Signs of change

In the last few weeks there have been some signs that the carrier world is likely to face its biggest change and shake up since the era of deregulation.

Postings from a high ranking Telia Sonera executive and news about Face books intentions underline that change is already here.

In a recent post Neil Tagare, who is never shy of writing what many do not want to hear, wrote on his blog that carriers should be very scared at the Facebook /WhatsApp news because it has the potential to shift a huge number of revenue generating communications off of carrier networks and onto the face book network.

Why are submarine cables relevant?

Personally I have developed the view that carriers should have similar concerns about what is happening in the submarine cable element of their global networks, at least in the Atlantic region where carriers show no appetite for further investment in cable systems and thereby look to cede control of this key element in global internet infrastructure to others.  That has to a degree already happened because most Atlantic cables are not controlled by major carriers but fortunately for them they are not controlled by entities that want to or could harm carriers either.

However while the Atlantic network look quite static on the surface is it realistic that with the constant growth in demand continuing at extra ordinary rates this transport requirement can be managed with aging to old infrastructure. In addition perhaps the largest global cable system operator–TATA seems to want to exit the wholesale business. As a wholesale operator TATA wanted good relationships with major carriers because they were customers but there are parties out there who have completely conflicting priories.  For brevities sake these parties, which to my mind include Google, Facebook and the very large Data Centre and domestic data operators , can be called Neo carriers because they have the potential to reinvent the carrier business for the 21st Century to be built around their network assets.

So how can this happen and how can it be a threat to the established carrier giants like ATT, Verizon and the large European legacy carriers and how can submarine cable systems play a part.

The rise of the Neo Carrier

The business model for these Neo Carriers is not homogenous but they do have similar characteristics , they need to transport data between very large nodes rapidly and resiliently and as that data carries IP, SMS, Voice , Carrier Grade LAN and all kinds of specialised customised data applications  they have the same basic function as traditional carriers .

The traditional carriers come from a world of voice, fax and private lines and they thrived because these were the vehicles of communication thirty odd years ago. They grew to establish nationwide end user networks (as the phone company) large domestic trunk networks and usually shared the cost of international capacity as consortium cable owners. The domestic and international trunk networks focussed on carrier owned PoPs or a few carrier neutral facilities that were usually located quite close to clusters of PoPs to serve them easily As we know too well there were private venture cable systems but they were almost uniformly unsuccessful financially and many were bought my other operators at low costs in order to sell capacity as a wholesaler to the carriers their only customers.  What is worse is that in addition to the change in competitive advantage on the supply side all these changes directly impact carrier revenues as voice and SMS disappear into a big bundle of IP transit, wholesale revenues vanish and the major data users like the banks and airlines buy integrates packages of services and transport from the neo carrier segment

The New Network Geography

But in 2014 things have changed – large data centres have grown up in many developed countries and these are often interconnected with high capacity often dark fibre based networks and they are often located away from city centres to avoid high property and operating costs –they interwork with each other but also interconnect with carriers and crucially large data users with direct fibre links.

These large users, the neo carriers, now find that their equipments for capacity are now of the same order or greater than their original suppliers the carriers and deregulation allows them get even better capacity deals on international links than many carriers because higher volumes equals lower unit costs. This change in levels of demand and thus unit cost between what was once supplier and customer has another impact. The Neo carriers no longer need or want capacity to be delivered via a carrier owned PoP-why can’t it be delivered directly to their nodes in some huge data centre. Data centres on this scale are bigger than traditional carrier PoPs and are wholly dedicated to the transport and interconnection of high speed data links complete with NOCs and network management facilities. Since they also have links to very large data users in commerce or government they are also directly connected to the high end of the traditional carrier customer base.

As regards subsea cables the carriers have allowed the Atlantic networks to drift along, lulled by cheap upgrades made possible by advantages in optical transmission and not seeing any strategic benefit in the network. However sooner or later there will be a crisis or demand will finally outgrow supply and when that happens –or before if a small group Neo carriers decide they no longer want to work with an aging infrastructure and interconnection architecture optimised for the 1990s. When that happens the traditional carriers may wake up and realise that their once single greatest asset, the scale and reach of their networks is no longer relevant because the Neo carriers have re engineered things to connect to their data centres and indeed all their traditionally large customers can now interconnect directly there too. What’s left-well a lot of legacy voice business with no value and a huge sprawling local delivery network serving mostly low volume and low value households and small businesses.

West vs east. Different Strategies

What is interesting is that it seems that in the Atlantic carriers have decided to let the international segment of the network fall into the hands of others. However in the Pacific the opposite is true where legacy carriers like CT, KT, NTT, SingTel etc have all recently invested huge sums in new systems which of course are optimised for their needs in terms of interconnection and financial and commercial competitive advantage. They it seems have decided that to continue to prosper they must continue to control the international network as much as they can and use it to their strategic advantage . So will the Atlantic legacy operators who are looking to move into OTT and entertainment services to replace revenues lost to the neo carriers, a move way away from their traditional skill sets and by now paying more for transport than their once large customers survive and prosper. Alternatively do the Asian giants have the right answer by investing so heavily in modern networks that they will retain the competitive network advantages of lowest cost and presence and therefore evolve into the Neo carrier role themselves preserving their traditional revenues, or at least controlling the rate of substitution and filling the role of data centre provider themselves to exclude new entrants and protect their market by defence not diversification.