dynamic. The problem? This dynamism is bringing its own challenges.
What drives everything?
The Internet infrastructure business is seeing boom times. Global demand for data centers and the fiber connections to link them has probably never been greater because of “cloud services, mobile data, and content” reports Anthony Rossabi, Managing Director, Colocation and Connectivity for Digital Realty, a major data center operator.
Alongside many factors, much of this demand in turn stems from burgeoning smartphone activity by users everywhere. “The use of handheld devices of all kinds is driving the use of content, particularly in streaming applications,” says Rossabi. “I think you will see that continue to evolve.”
Unlike 2G systems, mobile broadband represents a step change in traffic demand for the industry. LTE and 4G deployment deliver “enormous traffic throughput” says Bill Barney, CEO of Global Cloud Xchange (GCX), a service provider owning a global networks of subsea cables, landing stations, terrestrial networks and network platforms. “[Service providers] have to get [this mobile traffic] off the air and into the ground as quickly as possible as a matter of efficiency,” he says. He suggests there will be an ongoing “huge opportunity” in big pipe strategies to meet this, especially in emerging markets still facing the early stages of mobile data demand.
As a result, alongside data center expansion, cable build is happening more or less everywhere. “The sector is really healthy at the moment, with a lot of new cables being built,” says Sean Bergin of APTelecom, a telecom and fiber consulting company specializing in emerging markets. “There are multiple new systems on the trans-Pacific routes as well as trans-Atlantic. The other area to watch is the South Atlantic where build is also driven by the need to have logical bypass around existing choke points.” Meanwhile intra-Asia subsea cable network building has “gone crazy” says Bergin.
March of the content players
In an already heated market, there are additional players from outside the established telecom community appearing with ambitious plans of their own. Some of the biggest names in the global ICT community– Microsoft, Google, Facebook and Apple– have announced major builds or are thought to be preparing to finalize their involvement.
By common consent, with their enormous user base and available capital, these so-called OTT players are impossible to ignore. ”It is the large content and digital media folks driving the build,” says Digital Realty’s Rossabi. “It is a huge swing in terms of where the business is heading.” Alex Vaxmonsky, Director of Ecosystem Development at Equinix, a major data center operator, acknowledges the market has changed in terms of how it is being influenced: “The overwhelming amount of these projects are still consortium-based but no one is going to be financed without one of [the big content players] as part of the mix.”
He says typical of the major projects now underway is the Monet cable system linking the U.S. and Brazil where Google is an investor and landing party. Monet will be terminated at an Equinix data center in greater Miami essentially running POP to POP and bypassing the traditional beachhead cable landing station installation. Vaxmonsky calls the resulting configuration “unprecedented”. “It has transformed the subsea industry,” he says.
John Hjembo, Senior Analyst at Telegeography, a consulting firm, suggests that “given content is the driver of transport network demand, these companies are increasingly driving subsea network demand” too. AP Telecom’s Bergin likewise contends that the entry of these so-called OTT players is probably “the biggest trend in the industry with the most impact” and represents “a massive change” given these players were previously clients of system owners.
GCX’s Barney, argues the logic of big non-traditional players building facilities. “It is no surprise that they invest in submarine cables and in data centers,” he says, “these firms are at the growth pinnacle of the Internet and are constantly optimizing their operations. That is where the focus is and continues to be.”
Nevertheless, OTTs do have a choice and build is not necessarily a given every time. John Hibbard of Hibbard Consulting notes that many players in the content space are still choosing to buy capacity rather than actually build it. Apart from the major players, “the others are tending to buy and be a party rather than being the driving force in cables,” he points out.
Where they do build, APTelecom’s Bergin points out that the OTT players use a “completely different business model” to traditional telco and consortia systems: “The carrier involvement in submarine cable is about fulfilling their own internal requirement and then in the onward selling of excess capacity at a margin, whereas OTT is all about self-consumption…these players are not out there selling capacity back to the carriers.”
Large customers becoming operators is clearly a major trend in the industry, says GCX’s Barney but he suggests “it is a double-edged sword because most [private system owners] don’t really want to be telephone companies.” If they were interpreted to be such, says Barney, this might subject them greater regulatory and taxation burden in many countries.
A new supply chain?
Regardless of what individual players do, most executives say they sense an ongoing dynamic inside the industry that will continually need to reinvent itself. With new players and new demand, many say they see an industry that may look quite different in the future.
Barney predicts structural changes but with an outlook that sees the Internet connectivity community evolving to emphasize a supply chain methodology that is capable of connecting to demand and content everywhere but on an increasingly planned basis.
In this, he argues it would be logically similar to other global industries such as the oil production and distribution industry. “We are seeing an Internet supply chain emerging and an ecosystem that drives the Internet,” he concludes. In this streamlined view, providers will build networks and data centers that align to local demand, low cost power and open content resources essentially protected from outside control. Cable connectivity in this ecosystem will then be brought in as most markets still need access to content created and stored elsewhere, he says.
This rapid configuration character may already be developing. Timescales in terms of delivery of new facilities and services have “definitely shrunk” says Digital Realty’s Rossabi and he predicts more companies will search out efficiencies in the supply chain. He points out, “I think there is a huge focus in terms of how quickly and efficiently you can deliver a data center.” Barney agrees. “As the Internet gets larger and larger, we are going to see the optimization in those areas.”
Is more disruption on the way?
But this ecosystem may still be tricky to get right every time. Building new facilities may meet demand but also increase competitive pressures and often erodes service prices in the process. Scaling this erosion up, a bigger risk, according to some, is too much capacity chasing too little demand in the wrong place at the wrong time, and it is a scenario that the subsea sector in particular has experienced before. “There are potential tendencies to overbuild in specific markets,” reflects Digital Realty’s Rossabi.
He is not the only one taking this possibility seriously. “When you have a huge demand spike everyone invests very quickly,” says GCX’s Barney. “We are seeing new trans-Pacific and trans-Atlantic systems coming and, in my view, there’s not really a requirement for that much capacity in the marketplace.” Consequently, Barney predicts “another bloodbath” [for suppliers and investors] but one that will eventually “work its way through” as demand catches up. In this, the data center community, with an ability to stage its investment, may fare better than the subsea telecom sector which generally needs ring-fenced investment upfront.
There will be winners as well as losers, however, and the smartphone demand may end up causing bigger upheavals still. Some suggest in its very dynamism, the wireless sector may ironically be far more vulnerable to market changes than its fixed line counterpart. Wireless companies– particularly in emerging markets– may struggle to restructure to meet a shift from voice to data services much as fixed line players did 15 years ago. Barney says he is expecting a “reset” to take place in the foreseeable future: “Some companies will consolidate and a lot will go out of business.”
But in the heat of the marketplace, many fixed line players will be able to benefit from exploding mobile data demand and the Internet cycle will be into a new phase.
The only sure thing? It will continue its relentless dynamism.