2023 GLOBAL SUBSEA INDUSTRY HEADWINDS AND OPPORTUNITIES

BY SEAN BERGIN AND TOM SOJA

As we stare down the second half of 2023 and look towards 2024 and beyond, there is no better time to consider the implications of the fundamental changes that are happening within our industry and also the external factors that influence the shape of our sector. There is a lot to unpack and digest, but the shifting dynamics in the subsea space could broadly be dissected into the following components: technology, chokepoints/ routing, cost of construction, production and vessel availability, cost of capital/inflationary pressures and also tech layoffs. All of these elements are factors, or at least considerations, in building any business plan when developing a new subsea cable system. Let’s take a high-level look at each of these components, in no particular order, which shape the landscape of the industry and attempt to understand if any headwinds may actually be masquerading as opportunities.

Talent

It’s the people that make our industry tick, so this is as good as any place to start. Currently, our industry is dominated by a more senior demographic. Just go to any subsea focussed conference and scan the crowd and you will note that the majority of the people in our sector are without doubt male and forty-years old plus, plus. Are we putting enough effort in to attract a broader (and younger) demographic to the industry? It’s important that we do focus on new talent particularly as our industry evolves, and evolution obviously requires fresh ideas. “What got us here will not get us there” comes to mind.

It’s not like there aren’t enough displaced folks in the tech industry (of all genders, races, and ages) that would be able to fit right in with minimal upskilling. Consider significant layoffs1 in the tech space (congruent sectors to subsea) in 2023 alone – around 80,000 of them and this is just the last 4 months. Add to that further planned layoffs due to bite in May and June, and we are looking at a significant amount of available talent for our industry to draw from. Although it’s an unpleasant picture, it certainly does create an opportunity for the subsea industry to look at gaining some ‘fresh blood’ to help shape the future from an extremely diverse and talented pool of resources. Sure, they aren’t subsea experts, but who of us was when we joined the industry?

Where is the opportunity here? Ironically, the submarine cable industry provides a large part of the physical components that comprise the virtual ecosystem that is the Internet and 1 global communications infrastructure. Certain economics and other business aspects do have crossover between the physical world and the bits and bots of the tech world. Those types of talents are welcome, particularly in business model innovation.

PTC and SubOptic have both prioritized attracting younger talent to our highly dynamic and vital industry, as have companies such as Google, with its summer submarine cable boot camps. These efforts are to be applauded, but more initiatives are needed, and all are welcome.

Macroeconomics

We are operating in an environment of higher-than-normal inflation, supply chain limitations, and heightened geopolitical tensions. Times are challenging, no doubt. How many companies that have been the backbone of our industry for the last decade or so, will be economically viable within a decade from now if they continue on their current path? What is really being done to evolve the business models that drive our industry in light of the challenges we are currently facing? I am sure these questions are what many shareholders, Boards and CEOs are grappling with at the moment – how to balance the need for short term profitability whilst managing long term transformation and growth aspirations. In the subsea space, this is a complex issue given evolution of technology, the cost of construction and supply chain challenges.

Opportunity Amidst Economic Uncertainty does exist. One of the enduring lessons from Covid is that the global telecom infrastructure played a key role in enabling the global economy to endure massive shutdowns for an unprecedented amount of time. To the extent that the global economy may be in a temporary period of uncertainty – for example, with concomitant belt tightening for business travel, the lessons of Covid taught us to work smarter.

Things aren’t necessarily so dire for our industry, and it could indeed again be countercyclical for our industry - sort of a ‘heads we win, tails, we win again’ situation, as was the case with the pandemic. Looking back to previous global economic downturns such as the banking crisis of the 2008 - that did not have a significant knock-on effect to our industry either.

Technology

When this author started in the subsea space, E1’s (2Mb) where big international circuits. Working on deals for STM1’s (155Mb) and above was a huge deal. Nowadays, we are talking about 400Gb circuits delivered over >20Tb fibre pairs and even spectrum solutions (fractional fibre pairs). Then comes along SDM (Space Division Multiplexing) technology, with the capability to enable sixteen, twenty-four or even more fibre pairs per system. Finally, the greater flexibility on offer that comes with WSS (Wavelength Selective Switching) technology now also come into play to complicate things. Everything has evolved from a technology perspective, and as a consequence the business models need to evolve in parallel. What impacts do these enhancements and improvements in technology do to a traditional subsea business model? In short, the models need to be looked at differently for it to make sense.

Technology improvements over the last 5 years have been amazing, but what will these high capacity, high fibre count systems do to the health of the industry overall? Let’s take a snapshot of the transpacific market as it sits today. The last four cables officially announced (JUNO, BiFrost, Echo & TOPAZ) have a combined fibre count of 60 fibre pairs yielding a total of 864Tb, an average of 14Tb per pair. That’s right, SIXTY FIBRE PAIRS. The question that we should be asking ourselves is what this will do to the average price of capacity in the market once these systems are all in service. One has to assume that the historic average negative CAGR on pricing of around 17% transpacific will skyrocket. It simply has to. So, once the average market price decreases, how will developers be able to make a business case stack up to build something new in the last half of this decade?

Our industry thrives on technology and re-invention and therein is the opportunity - it has always been thus. But the most enduring business models have never been based on ‘who has the best technology’ or ‘who has the biggest cable,’ but rather, what type of new and innovative services can be offered over it. With ever decreasing capacity costs, new services become more economically viable and it’s the scaling of those new innovations that will drive future business models, not merely more of the ‘same old, same old’ at ever lower prices. Back in the E-1 days, voice traffic was 90+% of all international telecom traffic. Today, voice is merely an app, and often times, free.

Construction Costs

Cost per bit will undoubtably be one of the key issues moving forward. A push to drive this down which is a consequence of improvements in technology coupled with vendors being squeezed, may generate ‘high fives’ amongst certain developers/buyers of systems in the industry, but this potentially leads to a situation where build economics simply won’t stack up in the future. In spite of all the technology advancements and reduction in cost per bit, there are some fundamental building blocks (commodities) that will not decrease in price in concert. Raw commodities, such as copper and oil which is both the feedstock of cable insulation material as well as the fuel for the ships that install and repair the cables, are all required to get these systems built and laid. At what point does it become impossible to make a business case stack up and generate sensible IRR’s? It ‘feels’ like capacity prices still have a long way to fall. I am not convinced that the same can be said for manufacturing economics.

It’s in a private developer’s interest to see the price of capacity remain relatively stable, or at least be able to factor in an acceptable level of price decline. Price decline is the number one enemy of any subsea business plan. That is, of course, unless you have serious levels of free cashflow underpinned by massive core demand. So, we have some really complicated dynamics at play here. One segment of the market driving the price per bit down as low as possible, another segment doing all it can to keep the price per bit stable. And, in the background the suppliers of the technology are creating solutions which support the first objective. The industry is undoubtably at odds with itself to an extent. What does this all mean for future builds beyond what’s in planning today?

There is certainly opportunity in the construction space. SDM technology was a major step-change breakthrough in cost-per-bit reduction on the manufacturing side. While there is no doubt that factory wages and other commodity prices will continue to fluctuate over time, the ability to derive greater capacity per constructed element still has some ways to go before all additional technologies are exhausted. Innovations – that word again – in new fibre types (multicore, hollow core, etc.), better power supplies (enabling longer systems with more fibre pairs), more efficient greener vessel design with new types of fuels and propulsion systems – are but a few of the items being worked on by the leaders of our industry. Not all the innovations are necessarily ‘sexy’ but there is progress to be made and is being made on a number of fronts that don’t necessarily garner headlines in the popular press.

Maintenance

Submarine cables are owned and operated by private companies and support a nation’s economy. TeleGeography recently estimated2 that over 40 trillion dollars of daily financial transactions are transmitted by submarine cable infrastructure. By default, protecting a nation’s economy relies upon third-party agreements, commercial models, and foreign owned repair vessels. Globally, between 20232025, projected investment in new cables will be approximately $11.8B, seeing an additional 380,000km of cable deployed that will require maintenance services. However, corresponding investment in vessels assets designated to maintain this vast, expanding network infrastructure is lacking. The industry is only now coming to terms with the anticipated impact of this investment dichotomy.

The global fleet of specialized cable installation and repair vessels numbers approximately 50 vessels. Of these, approximately 21 vessels are dedicated to zone and private maintenance agreements. The majority of vessels are older than their design lifetime of twenty-five years, as the economic case for investment in new assets face significant challenges. High running costs, an aging fleet and inflationary factors do not appear to be recognized in commercial negotiations for maintenance when up for renewal.

From the fleet operator’s perspective, there is an almost ‘expected’ discount at each renewal negotiation that is driven by procurement departments who are incentivized to achieve favorable or discounted price points. There is an element of short-termism in this approach without a corresponding balance of risk or lengthened contract terms (e.g., five to ten years) that will aid vessel investment economics and allow fleet operators to build a pragmatic business case for reinvestment. Perhaps investment in additional vessels remains an opportunity for an entrepreneurial mind.

Maintenance opportunities may sound a bit mundane, however, it’s an interesting space. It’s clear that our indus- try lacks an adequate response to cable outages in certain parts of the world. This gives rise to a major opportunity for new players to join in with fresh, long-term investment capital, even beyond the initial new players that have arisen over the past few years. This is a particularly opportune time also, to re-examine the balance of negotiating power between cable owners and maintenance providers as several of the zone agreements come up for renewal over the next few years. There is certainly room for consideration of innovative economic and risk models for those club agreements beyond the ‘tried and true’ and perhaps even beyond what is currently on offer by private maintenance agreements.

The submarine cable industry has long been an obscure niche industry. For better or worse, it is now gaining recognition of its importance even by world leaders for its strategic and security value, in addition to its massive importance to economic value. So, in addition to risk and cost, strategic consideration on multilateral geopolitical levels enter the equation.

Routing

Three problematic regions come to mind in the context of headwinds and opportunities in the subsea sector. Namely Egypt, the Strait of Malacca, and the South China Sea. All three represent different challenges and the market appears to be investing in innovative routing solutions to minimize future risks.

Egypt has long been talked about and a viable alternative to compliment the traditional route traversing the Red Sea and onwards to Marseilles and the FLAP (Frankfurt, Lon don, Amsterdam, Paris) markets. Finally, this is starting to crystalize with planned systems such as Blue Ramon, EMC and Neutrality One all eyeing a. terrestrial bypass through a combination of territories such as Saudi, Jordan and Israel. Not only will this bifurcate risk, but it should also serve to re duce operational costs be avoiding the NTRA fees in Egypt.

The Strait of Malacca is the typical entry point for all cables headed to Singapore from Europe and/or India. At its narrowest point in the Phillips Channel of the Singapore Strait, the Strait of Malacca is only about 1.7 miles wide, creating a natural bottleneck with the potential for collisions, grounding, or oil spills, not to mention anchor drags. Given reliance on Singapore as a hub, plans are in place to bring subsea cables terrestrially across the South of Thailand (north of this bottleneck) and continue their subsea journey to Singapore via the Gulf of Thailand. Again, innovative routing aimed at mitigating and de-risking what is a single point of failure.

Finally, it would be remiss to not talk about the South China Sea. Given geopolitics at play, new routes to avoid this region are being developed. We are seeing new ‘great circle’ routes being followed between Singapore and the

USA avoiding the South China Sea and we are also seeing the establishment of systems between Singapore and north Asia routing south out of Singapore and then heading north via the south-eastern most point of the Philippines, thus avoiding the South China Sea altogether.

New routing challenges without a doubt create opportunity for our industry. New routes create new builds which in turn, fuel ongoing growth and opportunity for all of us in the subsea space.

In summary, there’s no question that the submarine cable industry is very vibrant in terms of innovation at all levels, be it technical, strategic, economic and security. The industry we are in has never been more important than it is today. Moving forward, anyone with ambition, a bit of talent and a willingness to learn would be hard-pressed to find a more multifaceted, challenging, and exciting business environment. The fact that submarine cables are (finally!) becoming recognized for their intrinsic value rather than for their ‘investment and quick flip’ value like 25 years ago is a very good thing.

Spread the word. The submarine cable industry is thriving, continues to innovate and evolve as any healthy industry must continually accomplish over time. An industry built around work in the sea is very accustomed to headwinds (and also crosswinds and tailwinds). Navigating the uncertainties and overcoming the challenges for the benefit of mankind in what we do - really. Be proud. STF

SEAN BERGIN, along with co-founder & CEO Eric Handa have taken APTelecom from a startup business to an award-winning global organization which has generated over $500 million USD in sales for clients and provided valuable insights to clients seeking reach and expertise spanning a wide range of markets including Africa, Southeast Asia, EMEA, LATAM & South America. Bergin has significant management experience at both national and international levels at Telstra, BT, and Hutchison. Bergin has also served as Director of Sales for Australia Japan Cable. He is highly experienced with complex, high value deals and has significant consulting experience in the areas of due diligence consulting and M&A. Bergin has covered, lived, and resided in a multitude of primary and emerging markets across Asia, Australia, and Europe. Bergin also sits on the of the Board of Governors at the Pacific Telecommunications Council (PTC), is a former President and Chair and is a frequent speaker and panelist within the ICT sector.

TOM SOJA is a Leader and Innovator in the International Submarine Cable Industry. For more than 30 years, he has assisted a wide variety of clients with compelling analysis of opportunities in the industry, developing actionable plans, and training and leading senior technical and commercial teams to construct and commercialize submarine cable networks globally.

Mr. Soja is President of T Soja & Associates, Inc. (TSA) which he founded in 1997. Last month TSA celebrated its 25th Anniversary. Mr. Soja has provided strategic advisory and hands-on support to telecommunications companies, content delivery players (OTTs), network entrepreneurs, investors, lenders, the legal community, the insurance industry, offshore oil & gas producers, network and equipment suppliers, government policy makers and regulators. Mr. Soja currently serves as a reviewer on the SubOptic papers sub-committee on Regulatory, Permits, Legal and Security.