SUBMARINE TELECOMS INDUSTRY REPORT – SECTION 6.1: OVER-THE-TOP PROVIDERS

OTT providers are an increasingly integral part of the submarine cable system development process. Facebook, Google, Microsoft – and now Amazon – are moving from capacity purchasers to cable owners. Not only are these new players now driving where cables are going, they are helping to push along new innovations inside of the cable systems themselves. New transmission technology to handle higher capacity wavelengths, increased fiber counts for more overall system capacity and streamlined network management and the push for open systems leading to shared system architecture are just a small sampling of new technologies and ideas these providers are backing.

Another major change OTT providers have brought to global networks is shifting the focus from city to city connections to data center to data center connections. Unlike traditional cable owners, companies like Facebook, Google and Microsoft do not necessarily need to build infrastructure in locations with a variety of interconnect options. Instead, they favor locations that provide economic and cost saving benefits to reduce the operational expenditure impact of their data center facilities. The arrival of a major OTT provider not only brings new telecoms infrastructure to a region but also the cloud services that company provides.

6.1.1 Current Systems Impacted

Figure 56 - OTT vs Non-OTT Cable Systems, 2016-2019

Figure 56 – OTT vs Non-OTT Cable Systems, 2016-2019

A new paradigm emerged in 2016, with OTT providers stepping into the world of submarine cable ownership. Many of these companies have such large and complex infrastructure requirements that it has become more valuable for them to own their own cable systems rather than buy capacity from a carrier.

The dramatic growth in demand is creating significant challenges for telecommunications companies, Internet Service Providers (ISPs) and OTT Providers. The top segment of many markets is becoming dominated by large OTT players, such as Google, Amazon, Microsoft and Facebook who have become key stakeholders and require large amounts of bandwidth between their data centers in various continents.

OTT providers were the driving force behind 31 percent of systems that went into service for the period 2016-2018 – which is down from 43 percent a year ago. (Figure 56)

Figure 57 - Systems Impacted by OTT Providers, 2015-2019

Figure 57 – Systems Impacted by OTT Providers, 2015-2019

Several factors led to these companies making the decision to build their own infrastructure. One of the biggest eye-openers was Hurricane Sandy hitting New Jersey, USA – a major cable landing hub – in 2012. This storm wiped out critical infrastructure, flooded cable ducts and caused a huge loss of connectivity to Europe for several days – ultimately resulting in millions of dollars in lost business. The aftermath of this storm highlighted the need for increased route diversity and more direct control over critical infrastructure. This help to spur on the surge of OTT backed submarine cable systems. (Figure 57)

Additionally, major OTT providers had been growing at such a rapid pace that their need for additional bandwidth was beginning to outpace their ability to purchase it in a timely manner. Building their own infrastructure provided both greater control over assets and removed the need to “compete” against other carriers and businesses also trying to buy capacity circuits. As a result of owning and operating their own critical infrastructure, OTT providers can now turn on additional capacity in a matter of days instead of weeks or months when buying circuits from a traditional carrier.

While transoceanic cable systems are expensive – well over $100 million USD just to get across the Atlantic – these assets represent business potential in the billions for major OTT providers. Even the annual operations expenditure to manage and maintain the cable is a fraction of potential revenue.

6.1.2 Future Systems Impacted

Figure 58 - OTT vs Non-OTT Cable Systems, 2020-2022

Figure 58 – OTT vs Non-OTT Cable Systems, 2020-2022

For the period 2020-2022, 21 percent of planned systems are being driven by OTT providers. (Figure 58) This indicates that currently observed levels of and OTT driven systems might not continue – though this is still a significant chunk of industry activity driven by just four companies. However, as systems driven by major OTT providers have a much greater chance of being implemented – due to the high financing threshold of these companies – expect this percentage to increase as new cables are announced, and other projects die off. Without these kinds of backers, future systems will have a much harder time proving their business case and securing funding.

While the top tier OTT providers are continuing to develop new systems, there are numerous other companies in this part of the Information Technology sector. A second wave of these companies may decide they need similar infrastructure plans and follow in the footsteps of their respective market leaders. This could trigger a second wave of and OTT driven systems and allow the submarine fiber market to continue enjoying its current level of activity even after the top tier providers begin to reach the end of their infrastructure buildout plans. However, no new OTT providers have officially or publicly expressed interest in building submarine cable infrastructure.

Figure 59 - System Investment Driven by OTT Providers, 2020-2022

Figure 59 – System Investment Driven by OTT Providers, 2020-2022

Of the nearly $7 billion investment for planned systems over the next several years, nearly one-third that amount is tied up in OTT backed systems. Again, while these companies are not sole owners on every cable system they are a part of, this still represents a significant dollar value that would very likely not exist without their involvement. (Figure 59)

While only 52 percent of announced cable systems end up entering service (Clark, 2019), OTT backed systems have thus far proven largely immune to this trend as they generally do not announce a system until it is already CIF. It is therefore probable that up to half of non-OTT driven systems will not achieve the CIF milestone and further highlight the dominance of the OTT providers on the submarine fiber industry.