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08/25/16 05:00:20 PM
TECH KNOWLEDGE

SECTORS: THE UNSEEN WORLD OF SUBMARINE CABLES

Communications equipment companies will likely benefit from the rapidly-growing number of submarine cables being placed to meet the exponential increase in global data traffic, says S&P Global Market Intelligence. Global Internet traffic will increase three-fold between 2015 and 2020, reaching 6.4 exabytes per day, according to Cisco. To put that in perspective, in 2020, the gigabyte equivalent of all movies ever made will cross global IP networks every two minutes. In 1995, roughly 50% of all transoceanic Internet data was sent through undersea cables while satellites were used for the other 50%. Today 99% of all data traffic is sent via undersea cables.

At the end of 2015 there were 285 submarine communication cables buried beneath the oceans with a combined length of roughly 620,000 miles, according to TeleGeography, a telecom research firm. Newer cables typically consist of four or six fiber optic pairs, with each fiber in a pair carrying data in one direction. The longest single cable is SEA-ME-WE 3, stretching 24,000 miles, connecting 31 countries across three continents. With the growth in data traffic, the number of submarine cables has almost doubled, from 150 in 2012 to 285 in 2015. Between 2011 and 2015, $6 billion was invested in submarine cables with roughly 47,000 miles of new cable placed each year, according to industry publication Submarine Telecom Forum. Meanwhile, 2016 is expected to be a breakout year for the submarine cable industry with 93,000 miles of new cable.

Cables are designed to have an operating life of roughly 25 years, but many companies retire cables long before then to avoid potential unexpected failures that can occur when cables reach the end of their lives. Also, given rapid advances in technology, cables can quickly lose their commercial viability; although companies like Ciena specialize in upgrading the capacity of these cables. The cost of submarine cables has decreased significantly in the past few years, and now is cheaper per mile in some cases than running cable over land. Submarine cables have the added benefit of connecting different countries at single points, avoiding any risks associated with a similar land run that may cross through unstable regions of the world. Submarine cables face a number of threats from anchors, fishing nets, natural disasters and occasionally sharks, which have been known to chew on exposed cables. Cable breaks can cost $1 million to $3 million to repair, taking an average of 21 days.

Laying submarine cables is still no easy task, requiring many months to complete with price tags in the hundreds of millions of dollars. Cables are built as a single long strand, which is then loaded onto special ships that move slowly across the ocean, placing the cable. We see companies like TE Connectivity (TEL 62 ****) likely benefiting from submarine cable growth given its fleet of ships that can place and repair cable. Cable thickness can vary from one inch in diameter for deep-sea cables (weighing 2.5 tons per mile) to four inches (60 tons per mile) for shore-end cables, which need additional protection from threats. The cable cost varies greatly, depending on total length and where it is placed. A recent cable placed by Alphabet (GOOGL 805 *****) and five other investors, connecting the U.S. and Japan, cost roughly $53,000 per mile, while a cable across the Mediterranean recently cost $144,000 per mile. Adding to the cost is the need for repeaters, which are missile-shaped devices, weighing roughly 1,000 pounds and costing up to $1 million each that boost the signal strength along the cable. These devices must be placed every 35 to 75 miles along the cable, depending on the overall length.

Ciena Corporation (CIEN 22 ***) provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. S&P Global Market Intelligence expects Ciena to benefit from submarine cable operators upgrading existing cables to increase capacity and extend the economic life of the cable. While capacity demand is increasing rapidly, the price for capacity on a per-bit basis is falling, posing multiple challenges for submarine network owners. Ciena's GeoMesh solutions enable operators to upgrade existing submarine cables from legacy 2.5Gb/s and 10Gb/s to 40Gb/s and 100Gb/s technologies through upgraded terminal equipment. This is much cheaper than running new cables and in some cases can provide massive capacity gains on existing cables.

Corning Inc. (GLW 23 ***) is a maker of high-technology fiber optics for the global telecom industry and high-performance glass components for the personal computer, television, and mobile device manufacturing industries. The optical communications segment represented 33% of GLW's sales for 2015. The carrier network product group consists primarily of products and solutions for optical based communications infrastructure for services such as video, data, and voice communications. S&P Global Market Intelligence foresees GLW likely benefiting from increasing demand for fiber optic cable, driven not only by the growing number of total miles of cable placed each year, but also by the increasing number of fiber pairs placed in each cable.

Nokia Corporation (NOK 6 *****), together with its subsidiaries, provides network infrastructure and related services worldwide. In early 2016, Nokia completed its purchase of Alcatel-Lucent. Alcatel-Lucent is the industry leader in submarine cable production, installation, and maintenance, with approximately 40% global market share in 2015. S&P Global Market Intelligence forecasts the company likely benefiting from both the growing number of cables being placed and also from the associated maintenance and repair revenues. The company operates a fleet of seven cable ships and has in-house cable manufacturing capabilities.

TE Connectivity Ltd. (TEL 62 ****) designs, manufactures, and markets engineered electronic components, network solutions, and undersea telecommunications systems. The Subsea Communications (SubCom) segment accounted for 6% of total revenues in FY 15 (Sep.) and has recently been growing at double-digit rates. The SubCom segment designs, manufactures, installs, and maintains submarine fiber optic systems. Like Nokia, TE Connectivity has its own fleet of cable ships and in-house cable production capabilities. S&P Global Market Intelligence anticipates TE benefiting from growing demand for long submarine cables and the associated maintenance revenues.

Our outlook could be undermined by slower Internet traffic growth, reducing the need for new cables.

 

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