SUBMARINE TELECOMS INDUSTRY REPORT – SECTION 1.2 CAPACITY

1.2.1 Global Capacity

The world continues to consume ever increasing amounts of data, with bandwidth demand projected to almost double every two years for the foreseeable future. This demand – largely driven by a continued shift towards cloud services, continued explosion of mobile device usage and mobile technology like 5G – provides numerous opportunities for the submarine fiber industry. Over-The-Top (OTT) service providers continue to post strong earnings reports and grow at a rapid pace, which indicates that this bandwidth demand won’t be tapering off any time soon.

Figure 4 - Global Capacity Growth by Region, 2015-2019

Figure 4 – Global Capacity Growth on Major Routes, 2015-2019

For the period 2015-2019, submarine fiber design capacity on major routes has increased at a Compound Annual Growth Rate (CAGR) of 32 percent, including upgrades and new system builds. (Figure 4) This is up significantly compared to this time last year where the CAGR along major submarine cable routes was just 25.6 percent. There were slightly fewer systems installed this year compared to 2018 but a couple very high capacity systems and system upgrades pushed the CAGR higher.

With global demand increasing at such a rapid pace, sustaining infrastructure growth will be challenging, potentially causing demand to exceed supply. To date, the industry has been able to keep up with demand— but it will be necessary to continue focus on increasing capacity in order to continue to meet the increasing demand.

Figure 5 - Average New System Capacity, 2015-2019-01

Figure 5 – Average New System Capacity, 2015-2019

Further evidence the submarine fiber industry is working to meet global capacity demands is the average new system capacity over the last five years, which has increased by 37 percent. Averaging at just over 31 Tbps in 2014, new systems now average at 42.5 Tbps. (Figure 5) With future systems positioned to take advantage of higher wavelength capacities and potentially more fiber pairs, system capacity growth is expected to continue to trend upwards.

Figure 6 - Global Planned Capacity Growth, 2019-2022

Figure 6 – Global Planned Capacity Growth, 2019-2022

Based on reported data and future capacity estimates, global capacity is estimated to increase up to 79 percent by the end of 2022. (Figure 6) Despite multiple systems planned over the next two years boasting design capacities of more than 100 terabits per second, overall capacity growth will plateau based on currently announced planned system data which indicates a CAGR of just 21 percent through 2022. However, not all announced systems are far enough in the development process to have decided things like fiber pair counts and design capacity so expect to see an increase in projected bandwidth as these details are finalized and new systems are announced. The prevalence of 200G and higher wavelengths will also impact these numbers as several of these currently planned systems are being design with only 100G wavelengths in mind.

1.2.2 Lit Capacity

Since 2014, major submarine cable routes have averaged 18 percent lit of total design capacity. A large capacity buffer is designed for cable systems to deal with sudden spikes in demand, such as handling rerouted traffic due to a cable fault.

1.2.2.1 Transatlantic Region=

Figure 7 - Transatlantic Capacity Growth, 2014-2018

Figure 7 – Transatlantic Capacity Growth, 2014-2018

The Transatlantic region has seen steady design capacity growth over the last five years at a CAGR of 29.7 percent due to regular upgrades and a new system each year for the period 2014-2018. (Figure 7) This is down from last year where the CAGR for the period 2013-2017 was 35 percent. On average, the Transatlantic route has maintained a lit capacity at 21.8 percent of total for this five-year period, well above the global average of 18 percent. The last two years have seen 20.5 and 22.4 percent, respectively. Transatlantic routes are the most competitive globally – especially those connecting the two biggest economic hubs in the world of New York and London – and carry traffic between the highly developed economies and technology markets of North America and Europe.

Figure 8 - Transatlantic Capacity Growth, 2018-2022

Figure 8 – Transatlantic Capacity Growth, 2018-2022

Capacity growth in the Transatlantic region is expected to continue over the next few years through 2022, fueled by new routes across the South and Mid Atlantic, which are under consideration. (Figure 8) Based on publicly announced planned system information this route will observe a CAGR of 26.1 percent for the period 2018-2022.

Additionally, OTT providers continue to focus on building new infrastructure across the Atlantic, which raises the probability that growth will increase more dramatically than currently predicted.

1.2.2.2 Transpacific Region

Figure 9 - Transpacific Capacity Growth, 2014-2018

Figure 9 – Transpacific Capacity Growth, 2014-2018

Like the Transatlantic region, the Transpacific has observed moderate design capacity growth at a CAGR of 25.1 percent for the period 2014-2018. This is about the same as last year where the CAGR for the period 2013-2017 was 25.6 percent. The region has maintained an average of 15.3 percent lit capacity during this time – below global averages. (Figure 9) In 2014, lit capacity was as low as 12 percent, indicating a short-term capacity overbuild in this region that has only recently begun to recede with 2017 and 2018 observing lit capacities of 17.7 and 18.5 percent, respectively. Like the Transatlantic region, OTT providers are looking to expand their infrastructure in this region — especially with recently announced systems.

Figure 10 - Transpacific Capacity Growth, 2018-2022

Figure 10 – Transpacific Capacity Growth, 2018-2022

As one of the more competitive regions in the world – with a diverse number and type of both systems and customers – the Transpacific is expected to increase from its CAGR of 25 percent to 30 percent through 2022 based on publicly announced system information. (Figure 10) New, high capacity systems are beginning to come into service, and lit capacity seems to be back on track with global trends. If OTT providers continue to focus on this region, expect lit capacity growth to accelerate to the levels seen in the Transatlantic region.

1.2.2.3 Americas Region

Figure 11 - Americas Capacity Growth, 2014-2018

Figure 11 – Americas Capacity Growth, 2014-2018

The Americas region has seen significant growth in the last few years, more than doubling in total capacity from 130 Tbps to 415 Tbps along major routes. This region has observed a CAGR of 38.9 percent for the period 2014-2018. (Figure 11) This is up slightly from last year where the CAGR for the period 2013-2017 was 36 percent.

The region has maintained an average yearly lit capacity of 16.8 percent, slightly below the global trend. Much of this growth has been spurred on by growing markets in Latin America, with new systems and upgrades increasing flow of traffic between these countries and the United States. OTT providers have been especially interested in the Brazil-US route, adding several high capacity systems in 2017 that have increased the total capacity along this route by over 50 percent. Typically, OTT providers have partnered with traditional telecoms carriers that add this capacity to the general market but moving forward OTT providers are beginning to build cables entirely for their own use. It is unclear whether OTTs will one day monetize these exclusive use cables.

Figure 12 - Americas Capacity Growth, 2019-2022

Figure 12 – Americas Capacity Growth, 2018-2022

Based on publicly announced information for planned systems, the Americas region is not expected to continue its surge of recent growth as no systems are currently planned for 2021 or 2022. (Figure 12) Based on publicly announced planned system information this route will observe a CAGR of 19.5 percent for the period 2018-2022.

While no system is currently planned for 2022, there is still time for some to be announced as cable systems typically have a two to three-year development cycle. Growth in this region is fueled by growing markets in Latin America – typically Brazil, Argentina and Chiles – and helped by the expansion of OTT providers in South America. However, growth has slowed down since 2018 – potentially because the growth spurt observed from 2016-2018 which added seven cables and 360 Tbps of capacity has satisfied capacity needs for the immediate future.

1.2.2.4 Intra-Asia Region

Figure 13 - Intra-Asia Capacity Growth, 2014-2018

Figure 13 – Intra-Asia Capacity Growth, 2014-2018

The Intra-Asia route has maintained minimal to moderate design capacity growth since 2014 with a CAGR of 24.3 percent for the period 2014-2018. (Figure 13) This is down significantly from last year where the CAGR for the period 2013-2017 was 39 percent.

Growth along this route largely depends on huge infrastructure builds connecting major hubs throughout Asia and Southeast Asia – something that does not happen every year. Lit capacity stays in line with global trends at 18 percent of total.

Figure 14 - Intra-Asia Capacity Growth, 2019-2022

Figure 14 – Intra-Asia Capacity Growth, 2018-2022

Nearly 300 Tbps capacity is already available along these routes and 520 Tbps will be added through 2022 adding a sizeable increase of nearly 200 percent – departing from the route’s historical trends. (Figure 14) There is no indication that demand trends along the routes are changing in any meaningful way, so expect the annual average of 18 percent lit capacity to continue.

Based on publicly announced planned system information this route will observe a CAGR of 22.7 percent for the period 2018-2022.

1.2.3 Capacity Pricing

It all starts in the Atlantic. Transatlantic routes have set trends throughout the history of the submarine fiber industry and will continue to do so in the future. The New York – London route is the most commercially competitive in the world and will continue to be so through the foreseeable future as it is the oldest route and carries traffic between the two biggest economic hubs.

The Transatlantic market is shifting from connecting population centers for traditional telephone carriers to connecting data centers for OTT providers. As OTT providers like Amazon, Facebook, Google and Microsoft continue to expand their infrastructure and drive cable development, continue to expect new cables that do not follow the more traditional routes between New York and London such as those from Virginia Beach to France and Spain, Brazil to Europe and Brazil to Africa.

Figure 15 - Monthly Lease Pricing on Major Routes

Figure 15 – Monthly Lease Pricing on Major Routes

Like the Transatlantic routes, Transpacific routes will be shaped by the market shifting towards interconnection of data centers instead of connecting population centers. Cloud service providers are developing infrastructure in a major way all throughout East Asia and the Pacific with numerous new data center builds announced for places like Indonesia, Singapore and Hong Kong. Multiple cloud providers such as Alibaba, Amazon Web Services and Google Cloud have all announced new data center facilities in Indonesia (Mah, 2019), Singapore’s colocation market is expected to grow 14 percent by the end of 2019 and nearly double in size by 2023 (Wong, Singapore’s Colocation Market to Nearly Double by 2023, 2019) and the amount of hyperscale data center capacity has increased by 42 percent over the past year in Hong Kong (Wong, Hong Kong’s Cloud Data Center Boom, 2019)

Capacity pricing for routes in the Americas region will depend heavily on economic health in South America. While these routes may never see the same level of demand as the Transatlantic and Transpacific, they are becoming increasingly important to OTT provider infrastructure plans and global economic development as these companies look to increase their presence in places like Brazil, Argentina and Chile to take advantage of the growing economies in this region.

Figure 16 - Median 100G IRU Pricing on Major Routes

Figure 16 – Median 100G IRU Pricing on Major Routes

Intra-Asia routes will continue to provide paths between three major cities – Tokyo, Singapore and Mumbai. While the Tokyo – Singapore route should remain relatively unchanged in the future, the Singapore – Mumbai has the most potential for growth. As new cables and telecoms development turn towards India’s growing technology sector, this region is prime for growth.

EMEA to Asia routes have been well established for decades and carry traffic between Europe and Asia. However, they are high latency and expensive to operate. Threats to the commercial viability of this route will be planned systems that bypass the Suez Canal to avoid the sustained economic and political instability in the Middle East and Arctic routes that connect Europe to Asia via much shorter pathways. Should these alternatives become truly competitive, these routes will be negatively impacted.

Overall, there seems to be a healthy global capacity market, but this is dependent on OTT providers’ plans for their excess capacity and how cost-effective system upgrades and new cables will be implemented.