In 2011, a 75-year old pensioned woman from Georgia (Caucacus region of Eurasia) was digging for scrap metal. She came upon a fiber optic cable that she sliced through, hoping to retrieve the valuable copper metal. She did not know that the copper was covering a cable that was incredibly important for communication. This one cable was the sole supply of internet to Armenia, a neighboring country from Georgia. As a result, 90% of the country had no internet access for 12 hours. This kind of story makes you think about how vulnerable we sometimes are.
Global communication is done through subsea fiber cables. These are lines that cover the bottom of our oceans and connect continents and countries with one another. As of now, we have more than 700,000 miles of fiber cable on the seabed, responsible for 99% of all internet traffic. Satellite internet traffic accounts for less than a percent.
These cables are the size of your garden hose, made up of tiny strands of glass (as thin as a hair) which are covered by a plastic tube, which in turn is covered by steel wire. After the steel wire, it will be covered with copper. In some cases, dependent on the location, a further 1 or 2 layers of steel wire will be applied. At last, there will be a plastic insulation.
The industry for laying these subsea fiber cables was booming in the 1990’s. Telecommunication firms were laying as many as they could, and wholesalers/resellers were thriving. Money was being made left and right, until the dotcom bust and the industry died for a good decade. No new developments were made for more than a decade, primarily due to the discouragement following the dotcom bust, and telecom companies selling their assets for pennies on the dollar.
In the past few years, we have seen the industry picking up again. Internet traffic is growing rapidly, especially with more content being produced and watched on a daily basis. This in turn has led the industry to be taken over by the new leaders: content providers and cloud computing firms. Just 4 years ago, internet companies accounted for less than 20% of the investments, and today it accounts for more than 80% of the investments.
Google is the largest owner of subsea fiber cables within the internet/technology industry. They own 63,605 miles of fiber cables. The closest competitor is Facebook with 57,079 miles. Other involved companies are Amazon with 18,987 miles and Microsoft with 4,104 miles. Most of these cables are owned in partnership with other firms, and less than 20% of them are wholly owned by the mentioned companies.
The cost of laying a new cable has been reduced significantly. A transatlantic line would cost around $200 million now. A larger project, such as the Scandinavia-Japan line (developed by Finnish firm Cinia Group Oy) at a length of 11,000 miles costs $600 million. Such a line will cross through Russia, bringing along the risks of frozen ocean waters during winter (no maintenance access) and Russian meddling/attacking of the lines. On the other hand, it will reduce data transfer time by a few milliseconds, which can be vitally important for financial institutions, as well as a whole range of other purposes.
Other notable developments and partnerships are China Mobile with Amazon Web Services and Facebook for a line from San Francisco to Hong Kong and Singapore, as well as the partnership between Huawei and British firm Global Marine Systems to lay a 9,000 mile line from Britain to South Africa (with 12 nations in between) and a 3,700 mile line from Cameroon to Brazil.
As I just mentioned Singapore, it is important to see the relationship between the average GDP per capita and the access to high bandwidth. There is a strong correlation between a higher kbps rate and a higher GDP per capita, as shown in the chart and table below.
The subsea fiber cable industry it set to double every two years, which technically makes it a great investment opportunity. This growth is led by a multitude of factors:
1) New investments are underwritten by the internet companies based on realistic demand. It’s not the same speculative industry as it was for telecom companies in the late 1990’s.
2) Most cables are at minimum 20 years of age, meaning that replacements and/or upgrades are highly necessary.
3) Therewillbeanincreaseinshorterroutesforregionalsystems,withmostof the world still having a bandwidth of less than 30kbps right now.
4) The upcoming technologies of 5G, IoT, AR, VR, Quantum and AI mean that the demand will increase rapidly.
5) New technology allows for greater capacity at minimal cost increase.
6) New laser technology and cleaner glass strands have drastically reduced the costs for longer routes.
7) There is a need for route diversity. For example, more than 10 cables go through the Suez Canal, a few anchors or a terrorist attack on these cables can shut down a large part of the global internet. On top of that, specific foreign nations have mini submarines close to the cables, and potentially might want to damage the lines. It is important to have a minimum of 3 routes, due to the risk of terrorist attacks / earth movements / anchors / other methods of damage.
8) Every couple of days a line breaks, requiring immediate maintenance. More lines will lead to more maintenance work to be done.
The risks to sustainable growth are new technological developments that increase the data size capacity beyond currently expected or overbuilding on specific routes.
As an investor, you have many choices to gain exposure to this industry. Internet companies such as Google, Facebook, Amazon and Microsoft offer indirect exposure. Amongst these, Google is our favorite. But for this article we will look at a few of the companies that operate primarily within this industry.
Lumentum is a world leader in optical communication solutions. They recently sold off a few of their non-core companies. 85% of their revenue comes from their optical communications area, for which they released their next generation of technologies on March 4th. With the recent resolution between Apple and Qualcomm, as well as broader overall developments, 5G networking will become a standard in the coming years. Lumentum manufactures a variety of critical parts for the subsea fiber cable industry. The stock went down almost 30% within the last month, primarily due to trade war concerns. This allows for investors to pick up more stocks at a discounted price. I have been invested since 2016 and will continue to hold for the forthcoming years.
KT Submarine, a Korean company, is the purest play on the industry. KT owns and operates 3 vessels, one of which has a sole focus on laying cables, while the other two both lay and maintain the cables. Their focus is on Asia-Pacific region, an area that will soon require a lot of maintenance/replacement for the cables laid out prior to the year 2000. On top of that, many regions in APAC are still stuck with bandwidths below 30kbps and will soon require new upgrades. KT Submarine is one of the contestants to win new projects in this region.
Other options includes II-IV (Two-Six) Incorporated, Ciena Corporation, Infinera Corporation, Fujitsu Limited, Nokia Corporation, NEC Corporation, and Prysmian Group SPA,
Note: author Nicole Starosielski wrote the book “The Undersea Network (Sign, Storage, Transmission)” in 2015. If you are interested in gaining a better understanding of this industry, I highly recommend this book.