By KEN BELSON
It has been several years since executives in the undersea cable industry had anything to cheer about. Nearly every company that strings fiber optics across oceans has been restructured or has gone bankrupt. Lease prices for cable lines have collapsed and are still falling. Bankers pulled the plug on most new projects long ago because so much cable was already sitting at the bottom of the ocean.
Yet announcements came in February and March that two new large cables would be built under the Indian Ocean, the Persian Gulf and the Mediterranean Sea to connect East Asia with Europe via the Middle East.
The projects - the Falcon cable financed privately by Flag Telecom and the Sea-Me-We 4 line built by a consortium of global telephone companies led by Singapore Telecommunications - are nothing if not ambitious. The cables, which were several years in the planning, will stretch more than 9,300 miles, touching some of the more underserved parts of the globe. Flag did not announce a price tag for its project, but the consortium said it would spend $500 million on its line.
Internet use is surging in many of the countries to be served by the cables - particularly in India, where Western companies are shifting some of their data businesses. And demand for high-speed connections will certainly grow in places like Bangladesh and some countries in the Persian Gulf that have had little access to global undersea networks.
But the operators of the new cable lines face the same problems that sank many competitors. Chief among them is that the amount of capacity being added far outpaces growth in Internet use and demand for long-haul lines. Until this changes, prices will slide, making it harder for investors to recoup the hundreds of millions of dollars they are putting into these projects.
"They are not pipe dreams by any means," said Julian Rawle, an analyst at Pioneer Consulting in Boston, referring to the two projects. "There is certainly demand, especially from the Indian Ocean looking west." But with so much new cable being laid, he said, "we'll see the same kind of prices collapse like they had in the trans-Atlantic market."
That raises the question of how much the cable operators and builders have learned from the spectacular collapse of the bandwidth bubble of the late 1990's.
"Ye have little faith," said Patrick T. Gallagher, chief executive at Flag, which emerged from bankruptcy protection in 2002 and was bought by Reliance Industries of India in January. "All of us have scars on our back from the 90's. I'm not more conservative than I was in the 90's; I'm just wiser."
Mr. Gallagher would not specify the profit he expects the Falcon project to generate, but called his business plan prudent. By 2010, demand in Iran, Oman, Kuwait, Qatar and Bahrain, where the Falcon cable will land, is expected to grow tenfold, according to Ovum Research, a technology research firm. The price of building cables has also fallen by about two-thirds since the peak of the bubble, reducing the needed investment, Mr. Gallagher said.
Mr. Rawle also expects demand for data links from countries in the Indian Ocean, Persian Gulf and Red Sea to the rest of the world to increase 38 percent a year on average through 2013. The problem is that technological innovations have evolved so fast that the capacity of the Sea-Me-We 4 cable - able to carry 32 times more data than Sea-Me-We 3, an older cable also under the Indian Ocean - is likely to far outpace future demand.
As it is, 11 percent of available undersea bandwidth globally is being used. With so much unused capacity, prices on leased lines across the Atlantic fell about 25 percent last year even as demand doubled, said Alan Mauldin, an analyst at the research firm Telegeography. There is so much unused bandwidth worldwide, he said, that three-quarters of all network operators would have to leave the market before prices stabilized.
Part of the problem, too, is that many companies are trying to reduce their debts and, to generate income, are slashing prices. Others, like Tyco International, are trying to sell their network businesses entirely, further deflating the market.
"The frightening part," said Stephane Penzo, an analyst at another research company, RHK, "is that prices can still go lower." He added that "it will take a decade" for prices to recover.
In theory, lease prices for cable lines between Asia and Europe in isolation could withstand the pressure of declining prices, analysts said. But in reality, prices will probably be dragged lower because big corporate customers often lease lines from, say, San Francisco to Mumbai, and network operators often offer discounts to win big contracts.
The huge amount of bandwidth being installed in the Middle East, where Internet use is still developing, is likely to force prices lower. Even in the Indian Ocean region, where demand is robust, prices fell more than 60 percent last year because of competition, according to SubCableNews, an industry newsletter.
Even Mr. Gallagher of Flag conceded that prices along the Falcon route, which will start operations in 2005, are bound to fall. He also said he no longer created 10-year business plans because it was too hard to forecast that far into the future.
In the short-term, though, the projects will provide a welcome lift to the construction companies that lay the cables across oceans and build base stations on land. The Sea-Me-We 4 project will funnel $500 million to the lead builders, Alcatel and Fujitsu, and the other vendors who will contribute to the construction of the cable.
"It was like a nuclear winter," said Jean Godeluck, president of Alcatel's submarine network activities in France, referring to the last few years, when business shrank rapidly. "We feel we are coming back to a situation that is more normal. But it is too early to say we will go back to where it was."
Most analysts do not expect the two new cable ventures to usher in an era of new building. The $500 million price tag for the Sea-Me-We 4 project is small compared with the $8 billion companies spent laying cables during the peak of the bubble.
The submarine cable industry's woes have a silver lining, though. Rock-bottom prices on cable leases mean that phone companies and Internet providers can offer cheaper long-distance calls and Internet connections, a boon to consumers and corporations. That, in turn, is helping increase Internet use - which in turn is good news for companies that depend on online sales and other activities.
"If you're a buyer, that's the side you want to be on," said David W. Dorman, the chairman and chief executive of AT&T, which has not built undersea cables since 1999. "Any time I hear someone is going to build another cable, we go, 'Bravo.' " But Mr. Dorman added that as a business proposition, "I wouldn't be putting any new cable into the ocean right now."
Copyright 2004 The New York Times Company
