It was one year ago that Aqua Comms polished off the build-out of the transatlantic cable system America-Europe Connect (AEConnect). This past autumn, the company brought in as CEO an industry veteran with extensive experience in all aspects of the submarine cable industry. Nigel Bayliff started out at Mercury Communications back in the 80s, moved on to what later became Virgin Media, then on to Flag Telecom, and more recently to Huawei Marine, with various periods of independent consulting in between. He joins us today to discuss what the submarine cable market looks like today and where Aqua Comms goes from here.
TR: How have things been things going since the launch of AEConnect last year?
NB: The final splice was at the end of November 2015, and services were commissioned by January of 2016. We've essentially built our operational capabilities to deliver services from New York to London via Dublin. We've got two fiber pairs occupied by internet content players. Then our own fiber pair is lit by Ciena's WaveLogic 3 with end-to-end encrypted SLTEs, and we have been selling 100G and 10G services to the carrier's carrier market. We've also negotiated some spectrum deals with particularly large purchases of capacity.
TR: How does Aqua Comms differentiate itself from other transatlantic bandwidth options?
NB: There's always been something non-traditional in the Aqua Comms story. We offer enormous bandwidth between the US and the west coast of Ireland down trough resilient backhauls to Dublin, across the Irish Sea on a cable we own, CeltixConnect, with a resilient path via an alternative, and then on to London via discreet and separate backhauls. So, our transatlantic PoP to PoP network provides protected terrestrial routes all the way up to the landing stations in Ireland and the US, and onto a unique submarine New York to London route. Virtually every other cable on that New York to London route lands within a 30 to 50 mile stretch of the Cornish coastline. It transits through shallow water off the coast of Cornwall that is one of the most heavily trafficked areas in the world for ships going into the English Channel. Landing on the west coast of Ireland, where we use very little shallow water to transit from the deep water to the landing site in Killala, gives us a great story on resilience and protection from those natural hazards — fishing, ship anchors — that do affect submarine cables from time to time.
TR: Do you have any plans for expansion, whether it’s new cable systems or additional branches?
NB: I don't think for us building another transatlantic segment makes a lot of sense, but we would be quite happy to add routes and collection networks to our transatlantic segment. So we're looking at a range of different developments. For example, there's talk of Scandinavia as a place where people want to originate traffic from without going the normal route through the Eurotunnel to the UK and then out. They'd like to come around the top of Scotland. Another possibility is a second cable across the Irish Sea that might pick up some traffic from the Isle of Man, which we could possibly put some time and money behind. There is also talk of possible extending southward into continental Europe.
TR: How would you fund such projects?
NB: We've got a good shareholding in our organization, some publicly-announced shareholdings not least of which was by the Irish state infrastructure fund. That provides us with several potential ways of sourcing capital to build such extensions. But all of these will be predicated upon customer need. It's been many years since the “build it and they will come” mantra has been used in telecom, and nowhere in the world sees that as a way to build systems anymore. There has to be a very solid business case, a series of anchor tenant customers and an efficient build price. We've got the team here to be able to build such add-on segments, and we'll look at those plans throughout 2017.
TR: What types of customers have you been seeing the most success with?
NB: We have two content providers who have purchased at the fiber pair level, but also other content providers who have purchased at the capacity level. Then we have a traditional spread of a wide variety of global carriers. People are looking to find resilient routes across the Atlantic, away from the traditional route of Cornwall to New Jersey, and when they look at our backhaul they are happy to see the resilience there. The fact that we essentially own and operate the route from London all the way through and across the Irish Sea and out through Killala, and don’t just combine it from lots of pieces, is a positive thing. We also have the smallest amount of shallow water cable across the Atlantic, which means having a very low probability of cable faults over the years.
TR: Transatlantic pricing has long been a tough neighborhood, how does the arrival of at least two new cable systems after a decade-long drought change the dynamic?
NB: I think pricing for the last decade and a half has been interesting. It has been falling because of the unique nature of the transatlantic market and what happened in 1999-2001 with massive oversupply leading to a series of failed businesses and then parties purchasing assets for cents on the dollar and being able to monetize those at very low pricing. What we've seen on the Atlantic since 2002-2003 is over 90 percent price declination. Yet if you look at the amount of capacity one can provide per fiber pair with capacity uplifts, the order of magnitude of growth of capacity on a cable system versus the price declination has still managed to hold up economically. Price declination is still in the range of 15-30 percent per year. But modern systems will have the gross capacity to ride that out. The older systems, however, are starting to reach a potential top point, and the economic costs of additional upgrades on what they have squeezed out there already are starting to look non-optimal. I think what you'll see is that now that new cables have been built, decisions will start being made about retiring older assets. That's an economic decision not a technical decision, but it will be an economic decision taken by different groups of people for different reasons. Private operators will have a different reason from consortiums and from the smaller private clubs that have been seen in recent years. After we will see some cable retirements over the next two to five years, the Atlantic will probably start to move back toward a more normal model of people building new capacity every five years or so to add to the capability, capacity and route diversity across what is the most important communications ocean in the world.
TR: In addition to the two we have seen, the MAREA cable is also on the way. Will that be the end if it? Or do you think there will be more?
NB: I've heard there is at least one more, and it makes some design sense that there be four new routes, especially since they go to different locations. But at the end of the day, these systems cost a number of hundreds of millions of dollars. If you've just built three in rapid succession, then it's all about the ultimate, overriding driver of demand. At the moment that is the content providers, not the normal growth of traffic or the retirement of older systems. If the content providers decide they want four systems to provide a diversity matrix, then there will be four systems.
TR: Another new thing we saw recently was the purchase of a transatlantic cable operator, Hibernia Networks by GTT. What do you think about M&A in Aqua Comms’ future on either side of the table?
NB: We have no plans to go looking for something which would grow our revenue inorganically. There isn't a sense to do that and it's probably not necessary. That recent piece of M&A is interesting, because it puts Aqua Comms in the position as the only independent transatlantic cable operator in the market. If you are a deeply competitive metro provider or deep optical network provider in Europe and you are looking for a partner to carry your traffic across to the US, if you look at the other providers of that capacity you would be working with someone that is competing with you, whether it’s down in the metro or at the enterprise layer or with the direct customer on the street. With Aqua Comms you are looking at a carrier's carrier. Does that make us attractive to M&A potentially? I suppose it does, and the high valuation and the price paid for Hibernia was certainly something that was of interest in the industry.
TR: What’s the biggest challenge Aqua Comms faces going forward?
NB: The challenges are to understand how the technology is going to grow and how new competitors are going to work on this route. I was around in 1999 and 2001 and saw the start of the boom and bust, and four new cables are probably a good number to give resilience across the Atlantic. If things move much beyond that, I think we'll all have challenge around competition and around potential oversupply. But at the moment I think we are quite balanced. We also need to understand what is happening at the customer base level. There's the Level 3-CenturyLink deal, for example. They are both parties we would have sold services to, but combined together we may not see as much sales.
TR: Thank you for talking with Telecom Ramblings!