News & media The Future of the Subsea Cable Market
When Sammel Morse devised a system of electronic relays in the 19th century, he changed forever the way information would be transmitted. Freed from the boundaries of distance, Morse opened the door to future innovations, including the development of subsea (or underwater) cables. The first transatlantic cable project was completed in 1858 and allowed, for the first time, a telegram to pass between two continents.
The telegraph revolutionised long-distance communication and worked by transmitting electrical signals over a wire laid between stations. Cables connected cities near and far. Fast forward to the current day and there is now approximately 1.4 million kilometres of fibre optic cable across the world’s oceans that connect countries around the globe[1]. These cables can transmit huge amounts of data rapidly from one point to another and are essential digital infrastructure for the maintenance of global internet networks and data transmission.
The Surge in Demand
The traditional demand for such infrastructure had been from telecom incumbents and the subsea cable sector was driven by investments from largely state-owned operators, but this has begun to change. In the last decade, the surge in both revenue and volume of data consumption by some of the US tech companies (e.g., Meta, Google, Microsoft), has far exceeded the conventional telecom businesses and this trend is likely to continue. Several factors explain this upsurge in demand including globalisation, the rise of e-commerce, financial transactions, and the increase in digital communications. This has presented a dilemma for US tech firms: if they choose to invest in their own subsea cable, they will be protected against incremental price increases to some degree by owning the asset directly as their data consumption continue to grow. On the other hand, though, the required capital expenditures will come at the expense of profit. Nonetheless, a large and growing pool of capital has provided these tech companies with an appetite to invest in the subsea infrastructure and, as a result, we see large capital moving in that direction despite lower returns.
Navigating the Geopolitics
There are various geopolitical considerations that require careful navigation in the subsea cable market: (1) increasing political tensions between Washington and Beijing, (2) the ‘new Cold War’ being waged under the sea and an ever-present threat from Russia, (3) China’s growing ambition and its shifting focus to regions where it maintains political and commercial influence, and (4) the heightened risk of espionage.[2] Each of these require a cautious approach by investors and governments, and striking a balance between the possible threats and the continuation of the subsea cable market is paramount.
In addition to the geopolitical situation, subsea cable – despite its evolution to high-speed fibre – is very susceptible to delays. This is due to the various challenges involved in its deployment such as permit approval, regulatory process, and weather conditions, among others.
Moreover, a long payback period and current high cost of leverage further impact potential returns. Often this results in subsea cable projects being executed by a consortium of companies who could share the risk, however this brings its own set of challenges (foreign exchange, etc).
Looking Ahead
Despite the concerns surrounding the subsea cable market, Cordiant believes it will continue to play a critical part in the overall digital infrastructure sector as the need for connectivity and the ability to transfer vast amounts of data securely will continue growing at a rapid rate. Investors looking to capitalise on this critical opportunity are advised to look for specialist funds that are equipped to mitigate the risk around such investment or more importantly, avoid altogether an investment proposition that could result in suboptimum performance for the investor. Strong industry expertise with active management is key to successfully navigating the future unknowns.
As Atul Roy, Cordiant’s Head of Telecoms Strategy, notes: “All variants of digital infrastructure play their part in bringing global connectivity together, and in doing so, are vital to the ecosystem, however, different types of digital infrastructure carry different risk profiles. Understanding and navigating this risk-reward ratio at the level of execution is vital for maximising return on investment.”
[1] How the US is pushing China out of the internet’s plumbing, Anna Gross et. Al., The Financial Times, June 13, 2023
[2] Ibid.
