water-1555170_1280.jpg

The Irrational Exuberance of Submarine Cable Bubbles

Network Spotlight

By Jayne MillerJun 12, 2017

Share

Things are going well in the submarine cable industry. (Exhibit A. Exhibit BExhibit C.) But is it too good to be true?

Those who have been following the market have seen it all before. About 15-16 years ago the industry was growing at a similarly fast rate, only to see the bubble burst shortly thereafter.

This overall similarity in market growth led TeleGeography's Tim Stronge to ask how today's submarine cable market compares to the one that popped in the early 2000s. He shared his findings at the PTC annual conference earlier this year.

Lucky for us, Tim was willing to sit down and talk a bit more about his presentation, sub cable bubbles, and the state of the cable market. You can listen to the conversation here or read it all below.

Jayne Miller: Alright. I appreciate you talking the time to talk for a couple minutes about submarine cable bubbles.

Tim Stronge: Well, I didn’t really have a choice, Jayne. I’m an employee here and I was told I had to do this.

JM: That’s a good point. Our listeners should know that as a TeleGeography employee you’re mandated to do a Spotlight with me. Them’s the rules.

But what we’re gonna talk about is a presentation you gave earlier this year at PTC. Widely, highly—critically acclaimed presentation all about submarine cable bubbles. So why don’t we start with a little background and history on what this presentation was about. And the bubble you spoke about that bust 15 years ago, I believe it was.

TS: Well, what’s going on now, and the reason I wanted to talk about it at PTC, things are going pretty well in some respects in the submarine cable industry. So well, in fact, that it makes a lot of people a little nervous. It reminds them of how fast the industry was growing 15-16 years ago. There is a tremendous amount of new capacity being added. And on a lot of routes where we thought it would be a long time before we saw a new cable, there are several new cables that are being installed—the Atlantic, Pacific—on core routes that already had a lot of capacity.

People are beginning to wonder is all this good news too good? Is it a bit of a bubble that we’re now in? So we thought it would be interesting to test what happened in that bubble 15 years ago. Why did it burst and are the conditions similar today?

JM: That’s interesting, so there’s a lot of relevance in 2017 to the conditions of years past. What are some of the findings there? How did the comparison work?

TS: Yeah, so we looked back at what happen in 1999, 2000, 2001, and there are several different factors that helped build that bubble and eventually caused the burst.

One was this idea that there was gonna be a huge amount of future demand, and possibly it never materialized. Another was this feeling of irrational exuberance. There were a lot of poor investments in the industry. People really wanted it to succeed and they didn’t really test it properly.

Third was just the wholesale cable model itself, which I could get into in a moment if that would be helpful.

One was this idea that there was gonna be a huge amount of future demand, and possibly it never materialized. Another was this feeling of irrational exuberance. There were a lot of poor investments in the industry. People really wanted it to succeed and they didn’t really test it properly.

A fourth really big problem was that there was a gigantic amount of CAPEX spending that went into build all these cables at the same time, which required a real quick return, which didn’t materialize.

And the fifth and final one, which is really the killer, is a really big scope for price decreases. Prices fell really fast.

JM: Well, you prompted it so I have to follow up—let’s get a little into the wholesale element. What are some of the topline things our listeners should know about the wholesale cable influence that led to the eventual burst of this bubble?

When prices fell, they were in a really tough spot. They had to match their competitors' prices and they weren’t getting sufficient demand to make the payments.

TS: Yeah, so a lot of the companies that were building the cables 15 years ago were not themselves direct users. They instead had the idea that they would turn around and resell the capacity they built on these cables to the actual users in the industry. That placed them in a precarious position because they had to get a quick return on the CAPEX spending that they had raised—partly equity markets, but even more dangerously from debt. And when prices fell, they were in a really tough spot. They had to match their competitors' prices and they weren’t getting sufficient demand to make the payments.

JM: I guess everyone has a bottom line. And that’s a driver here.

TS: And it went below the bottom line for almost all companies that were serving across the Atlantic and many across the Pacific. So almost all the cables we’ve used for the last 15 years were bankrupted.

JM: I guess I have to ask, then, since we’re examining this now in the context of 2017, is there anything different about today that’s worth noting? Maybe it’s more important to talk about what’s the same…but what makes 2017—

TS: There are a few things that are the same. There’s a lot that is different. One of the things that’s different: we don’t get the sense of irrational exuberance. People are far more sober. And, if anything, the bankers we talk to are a little too conservative in these respects. They remember what happened 15 years ago and they assume it’s gonna happen again—but a lot of the conditions are different.

We do forecast that prices are going to fall. And they’re going to continue to fall for a long time, but there is a cost floor out there and the scope for prices decreases are far smaller compared to what they were 15 years ago.

Another difference is the big CAPEX spending. We’re not seeing billions and billions and billions all at the same time all on the same route. Because there is no irrational exuberance, the bets are being placed more carefully, more strategically, and, generally, when there’s proven demand on a route.

And another area where there’s a big difference is the scope of the price decreases. We do forecast that prices are going to fall. And they’re going to continue to fall for a long time, but there is a cost floor out there and the scope for prices decreases are far smaller compared to what they were 15 years ago.

JM: I have one last question that I have to ask because I have the Adonis of submarine cables with me—what are your personal predictions? Weighing all of this information is there anything in the future that you expect to see in the market that you think our listeners might be interested in?

TS: Well I think we’re gonna see a lot of cables. That’s one of the positive aspects of what’s going on in the industry.

But there is a cautionary note. A lot of the build—or a lot of the demand for new capacity build is coming from content providers. Really big content providers. And within that group just a handful of companies. They are generally wanting to either build cables themselves or share the costs of new builds. So that is capacity that wholesale providers—and there are still wholesale providers in the industry—will not really be able to capitalize on too much. They won’t be able to sell lit services to those companies. So there’s a big chunk of demand that appears to be available to them, that is not.

JM: I’m so glad you mentioned that. We’ve been writing a lot about how content providers are getting into the cable game, so we’ll have to link to those stories at TeleGeography.com with this interview so everyone can check out the context.

TS: You do what you need to do.

JM: Absolutely. Well thank you again for taking the time to chat a little bit about the submarine cable bubble. We will also share your presentation from PTC with our listeners so they can watch the whole thing.

TS: Thanks, Jayne.

JM: Thank you! 

Why are Content Providers Building Submarine Cables?

Find the answer to this question and more in our latest Global Bandwidth Research Service. Click below to get the free Executive Summary.

GET THE EXECUTIVE SUMMARY

Tim Stronge

Tim Stronge

Tim Stronge is VP of Research at TeleGeography. His responsibilities span across many of our research practices including network infrastructure, bandwidth demand modeling, cross-border traffic flows, and telecom services pricing.

Connect with Tim