APTelecom Sees the Trans-Pacific Market Changing

Article originally published on Telecom Review

In excess of 40 new fiber pairs will come into service on at least 6 new cable systems, adding over 800 Tb of capacity across the Pacific given new builds underway from HKA, PLCN, B2B, RTI, and other systems not yet announced publicly. Eric Handa of APTelecom recently provided us with some updates on the Pacific capacity marketplace.

From a routing perspective, the majority of this new capacity is planned between Hong Kong and California, yet we are now seeing the development of routes opening up directly connecting Singapore to California. The aim here is to address the risks associated with the Luzon Strait and the South China Seas.

In the background, India has a desperate need to replace antiquated infrastructure and these new systems planned to directly connect Singapore to the United States may well provide the answer at what appears to be the right time, given the recent announcements of new builds between India and Singapore.

An interesting point to consider, is with the amount of capacity coming into service Trans Pac will be massively disproportionate to the amount of Inter Asia-Capacity between Singapore, Hong Kong and Japan.  This should spur on additional investment in new systems on the thickest routes in Asia, being the ‘triangle’ between Singapore, Hong Kong and Japan. SJC2 will simply not be enough, especially if we layer on top of current Asia – US forecast demand the current moves being made by Chinese content players reaching into South East Asia to grow their businesses, intra-Asia is a long way from being over-serviced with capacity.

APTelecom anticipates Trans-Pacific pricing coming close to parity when compared to the North Atlantic in the mid-term and for the first time, the North Pacific – Asia connectivity and North Atlantic connectivity will have similar pricing scenarios, yet very different demand profiles will continue to prevail.  Asia – US will continue to outstrip EU – US demand due to the ever-increasing tele-density rates and need for streaming and the delivery of content in emerging markets.

Our view of current pricing in the Pacific in 2019:

Japan – USA: Lease   100G = US$15,000 (monthly)
Japan – USA: IRU       100G = US$600,000 (IRU)

Some views:

  • Trans Pac will see greater price decline than what has been a very consistent negative CAGR of 17.5% per annum. It could reach close to 30% or more 2021 onwards or even sooner
  • Traditional Trans Pac buyers are largely in a ‘wait mode’ to see what happens to price points as this new capacity comes into the market. This is creating opportunity and demand for one- and two-year leases to bridge the timing gap between now and the targeted RFS dates of the new Trans Pac systems
  • Swapping by non-traditional players is becoming more of a currency and this trend should gather additional momentum as these new systems come into service
  • Ownership economics and a cost + model continue to be sought after on new builds for quarter pair spectrum buyers and above
  • Diversity remains key, yet finding diverse landings are proving more challenging in particular in locations that are small in land mass – i.e. Singapore.  Other parts of Asia may fill this void as concerns remain over SPOF (single points of failure). There is certainly potential for Malaysia and Thailand to act as a bypass to Singapore on routes from India destined for Hong Kong and Japan
  • Entitlements such as upgrade rights are becoming more important
  • Many pairs may not be utilized initially, and this offers unique challenges in meeting capital recovery targets and O&M obligations over the life of the planned new systems coming into service Trans Pacific
  • APTelecom sees a migration to 400G and 1Tb Super Channels within 3-5 years or less. This will also add to compound capital recovery targets for system developers
  • Myanmar, Vietnam, Thailand, Indonesia, and PNG remain in need of new and diverse supply and are currently underserved
  • Future demand of IoT, M2M, and in particular AI (Artificial Intelligence) and eGames will drive consumption
  • 5G impacts are going to be felt in 2020 and beyond in the Asia Pacific region and will serve to also drive demand intra-Asia and across the Pacific immensely

The long-term challenge in the Pacific will ultimately be build cost economics. Once we reach a point where the price points of capacity cannot justify the cost of building, something will have to give. Either the cost of systems will have to re-align with the cost of capacity or indeed, the price of capacity will need to stabilize. The Atlantic is just about there now. For quick comparison, let’s consider the two routes:

New York – London
100Gb IRU $280,000 ~5,500km    $50 p/km

Hong Kong – Los Angeles
100Gb IRU $1,300,000 ~11,600km $112 p/km

It’s a large delta, but not for long. The actual build costs across the Pacific look something like ~$300,000 per 100Gb depending on fiber count and technology deployed, so it’s easy to argue that there is room for accelerated price decline. However, the flaw in this assumption is that it assumes 100% utilization of every system, and as we all know, this simply never occurs. This coupled with the sheer amount of fiber being deployed further compounds the build cost economics conundrum.

Further down the eco-chain, let’s take a quick look at wholesale capacity sellers. Are the days of wholesale arbitrage over?  APTelecom doesn’t believe so. There will always be new entrants looking to obtain SDH style services. We will see the emergence of more gaming and movie platforms tailored to specific markets and we are also fielding requests for SDH capacity from large enterprise that would traditionally buy layer 3 services from carriers. As the market becomes savvier and less dependent on carriers muxing services, these ’new players’ will most likely replace the old guard.  Software defined Networks (SDN) technology and cloud-based services are enabling new market entrants and lowering the barriers to entry for competing in a highly complex eco-system.

In summary, the future for the trans-Pacific appear set to shift to an over-supply and depressed pricing cycle. But, how many of us thought that when we saw the step-change from DS3’s to 10Gb wavelengths? The industry will continue to innovate and adapt in the face of challenges like those outlined above and that, I would suggest is why we all enjoy being part of it.