The region is riding waves of burgeoning supply, but OTT activity, demanding consumers, and ever more exotic applications will power it forward, says APTelecom’s president

There probably has never been a better time to be involved in the Asia-Pacific subsea capacity business. New cable systems along with new build for the rest of the data economy value chain show the industry to be in robust health more or less everywhere. More is almost certainly on the way.

But, says Sean Bergin, president and co-founder, alongside Eric Handa, CEO of APTelecom, it should also be a time to reflect on what is becoming a very complicated market indeed. New players, new business models, new regulatory approaches, and a volatile investment climate probably suggest new risks are emerging, too.

After a decade specializing in pre-sales of subsea system capacity in the region, he is uniquely attuned to the ebb and flow of a market that has seen extraordinary swings of supply, demand, and pricing over the years.

It’s a business, he says, that has seen many changes and an evolution from consortium-backed builds to purely private builds involving telcos and of course OTTs. Currently, in vogue are new long-haul systems offering direct connectivity particularly between individual Asia-Pacific countries and the U.S. Direct connectivity combined with state-of-the-art technology brings favorable unit cost advantages. For some key markets, it also confers the undoubted attractions of minimized latency.

Are We Seeing Too Much Build?
But, he argues, too much build may create its own problems. Some projects are deployed, he points out, to replace aging systems, but much is entirely new build on new routes. It is potentially disruptive, he says. “I do not want to be pessimistic, but realistically if every system that is not only planned but in deployment [arrives], the market may see a problem,” he says. “We are aware of approximately 50 fiber pairs [coming on stream], representing about 700Tbps of potential capacity across the Pacific.”

As a result, he argues that capacity prices must fall substantially. Yet even before the upcoming systems are activated, he suggests the market on some routes is seeing substantial capacity price erosion anyway. He implies this could be as much as 35 percent per annum, when 17 percent was forecast. “From a pricing impact, we have to assume that market behavior will become similar to that of the Atlantic within the next two years,” he says. It is a comparison that will probably please few.

The rationale for this transoceanic build, he argues, is the attraction of high growth areas and particularly the “Golden Triangle” of Japan, Singapore, and Hong Kong, but [it] comes with a companion problem. “I don’t see there is enough capacity intra-Asia to distribute [this new capacity].” He reflects on a capacity paradox: “On the one hand, we are talking about a boom, but on the other, there is scope for more build on intra-Asia routes. We see India to Singapore as having a lot of potential and, outside the immediate region, we still think Africa has a lot of potential.”

It’s important, however, to see all the market factors that are driving the community, he argues. Complicating the ecosystem are OTT systems that now account for a very large part of the infrastructure build business, essentially taking the baton from the traditional telco systems of the previous generation.

He muses on what this means, and argues that there are positive and negative aspects to a complicated marketplace: “The OTTs are taking the burden largely away from the telcos themselves by their own build and a tendency to cache content in-region.” He suggests this is a logical strategy driven by the need to keep the customer experience as high as possible, but it is probably impacting market thinking too. Informal conversations with senior executives at telcos suggest to him that increased traffic demand in several countries is not necessarily translating into more transit demand, for example, as the OTT players effectively provide the required capacity themselves. “The dynamic has shifted, and [as a result] we are seeing fewer players stepping into the [build] space,” he notes. But, he argues, telcos are frequently relieved of the headache of getting more capacity.

User behaviors are also changing. “There’s so much [user content] being generated and uploaded locally right now,” he says, as changing demands have manifested themselves. Delivery technology is also changing. “One of the emerging technologies in the Asia-Pacific is the fixed-mobile package, particularly in a 5G context. The industry won’t roll out local fiber. There’s no need. With this delivery, I don’t have to worry about fiber cuts or power outages at home in Cambodia.”

But, upstream on the trading side, it has become a big business with big buyers and sellers. Capacity demand on many routes have moved into the 1Tbps units, he says, with trade now in fiber pairs and partial fiber pair units. “It’s a massive shift [of buying behavior],” he points out. Multinational enterprises with very large connectivity demands have also entered the space alongside telcos as buyers at this level.

Who Drives the Future?
What happens from this point, he suggests, hinges largely on the strategic direction the major OTTs take. “I don’t see OTT build appetite diminishing, but there may be a decreasing desire to involve other external parties directly,” he predicts. “[Investment] cash [from partners] is not the issue for [OTTs]. They are looking for partners that add value to the solution rather than just hang-off the solution.”

By contrast, he says, even though they are helped on the capacity front, telcos are faced with other investment demands particularly for 5G networks and associated regulatory costs, and a squeeze on margins is inevitable. However, he argues against a number of commentators predicting the demise of telcos that it is important to see winning strategies are available to everyone in this market. “The OTTs are in great shape. The telcos need to pivot a little and embrace what’s happening,” he points out, suggesting that the experience of players such as Singtel embracing deregulation in their home market could show the way to others in a new dynamic era.

Even potential overbuild on some routes may not be a long-term problem, although short-term, he says, there are a number of reasons to believe disruption will occur. He continues: “The industry has always survived, and the capacity has always been consumed eventually. Systems still get built. That said, we have formed Stratanet, a company designed to pick up distressed assets, not necessarily new systems, but older systems that may have been underutilized.”

Costs matter in this context, he says. “Everyone talks about the price of capacity, but there is another expense, in terms of O&M. We think O&M is a massive issue that is overlooked [on systems]. If there is a correction, having a business poised to capture opportunities [when players want to offload these assets] will be very useful,” he predicts.

He remains bullish. “I don’t think we have scratched the surface of the capacity outlook,” he says. “The products that will need it haven’t even been thought of yet, but we can be confident that innovators in Silicon Valley (and elsewhere) are about to pursue them. And we are talking extremely fast-moving product-to-market cycles that could overturn demand perspectives entirely in less than two years.”

Original Article