International data and structuring
ownership of submarine cables
Rory Macmillan
Partner, Macmillan Keck
2016 Digital Thailand
Bangkok 26 May 2016
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The theme of this presentation is how careful
structuring of ownership of submarine cables may
help the supply of low cost international data (a
crucial input for Thailand’s digital economy)
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Contents
• Demand
• Supply
• Structuring ownership
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Contents
• Demand
• Supply
• Structuring ownership
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Penetration rates are still rising and have scope for further increase in Asia-Pacific, including Thailand
GSMA
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Smartphone penetration is rising quickly – of 5.5 billion mobile users expected worldwide by 2020, 50% are
expected to be using smartphones
CISCO 2016 VNI
Asia Pacific
GSMA
GSMA
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The combination of rising smartphone penetration, bandwidth-intensive services (particularly video), and increasing
access network capacity (particularly LTE), are expected to produce 46% CAGR in mobile traffic consumption to 2020
Global
Asia Pacific
Content of mobile traffic
Average mobile data traffic consumption
Average mobile data speeds
CISCO 2016 Visual Network Index
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Much of the growth in consumption of data is driven by content and other ‘over the top’ (OTT) players, which are
location-independent, attracting millions of customers on a global scale, and growing fast
The global OTT market is expected
to grow from USD 28 billion in
2015 to USD 62 billion by 2020, at
an estimated CAGR of 17.2%
Key drivers:
• adoption of device-based
computing
• growth in demand for content
• increase in requirement for
compliance and verification
• increase in wide availability of
broadband infrastructure
• personalization of technology
MarketsandMarkets, Detecon
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Content and other OTT players place major demands on telecom networks, with real-time entertainment
dominating bandwidth consumption and file sharing remaining strong in Asia Pacific
Sandvine
Online non-linear media
Sandvine
E-commerce and platforms
‘Freemium’ VoIP providers
Social networks and messaging
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Contents
• Demand
• Supply
• Structuring ownership
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The radio access network is crucial for delivery of high speed mobile access, as is the backbone network
Thailand is taking significant steps to make
spectrum available for LTE to build on its
already high 3G coverage (97% population)
•
1800 MHz LTE auction in Nov 2015 for US$
2.25 bn for two licences
•
900 MHz LTE auction in Dec 2015 for US$
4.2 bn for two licences (second one re-bid)
•
2600 MHz band coming available mid 2017
as MCOT spectrum is refarmed
•
1500 MHz possibly coming available 2020,
if refarmed from TOT
GSMA
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International bandwidth supply is growing, including in Asia-Pacific
Telegeography
•
Growth in use of international capacity is being driven by content providers (e.g., Google, Microsoft,
Facebook)
•
These use about half of used capacity on the intra-Asian and trans-Pacific routes
•
Growth in private networks is nearly twice growth in internet capacity
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An increase in supply of international bandwidth is needed in much of Asia-Pacific
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After a slowdown, submarine cable construction is surging, with new cables being launched shortly
33 new cables (worth over US$8 bn) are expected to
launch, ready for service (RFS) in the next three years,
including in Asia-Pacific
Telegeography
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Just as with the trend in capacity purchase, content and other OTT players are increasingly investing in submarine
cables
•
Content providers may act as anchor
investors and consortium members in
submarine cable systems
•
Eventually, they may build their own
private cables (e.g., Google’s plan to build
the Junior cable between Sao Paulo and
Rio de Janeiro in 2017)
Investments in the Unity and Southeast Asia Japan Cable systems and
the planned FASTER and Monet cables
Investment in the planned Asia Pacific Gateway consortium cable
Member of the New Cross Pacific consortium cable and a major capacity
customer on Hibernia Express and the AEConnect cables
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In addition to new-build, technology is multiplying capacity, creating extensive unexploited capacity in many
countries
•
Technological advances have multiplied
capacity by 10+ (e.g., from 10 to 100
Gbps)
•
There remains substantial unused capacity
available over existing cables
Telegeography
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Long-haul capacity prices are falling mainly due to cheaper transmission equipment that increases supply and
reduces the cost per bit both in capex and opex
Telegeography
•
In the global market, prices are reducing
commensurate with growth in demand
•
Median 10 Gbps prices of key global routes
declined CAGR -25% 2012 – 2015
•
Major variations in price declines and price
levels still exist
• Los Angeles-Sydney = 4.3 x Los AngelesTokyo
• Miami-São Paulo = 5.4 x London-NY
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Thailand’s demand is bumping up against its existing supply of submarine cable capacity, and its challenge is to
ensure supply of sufficient capacity and to pass declining international prices through to consumers
Existing CAT cables
• TIS (Thailand Indonesia Singapore)
• SEA-ME-WE 3 (93 countries to Europe)
• SEA-ME-WE 4 (15 countries to Europe)
• AAG (Asia-America Gateway 8 Asian countries plus USA)
Planned cables (with limited regional connections)
• MCT (Malaysia-Cambodia-Thailand) Ready for Service (RFS)
Q4 2016 (Symphony & DTAC as Thai members)
• MYTHIC (Myanmar-Malaysia-Thailand Interconnect) RFS
April 2017 (Campana Group)
• JSC (South-East Asia Japan Cable) has option to connect to
Thailand (TOT as Thai member)
CAT
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Thailand’s many internet links to foreign countries should enable competition in Internet bandwidth, but upstream
concentration of control/market power over submarine cables may impede competitive pressure on prices
Nectec
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Contents
• Demand
• Supply
• Structuring ownership
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Ownership and financing of submarine cables can be structured in various ways to reduce cost, control risk and
accelerate rollout
Consortium
• Historically ‘club’ of incumbent operators for their own purposes
• TIS (Thailand Indonesia Singapore) – CAT as Thai member
• SEA-ME-WE 3 (93 countries to Europe) – CAT as Thai member
• SEA-ME-WE 4 (15 countries to Europe) – CAT as Thai member
• AAG (Asia-America Gateway) – CAT as Thai member
• MCT (Malaysia-Cambodia-Thailand) – DTAC as Thai member (Ready for Service
Q4 2016)
• APCN2 (10 countries in Asia-Pacific)
Private
• Allocation of Minimum Investment Units (MIUs) or Minimum Assignable Units
(MAUs) according to participation, discounting for amount invested
• Specialist and large international players, carrier neutral or for own-purposes
• MCS Singapore-Jakarta – owned by Matrix Cable System
• JAKABARE Singapore-Indonesia – owned by Indosat
• JASUKA Indonesia-Singapore-Malaysia – owned by Telkom Indonesia
Project finance
• Development
financial
institutions (DFIs)
• Loans,
guarantees,
equity
• Export credit
agencies
Vendor financing
• Competitive
feature offered
by vendors
• Delays/reduces
CAPEX cost
• Lighter burden
than debt
financing
Pre-sales, down
payments
• Sales of IRUs
rather than
leases
• Reduces upfront
financing costs
PPP
• Government participating as consortium member, anchor customer, subsidy
provider
• Public sector involvement facilitates approvals, reduces political and regulatory
risk
• Private sector involvement improves financing costs and reduces operational risk
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The domestic regulatory framework influences the speed of deployment and the commercial opportunity presented
by the submarine cable, and can aim to reduce cost through competition or regulation of market power
Non-telecom rights and permits
• Rights of way
• Municipal construction and land permits
• Environmental permits and cost/benefit studies
• Defence and security approvals
Telecommunications licensing
• Licence to provide telecommunications service (if for public use)
• Special cable landing licence in some cases
Telecommunications regulations
•Interconnection obligations
•Essential facilities and open access requirements
•Reasonable and non-discriminatory pricing and other terms &
conditions
•Reference offer obligations
•Colocation obligations (space, power, access)
In Thailand:
•
Prices per Mb remain 3 x Singapore
•
NBTC is considering regulating submarine
cable capacity prices
•
But is there scope for competition to reduce
prices?
•
Consider whether ownership and governance
structures may better serve policy objectives
than behavioural regulation of reasonable and
non-discriminatory terms and prices
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Ownership and governance models affect competition and investment (1)
Option 1 – Business as Usual (BAU)*
• Market player as landing party
• Landing party offers wholesale to other
operators by contract
• Other operators do not have an
ownership interest
• Landing party entity is a profit centre
Retail market
Retail market
Operators
Contract rights
to capacity
*Typical in most markets
Landing party entity
Capacity rights
Risk of rent seeking by the
landing party and conflict of
interest between landing party
entity’s shareholders and nonshareholder customers may
hinder competition and result in
higher prices
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Ownership and governance models affect competition and investment (1)
Option 2 – Wholesale only provider (WHOP)
•
•
•
•
Wholesale only provider
Contract rights for all operators
Operators have no ownership interest
Landing party entity is a profit centre
Retail market
Operators
*Developing model where cables are held
by international wholesale players
Contract rights
to capacity
Landing party entity
Success of the model depends on having
multiple submarine landing stations with
multiple landing parties to ensure
wholesale competition
Capacity rights
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Ownership and governance models affect competition and investment (3)
Option 3 – Family and Friends (FAF)
Retail market
• Operator consortium owns the
landing party entity
• Landing party entity sells capacity
to owners (and other operators)
• Landing party entity is a profit
centre
Retail market
Other providers
Operator investors
Contract rights
to capacity
Ownership rights (shares)
Contract rights
to capacity
*Increasingly used, e.g., Mauritania’s ACE
landing station
Landing party entity
Capacity rights
Landing party entity remains a profit
centre with risk of rent seeking. Conflict
of interest for landing party entity
between its shareholders and other
providers. The risk can be mitigated
through non-discrimination obligations if
the monitoring and enforcement
regulatory regime is strong.
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Ownership and governance models affect competition and investment (4)
Retail market
Option 4 – Keck Cooperative (KECO)*
• Cooperative model
• Equity ownership interest with direct
capacity rights
• Landing party entity is merely a cost
centre
*Conceived by Richard Keck for ACE
cable landing stations in West Africa
Retail market
Other providers
Contract rights to
capacity in a competitive
wholesale market in
international capacity
Operator investors
Cooperative ownership in landing party entity
combined with corresponding rights to its capacity
Landing party entity
Capacity rights
Where there are few cables and
landing stations, competition is inbuilt into the ownership, enabling
competitive wholesale and retail
markets
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A variety of options are available, some more suited to others depending on the circumstances and objectives
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Conclusions
• Globally, technology, markets and consumer behaviour are driving a rapid growth in
demand for bandwidth, particularly international data (which can also be expected in
Thailand)
• Access network LTE technologies and 4G frequencies are enabling supply of
bandwidth for these services over mobile broadband networks (including in Thailand)
• Submarine cable networks are racing to ensure that the supply of international
capacity keeps up with this growing demand through investment in new cables and
technology improvements that multiply capacity of existing cables (less so in Thailand)
• Prices of long-haul data in the international market continue to drop as supply keeps
up with demand (from which Thailand could benefit)
• However, the structure of the domestic submarine cable market is key to ensuring
that the benefits of higher supply, greater efficiency and lower prices are passed
through to consumers (a problem facing Thailand)
• Bottlenecks over international capacity in the domestic market can be addressed
through ownership and governance, enabling competition and pass-through of lower
prices for consumers (including in Thailand)
• Thailand may benefit from reviewing ownership and governance structures of
submarine cables
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