Bell Atlantic. Made from sand, fiber optics go back iinto the beach and the sea.

Racing to Wire Asia
How undersea cable systems may yet fall short
By ASSIF SHAMEEN

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Web surfers downloading smut might have thought they'd been caught by a new anti-pornography program when their screens suddenly went blank on Nov. 20. But that day's Internet interruption, which affected online traffic between Asia, Australia and Europe, was no act of electronic prudery. The line was just cut — literally. The line in question was the 38,000-km SEA-ME-WE 3 undersea fiber-optic cable linking Southeast Asia, the Middle East and Western Europe, one of the world's busiest Internet backbone lines. The portion between Singapore and Jakarta was cut, possibly by a ship's anchor or rocks shifted by a tremor.

Whatever did it, the severing of SEA-ME-WE 3 shows how crucial the region's network of undersea cables is to the smooth operation and rapid expansion of the online world. It's not enough simply to match demand with transmission capacity or bandwidth. More data and voice "pipes" must be in place than are actually used, so that when part of the telecom plumbing goes down, as SEA-ME-WE 3 did, backup will be immediate. And with thousands of new computers in Asia logging on every day — downloading ever bulkier files with images, music and video — bandwidth demand is projected to rise more than sixfold by 2003. It already grew seven times within Asia and 233% across the Pacific in the year ended in June.

Clearly, Asia's online backbone must race just to keep comfortably ahead of usage and avoid bottlenecks that could hold back the e-revolution. "Bandwidth today is almost a proxy for the growth of Asia," says Anthony Christie, vice president of Asia Global Crossing in Hong Kong. Just over a year old, AGC is in the business of laying miles and miles of optical cable across the region. Its main shareholder, Global Crossing of the U.S., does the same thing around the world. Last year its chairman Gary Winnick called his old friend Bill Gates to ask whether the Microsoft guy would like to join him in wiring up Asia and making some good money off the looming bandwidth bottlenecks within the region and across the Pacific.

Winnick didn't have to badger. Gates not only backed the plan to wire Asia; the software supremo also brought in his buddy and fellow billionaire Son Masayoshi, the founder and boss of Japan's Softbank. Within weeks, Asia Global Crossing was launched, with Global Crossing putting up 57% of AGC's $1.8 billion capital, and Microsoft and Softbank 15.4% each. In October the 13-month-old joint venture debuted on Nasdaq after raising $876 million in an IPO and bonds — enough for the first phase of its bandwidth build-up. While the stock price has plunged amid the U.S. tech sector's slump, going from $7.50 six weeks ago to about $4.50 currently, AGC's prospects remain rosy amid the Asian telecom boom.

Plainly, capacity is barely keeping up with exploding demand, so bandwidth suppliers like AGC won't be short of business for years to come. AGC has sold about 3% of its transpacific cable infrastructure — and has recovered 18% of the total cost. "That's how big their margins are," says Rohit Sobti, a telecom analyst at Salomon Smith Barney. It's easy to see why. The regional market for voice and data traffic, overseas and local, totals $200 billion a year. Analysts expect that to top $350 billion by 2005. International call carriers in Asia, including Internet service providers, have multiplied to nearly 500 licensed firms, from fewer than 50 in 1995. They all want bandwidth going across the water.

There's more. Pratik Gupta, a regional Internet analyst at Salomon Smith Barney in Singapore, says that in Japan, Korea, Singapore and Hong Kong, domestic demand for high-capacity broadband services will double annually for the next three years. "It's already happening in Korea," he says, "but we see a contagion effect throughout the region." And when Asian consumers and companies get the heavy-duty wiring, providers of video, music and image, many of them from across the Pacific, will target the newly broadbanded for sales. So watch bandwidth take-up leap.

A pretty big shortage could arise. In a recent study, investment bank Indosuez W.I. Carr says that by 2003 transpacific demand would be nearly 4.4 terabits (trillion bits) a year, while intra-Asian usage would be about 3.6 terabits. But at present only 2.9 terabits are scheduled to go on stream across the Pacific and 2 terabits within the region. This despite a 58-fold projected increase in transpacific capacity between 1999 and 2003, and 24-times expansion within Asia in the same period.

Even given the expected surge in demand, some analysts think that Asia could be on the verge of a bandwidth glut. After all, AGC's main competitors — Level 3, another U.S. undersea-cable player, and C2C, a Singapore Telecom-led consortium — have both announced large cable-laying projects. But the most common analogy used — Asia's 1990s property boom, which saddled its cities with empty, depreciated buildings — is nonsense, says AGC's Christie. "People talk about demand and supply in this [bandwidth] business as if it were property. People look at newspaper reports that new capacity of 2.5 terabits is being built. They say: 'Holy smoke, there's going to be a glut.' But look at how carriers buy the bandwidth. They buy it for peak traffic, so even though you are not using all the capacity all the time, you still need to have access to it." Normal data communications requires a buffer of 10%-15% above than the actual data flow.

Because of Asia's geography, no matter how extensive its land networks become, all the wires eventually have to converge at key points on the shore to link with major marine cable systems. Until AGC came along, the only other provider of submarine fiber optics was "the club" — various consortia of major national phone companies which laid cables around the region mainly for their own use. These groups provided shore-to-shore cable but left land connections to local telecom operators. The arrival of companies like Asia Global Crossing is changing all that. To lure clients and offer more lucrative services, AGC has pioneered in providing links from shore facilities to end-users inland.

"If you use the hotel or resort analogy, the key isn't how the rooms will get filled but who starts branding, who offers a suite of irresistible services that customers want," argues Christie. "We have seven landing agreements with partners in Korea, Taiwan, Philippines, Malaysia and Singapore. We are already operating in Japan. The keys are connectivity, services and content. We don't provide content, but we work with partners who do. And we do provide connectivity and services."

Being one of the first in the business gave the Global Crossing group $18 billion in capital raised at the height of the markets' fascination with so-called TMT stocks (for technology, media and telecom). Another plus for early birds is expansion cost, which, Christie says, can be as low as 10% of the original investment. In upgrading an existing cable line, there would be no need to spend on new shore facilities. And with new technology, the additional cabling will have far more bandwidth at lower cost. But the biggest first-mover advantage is having signed up a host of clients before anyone else. That huge customer base will help spread the costs of any future expansion and upgrade.

Still, being first hardly means no rivals will follow. Level 3 will be laying cables between Japan and Hong Kong. C2C, a $2-billion cable network 60%-owned by SingTel, includes TyCom of the U.S. It also has domestic partners in East Asia, where the consortium plans to lay its pipes. Japan's KDD, Korea Telecom and Taiwan's Chung Hwa Telecom will take care of building links inland. Christie insists: "We don't see them encroaching on our business. We are catering to the Asian aspirations of Global Crossing, Microsoft and Softbank." That means not just providing bandwidth, but ensuring quality data flows so carriers and end-users get the content and transaction activity they want.

Competition has in fact been the major driving force behind the bandwidth boom. The ninefold increase in international telecom carriers across Asia, all hungry for new bandwidth, would not have been possible if governments had kept phone monopolies in place. One of the last holdouts is Singapore, and it is now liberalizing two years ahead of schedule. Among major markets, that leaves only China and India still closed. Even that won't stop AGC; it hopes to lay cable just outside the territorial waters of both giants, so that it can quickly connect to shore and inland the moment Beijing and New Delhi allow it.

The clear winner in the cable wars is not AGC or the club — but the end-users. As capacity expands, prices will drop. Many analysts factor into profit forecasts declines of up to 85% from current bandwidth costs. Will the cable guys still make money then? You bet, says Christie. Lower prices will boost usage even as the cost of adding capacity keeps falling. Today's high-margin business will become a high-volume one, making billions by serving many millions of users across Asia. This is one pipe dream that may just come true.