For all the acres of analysis and grinding of teeth that seems to accompany the great Australian broadband debate, it’s amazing how much focus is placed on the last mile compared to what is arguably a similar chokepoint—international capacity.

While the retailers grind away bringing low margin broadband services to market—a business currently akin to an act of charity on behalf of the nation’s future– the purveyors of backhaul capacity to the US appear to have a very tidy, cash-rich business.

Could all that be about to change?

On the surface, it would appear that the Pacific is about to witness a tremendous bandwidth bubble that could rival the great Atlantic boom-and-bust that bought so many carriers undone in the 1999-2002 timeframe. It was this bust that effectively delivered control of mighty American and Anglo networks such as Flag, Tyco, Global Crossing and 360 Networks into the hands of Indian, Chinese and Singaporean discount buyers.

Warnings are now being sounded about the Pacific. The annual Submarine Networks World conference last week heard Level 3 executive Mike Saunders predict that eight new trans-Pacific cable deployments including two to Australia would unfurl some six terabits of lit capacity onto the market. This effectively will quadruple supply in a two year period.

Saunders may have even underestimated supply. As CommsDay revealed last month, plans are afoot for the French government to fund a new cable connecting Australia with the US via Noumea and Tahiti, while Western Australia may play host to a new north-south cable if it wins the global space agencies’ remote array telescope project next year.

But there is a different sense to the drivers for new cable builds compared to the first dotcom boom in 1999. For a start, this time, end-user demand is real. Back in 1999, narrowband Internet ruled and the use of broadband fixed and wireless technologies was extremely limited—both from supply and demand point of view.

Now we have BitTorrent, YouTube, MySpace and all the rest of the bandwidth hungry video and audio applications.

Significantly, many of these applications are focused on user-generated content, increasing demand for upload capacities and as a result, increasing the overall bandwidth requirement.

Then there was the September 11 of the global bandwidth industry—December 26, 2006 when an undersea earthquake triggered landslides that took out eight cables. Diversity has been a buzz word ever since and is a significant business driver for new builds such as the Rostelecom and Transtelecom trans-Siberian cables and Telekom Malaysia’s Asia America Gateway which is deliberately routing its trans-Pacific hop some hundreds of kilometers to the south of Taiwan’s geological hotspot zones.

Another factor driving the new builds is the cost-reward paradigm. A submarine cable is nothing but a network element and there is no law of economics that suggests it needs to be profitable in its own right– the margins can be made on downstream services.

This appears to be the philosophy adopted by Asia Netcom with its twin policy of building out new capacity while acquiring large retail customer bases such as Pacific Internet’s. Flag Telecom’s Owen Best admitted this when he said there is probably no longer a business case for a wholesale cable (which makes you wonder about the business case for, say, a wholesale fibre-to-the-node network but that's a topic for another column).

The final driver for the new builds is a more intangible one: prestige.

There is no doubt that a primary motivator for the Asia America Gateway cable was Telekom Malaysia’s desire to be positioned as a global carrier and a national champion. TM quite rightly perceives that it doesn’t have the same global profile as the likes of SingTel, even though it owns a constellation of south Asian telecom assets.

Also, TM’s leadership role in soliciting smaller Asia carriers to the fold not only enhances its prestige, it has the potential to open up new and possibly lucrative routes—for example, the West Coast US-Malaysia-South Africa route might prove an attractive alternative for pricey US-Europe-Africa routes.

Likewise there is no doubt that Pipe’s ambitious Australia-Guam cable dramatically lifts that firm’s international profile. Pipe’s efforts have already attracted the world’s largest bandwidth vendor VSNL as a partner. Its new found status as a putative global capacity player will no doubt open the door for more business partnerships and might even enhance the firm’s investor visibility and acquisition attractiveness. The benefit of all this might well outweigh the initial capex and margins hit from the cable.

There is no doubt that there is a Pacific capacity bubble is emerging and it will place downwards pressure on bandwidth prices and margins. But this time the price drops will directly stimulate demand—in the form of relaxed usage caps for high speed bandwidth services and increased innovation in the form of Asia– and Australia-centric Web 2.0 applications and services. Overall demand will suck up most of the supply. The owners of capacity—the Reliances, Tatas, Telekom Malaysias and Telstras of this world—have considerably deeper pockets than the one-dimensional concept companies—Global Crossing, Flag, Level 3 and so on—that fuelled the last bubble. And there will be a business failure or two along the way, but that’s risk for you in a big, uncertain world.

by Grahame Lynch