25 Comments

Summary:

Undersea cables might be snooze-inducing and not as exciting as, say, Google or a Facebook, but they foretell a rise in economic activity — and often a boom. Continue Reading.

Having followed the optical network business for over a decade, one thing I have learned is that the boom and bust cycles of the business often mask patterns that have long-term implications. The overbuilding of U.S. networks in the 1990s foretold a bust in the telecom industry. The buying up of bankrupt carriers’ assets indicated the rise of new players including Google, which has built a fearsome infrastructure. These days, all the excitement in the optical business is around new undersea cables being laid (or planned), bridging previously unconnected parts of the world. These cables are, in fact, the early warning signs of a pending economic boom.

Let me explain. In the 1990s, we saw a grotesque number of cables laid under the Atlantic and Pacific, connecting the United States with Japan, parts of Asia Pacific and Europe.

Those three regions went through an unprecedented boom, much of it inspired by technological changes that had millions turning to the Internet. The boom, also inspired by deregulation of the telecom infrastructures in those countries, led to further spending on communications such as wireless phone calls and high-speed Internet. Unfortunately, the demand (captured quite well by bandwidth provider Global Crossing in early days) led to overbuilding, oversupply and eventually a bust.

Growing Fibers In Asia

A similar scenario is now playing out in the Trans-Pacific region where cables are being built rapidly, and the bandwidth capacity on pre-existing cables is being doubled. Many more cables under construction are connecting with India and China, both of which are going through their own economic booms. According to the World Bank, China is the world’s second largest economy, and India claims the fourth spot. These countries have become economic hubs — not only buying but also selling to the outside world. And a key ingredient of trade is the ability to communicate, which in turn requires the large amount of capacity that can only come with undersea fiber cables.

The latest such effort is SEACOM, a $650 million, 15,000-kilometer cable connecting East Africa with Asia and Europe that is expected to be completed in June 2009 and provide 1.28 Terabits per second of network capacity. This is just tip of the iceberg.

According to TeleGeography, a research firm that tracks the global broadband business, there are about 12 cables either in planning stages or under construction that will connect Africa to the rest of the planet. Those connections will have a theoretical capacity of over 13 Terabits per second, and construction is estimated to cost more than $3 billion.

In Africa, Mobiles Drive Bandwidth Demand

Why so much connectivity? After all, PC penetration is abysmally low in Africa. The answer is cell phones. At the beginning of 2008, there were a quarter of a billion mobile subscribers on the continent, according to International Telecommunications Union, and Portio Research estimates the number will increase to 378 million by 2011. Local companies are furiously building out networks, and by all indications, the overall market penetration is going to increase from the 28 percent mark reported at the start of this year. Cell phones need networks to transfer calls between countries, so there is a need for networks to circle the continent — or at least countries like Kenya, Nigeria and South Africa, which have the most critical demand.

In the recent past, India went through a similar cycle, where a spurt in mobile sales acted as a catalyst for the overall economy. Phone calls provide the vital connections for trade to flourish in areas hitherto unconnected. Something similar is happening in Africa, where mobile banking has emerged as a facilitator of cross-border trade.

You can see a similar scenario set to play out in other parts of the world. There are about five cables on the drawing board or under construction that would connect Cambodia, Bangladesh, Vietnam and some of the smaller countries in Asia. All these countries are going through an economic upsurge and are becoming part of the global economic system.

This leads me to my conclusion: Building new cables is the equivalent of adding new roads, new shipping lanes or flights. The undersea fibers of today are what sea trading routes were in the past — an indicator of future economic activity and the subsequent boom.

This article first appeared on BusinessWeek.com

You’re subscribed! If you like, you can update your settings

  1. Using some of the latest generation of phones, a user with bandwidth is a user with bandwidth, period. It’s getting to the point when the device used will be a matter of choice. A user with bandwidth in Africa will be equal in that regard to a user with bandwidth in NYC.

  2. How right. I forsee a future where large data centres will be built in Africa, powered by solar energy (as crazy as this vision might seem to some).

  3. “According to the World Bank, China is the world’s second largest economy, and India claims the fourth spot”

    You aren’t even close to right. wikipedia 2008 future gdp

  4. I think this post is bang on, Om. I’ve worked with a major company before in the Teleco. sector and between 2001-2005 all we were interested were in Asia. The indians became a major partnet in FLAG telecom and its been uphill ever since.

  5. @tom thanks for your comment. well, according to WorldBank, whose data seems to be different, China happens to be the second largest economy and India fourth. It must be different methodologies, that are not exclusively based on GDP. If you click on the link, you will get all the information.

  6. Building networks in Africa will be a big boost economically for the surrounded countries.

  7. Dazed And Confused Monday, August 18, 2008

    What we’re seeing in Africa is the beginnings of all information booms, as Om pointed out. However the key difference is that the African people have chosen to skip progressive wired communication levels in favor of wireless. I attribute this to the cost of outlaying an underground fiber optic versus constructing a cell network. In short, while the rest of the world is in the process of distancing themselves from wired communications (see twitter, mobile computing, iPhones, etc…) Africa has skipped this step in it’s entirety. This will result in cost savings temporarily, but will it have ramifications down the road?

    My question is: Given that Africa does not have a strong underlying communications infrastructure, will this necessarily inhibit them from participating fully in the global economy, or will it have the opposite in effect by making the various corporate entities more mobile?

  8. It never ceases to amaze me how you think that OVERPRICING a product is not possible. You always call it “overbuilding”.

    You’re flat wrong. You can’t keep insisting that people across the nation and the world live on 1960’s wages while you feel they could afford these toys you want to sell.

    You want to sell your products? You need a customer base with a little money in their pockets. As long as big business attends their annual meetings, and the bankers, real estate holders, educators, medical providers, insurance providers, and goods sellers all collude to empty every pocket down to the last dime (because they DO indeed, have the real numbers to work with)…

    There will be an all out guarantee that you can’t sell any new products beyond the 3% range of the populace.

    That is because 3% of the populace has “discretionary” income and people don’t want to take on debt anymore because you broke the bankruptcy laws.

    You loose. You can’t sell your stuff.

    The economy will crash, and you will go bust too because you can’t use your money anymore either. There is no more American economy backing it up… or other nations by osmosis to stand behind those dollars.

  9. Dude Yellowbird what in the world are you talking about???

  10. @Tom and @Om: Economists usually compare country GDPs by normalizing currencies via PPP (Purchasing Price Parity) to reduce cost-of-living distortions. Via PPP, OM’s rankings stands.

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

  11. Tuesday Links – 08-18-2008 | Real Central VA Tuesday, August 19, 2008

    [...] Can Optic Cables Predict Economic Shifts? [...]

  12. Assessing Critical Mass for Mobile Applications | Eventually Consistent Thinking Tuesday, August 19, 2008

    [...] was reading uber telecom/broadband industry blogger Om Malik’s article on how undersea network cables are much akin to the sea-lanes from the 1400-1800s in the sense that [...]

  13. Hi Om,

    Nice article. I used it as a launchpad and added my own perspective here:

    http://zwadia.com/?p=46

    Cheers,

    Zubin.

  14. The Web V. Ethnic Sentiments | Mootbox Wednesday, August 20, 2008

    [...] Can Optic Cables Predict Economic Shifts? [...]

  15. Under The Sea, Google Expands Even More – GigaOM Tuesday, August 26, 2008

    [...] Can Optic Cables Predict Economic Shifts? [...]

  16. Hi Om,
    Quick question about the map. There is a lot of bandwidth that heads south out of Japan, and ends out in the western Pacific. What is this tropical island with lots of bandwidth? Guam? Kwajalein? Wake? Looks like a great place to live.
    Thanks
    David

  17. @David

    I wouldn’t go that far. That is Guam, and not quite that hot a place. By the way I am not sure what kind of bandwidth they have on the island. :-)

  18. It is World Wide Internet, For Real This Time – GigaOM Thursday, December 4, 2008

    [...] Can optic cables predict economic shifts? [...]

  19. Level 3 Has The Largest IP Network Thursday, December 18, 2008

    [...] gains because of a growth in Asia, where is started to offer transit services to more carriers. As we have noted previously, the growth in traffic in Asia is driven by the surge in the economic activity in the region along [...]

  20. Title For First Section | Beta Test Sunday, December 21, 2008

    [...] gains because of growth in Asia, where it has started to offer transit services to more carriers. As we have noted previously, the growth in traffic in Asia is driven by the surge in the economic activity in the region, along [...]

  21. Demand for Bandwidth Leads to Fiber Boom Tuesday, May 5, 2009

    [...] More than 60 percent of U.S. network operators surveyed will light new fiber on their network in 2009, and there are 16 planned undersea cable projects for 2009. That’s more than the number of cables laid in 2001, during the peak of the submarine cable investment bubble. This time around it will be cheaper, too, with the firm estimating the planned cable construction will cost $2.6 billion compared to $13.5 billion spent on systems back in 2001. The buildout in undersea optical cables should be viewed as a good thing, especially if Om is correct when he points out that network growth often presages an economic boom. [...]

  22. Anders Comstedt Tuesday, May 5, 2009

    Dear Om, having had a chance to follow the international submarine cable saga in East Africa the last decade and also participated in some studies and policy meetings on the issue, I can just confirm the change. Not least of mindset behind this development. And still you find significant differences between countries. It is no doubt that more progressive policy makers with a clear perspective on their reasons for changing the game is the key asset. Kenya is a good example (other political chaos disregarded). The reason to push international connectivity was as multifaceted as in other places, but compeating with the Indians on outsourcing was a clearly visible single goal. ” I have 20000 graduate students that we need to get into jobs right away just in Nairobi and not have in the streets” as one official put it well before the election riots (and the financial meltdown). In the year to come there will be 3 new cable systems connecting Mombasa to ROW. Two are just weeks away….

    Taking care of the international voice traffic could be possible still, for a good while at last, by using satellite. The big thing is the general Internet explosion just about to happen. And true, it will be lots of wireless access, but a lot of fiber, not only national backbones, also metro rings are just about to happen. Outside of capitals and a few district towns there is no copper, period. There may be 10 million cell phones to less than 200,000 POTS lines.

    A key problem is still licensing and gatekeeping, not handling commercial risks. Sound policy making is still in short supply. Actually, South Africa, by many in the west oddly looked upon as a liberal and advanced market, has systematically been shooting themselves in the foot until just a few months ago in protecting vested interests in Telkom. It was illegal to have a WiFi signal crossing the street… Alternative fibre was held back by not granting licenses etc. Could easily been much more dynamic.

    Creating and exploiting bottlenecks is a normality that needs to go. Everywhere in Africa. If that happens, and the political risks in general are reduced a little bit further for the telecom/ICT industry, we will see a very rapid development, likely moving faster than resources seem to allow if we just look at GDP and disposable income. Considering those indicators, there are far too many mobile phones in Africa. The difference is the informal economy not visible in stats.

    It will move fast now, also with relative growth of number of Internet users. The biggest problems? Bell heads and vested business interests.

  23. How Much Bandwidth Can You Buy With $15,000? Wednesday, May 20, 2009

    [...] can have a major impact on businesses and economic activity, as I argued in an earlier post, Can Optical Cables Predict Economic Shifts? In Africa, the growing bandwidth demand comes from a boom in mobile services, which in turn [...]

  24. Miami Firm Plans First U.S.-Cuba Fiber Optic Cable Wednesday, October 14, 2009

    [...] Cuba — which is the only nation in the Western Hemisphere without a fiber optic link to the outside world — has yet to give final approval to land the cable, and the Cuban government would set calling rates and could restrict web access. But it’s tough to overstate how important fiber optic access could be. While Cuba currently uses slow, expensive satellite links, TeleCuba’s cable would support 8-10 terabits per second, enough for more than 160 million simultaneous phone calls. So while Cubans may still be stuck with antiquated American cars, they may soon have access to modern American broadband — and that could be very good news for the Cuban economy. [...]

  25. Google’s Bet on Asian Bandwidth Boom Will Likely Pay Off Monday, June 7, 2010

    [...] broadband consumers as well as areas within the region. Om said such an investment in cables could presage an economic boom. From my standpoint what the new construction most likely means is that costs will go down for [...]

Comments have been disabled for this post