According to Elfenbein, there is a normal glut of capacity as the industry transitions from one cycle of development to another. The industry is currently in the middle of a transition period that will last one to three years. The excess capacity will disappear when new bandwidth hungry applications arrive. However, he warned that there "will be a lot of carnage in the industry" before the new cycle starts.

Looking at the current crisis in the undersea cable industry, the challenges, however daunting, are not unique. And they are understandable in a fundamental economic context.

According to keynote speaker Dr. John Kasdan, senior research fellow at the Center for Tele Information at Columbia University in New York, submarine telecom woes resemble those of the airlines, the early days of telephony, and the railroads. But unlike many press accounts that use the railroad analogy to imply a massive industry meltdown, Dr. Kasdan digs deeper and strikes optimism.

The railroads, airlines, early telephony, and the submarine telecom industry share certain characteristics, he says. First, the capital expense of building a system is high, while the variable cost of service is low. Second, when variable cost is less than average cost, there is no "invisible hand" to determine equilibrium price. In such an industry, Dr. Kasdan says, "we can't expect perfect competition, but usually won't have a monopoly. Railroads suffered from ruinous competition in the 19th century until the creation of the ICC. Airlines were a regulated cartel until the 1980s. And telephony for most of the 20th century consisted of the regulated AT&T and the governmental PTTs. An industry with sunk costs, such as submarine telecom, needs to assume a stable oligopolistic equilibrium."

Dr. Kasdan concluded that the submarine telecom industry does not have the barriers to entry associated with large monopoly profits. He says, "It is likely to have excess capacity which can produce price wars. As with airlines, it appears that an industry structure will develop allowing participants to make a normal or slightly super-normal profit."

Keith Schofield, Program Director for Global Operations Engineering Services at Cable & Wireless, says the new model for survivors requires rationalization and consolidation. Among the key ingredients are low cost for service and a return to an orderly market. "It's likely to be a long hangover," he says, though he noted that demand is still healthy.

Distressed assets were the topic of a presentation by Piers O'Connor, President of Bias/Pics Ltd., a business development consultancy in Rio de Janiero, Brazil. O'Connor emphasized the South American region in his presentation, though his observations apply equally well to assets everywhere.

"The initial step must be to clear the oversupply," said O'Connor, suggesting that consolidation of some assets might be helpful, but wondering how that would be achieved. He also suggested that some new cables might be abandoned.

Worldwide, more than 200,000 route-km of submarine cable are considered distressed due to the financial condition of their owners, according to KMI Research. Among these is a who's who list of some of the most aggressive carriers and ambitious submarine projects of the recent past.

O'Connor observed that although major telecom carriers are currently weak financially, they must participate in the rescue efforts of other companies that are failing. He said that major telcos could return to the consortium style of cable project. Concerning the future, O'Connor said that demand is increasing, but more slowly than envisioned.

One sector in which demand will be visible, said KMI's George Miller, is unrepeatered links. Like the case with terrestrial traffic moving between the long-distance and metropolitan networks, submarine network traffic often transits an ultra-long-haul or long-haul system to regional systems, many of which comprise unrepeatered links.

Unrepeatered links have been installed around the world since the mid-1990s, many incorporating DWDM technology. Bandwidth demand has been growing on these systems, chipping away at available capacity. As these systems reach their capacity limits, carriers will need to prepare for either DWDM or cable system upgrades.

Even in these times of tight capital spending, Miller expects unrepeatered upgrades to account for a growing proportion of submarine market activity. Such upgrades require less capital and have a more readily quantifiable return on investment compared to long-haul and ultra-long-haul builds.
(Reprinted from KMI's "Fiberoptics Market Intelligence" newsletter. For subscription information, visit www.kmicorp.com.)

Newport Conference Focuses on Survival
KMI's 25th Annual Newport Conference on Fiberoptics Markets is scheduled for October 7-9, 2002, in Rhode Island. Rather than focusing on what went wrong, the show will highlight market trends and analysis to help subsea cable companies get their businesses back on track.