XO Crosses the Pacific

January 19th, 2009 by · 6 Comments

XO Holdings (news, filings) has inked a deal with Pacific Crossing for capacity on the PC-1 cable, hooking up at Grover Beach with access to Japan, targeting Asian customers.  This is a new and somewhat surprising move by XO, which as recently as July had little capex to spend on expansion.  The refinancing of their debt by majority owner Carl Icahn gave them enough cash to do something, and I have been waiting to see what they might have on the drawing board.  Apparently, it was a giant picture of Asia.

Well, that’s not too surprising in a general strategic framework I guess.  Everyone has Asia in their sights right now, so much more data is coming in and out of the region that it cannot be ignored.  But here we’re talking about XO, which has little of an international client base.  Its offerings have always been national and regional ones, and the international bandwidth market is not underserved.

This move by itself seems odd, is there more in the works?  To really make a dent, doesn’t XO have to extend its footprint further?  After all, this deal is for 160Gbps, and that’s not something one buys for a single customer.  It’s not an idle purchase, but it doesn’t seem to stand alone either.  Next up, a followup link to Hong Kong and Singapore?  Or maybe capacity on the Southern Cross to Australia and New Zealand?

Recession or no recession, this plus the Verizon mesh expansion to Singapore imply that carriers feel they cannot cut back on Asia.  I’ll bet we see more of this as the year goes on.

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Categories: Internet Backbones · Undersea cables

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6 Comments So Far

  • fluids_only says:

    This moved really surprised me. As you say Rob, XO isn’t an international carrier and isn’t going to be one anytime soon. Its “international” business is based on providing US termination for international traffic (which it is well-positioned to do as a competitor to VZ, T, LVLT and TWTC, as it has a nicely upgraded national US backbone and a good number of lit buildings). But its Asia customers – large carriers – are all able to connect to this in the usual way, via interconnection at West Coast US, usually LA.

    XO may think that it can pick up more margin by interconnecting further away – in Japan, HK or Singapore – and hauling the traffic back itself. For this they would need to (i) create corporate presence, obtain licences and implement POPs in these locations, (ii) secure addtional Asia capacity (on the Reach, FLAG and/or PacNet Asia networks) and (ii) convince their customers to interconnect with them in Asia rather than in LA (good luck with that!).

    That all therefore strikes me as a strange strategy for XO unless it is part of a larger commitment to Asia in a big way. Are they really committed to steps (i) – (iii) above? Or would they enter the market through acquisition (eg, by buying PacNet?) Possibly if Icahn puts up more cash, as PacNet doesn’t really seem to be going nowhere and its valuation can’t be too high these days (Ashmore et al will be facing big losses to get out of that investment). But PacNet is already an invetor in the Google-sponsored Unity system.

    That might be reading too much into things, but it’s simply that a standalone purcahse of large trans-Pacific by XO just doesn’t seem to add up. Another point is that Pacific Crossing will have to be selling capacity very cheaply these days, what with TPE and Unity soon to boost Japan-US capacity. Within 12 months that company will be going for a song, so they might be starting to do going-out-of-business deals. Even so, I am surprised that XO thinks it needs 160G – that’s quite a bit of bandwidth.

    • Robert says:

      Looks like a play to get peering enhancments in Asia more than a customer play. This will allow XO to unload from paid peering with Level 3 and others going to Asia.

  • Rob Powell says:

    I thought about the possibility of XO doing this as a prelude to M&A, but I can’t make it work, either as acquirer or acquiree – this capacity doesn’t improve such scenarios. The only thing that seems reasonable is that XO has a big anchor customer for the pipes, one that either can’t or doesn’t want to manage its own transpacific capacity. But then I get stuck because I can’t think of anyone that fits the bill.

  • iSiS says:

    Honestly, this move shows me that they don’t know what they’re doing right now. They need to show that they can understand the US market – ANYTHING in the US market – before they spend this money on Asian initiatives.

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