Masao Fujita NTT

Slide1 : How Australia Is Served or Not by Cable Systems Commercial Aspects of Cable Projects Masao Fujita NTT Australia April 2007


Topics : Topics Submarine Cable Systems in Asia Pacific Common Carrier Cables Private Cables Private Cable Boom What Is IRU? How Australia is served?


Slide3 : Submarine Cables in Asia Pacific


Cables to/from Australia : Cables to/from Australia


Cables to/from Singapore : Cables to/from Singapore


Cables to/from Hong Kong : Cables to/from Hong Kong


Cables to/from Japan : Cables to/from Japan


Common Carrier Cables : Common Carrier Cables Carriers form a consortium and jointly construct, operate and maintain a cable system (Construction and Maintenance Agreement). Based on the carriers’ capacity demand forecast (DGM, PIM). The cable system owned by the carriers in common and undivided shares in proportional to their investments. Cable capacity assigned to the carriers in proportion to their investment shares (bulk advantage). Management by the investing carrier democracy Steering Committee, C&MA SC, Procurement Group (Planning) Management Committee, PG, A&R, O&M, F$A SCs (after C&MA). Voting by majority (voting shares = investment/ownership shares) Investors = Users (Carriers), Investment = Use Possible IRU sales (by cable consortium or individually by carriers) Low risk. Financing not required. Capacity acquired at cost. Issues: Decision making Difference of interests between: Large investors vs small investors Large investors (large demanders vs small demanders)


Private Cables : Investors (not necessarily carriers) from a SPC to construct, operate and maintain a cable system and to sell the cable capacity in the market (Company Charter, Shareholders’ Agreement). Based on market capacity demand (perceived by the investors) The cable system owned by the SPC, which in turn owned by the investors in investment shares. (Can be a complicated ownership arrangement) Cable capacity owned by the SPC for its commercial sales in the market. Company management Board CEO, COO, CFO Tax benefit maximization (company location, structure) Investors = Users, Separation of investment and Use Capacity sale is a must (“IRU”, Lease) High risk. Various financing utilized: share sales, bank loan, vendor finance, etc. Capacity sold at market price. Issues: Business plan realized? Re-financing and/or bankruptcy Chapter 11 and phoenix? Private Cables /


Private Cable Boom around 2000-02 : Private Cable Boom around 2000-02 PTAT-1: the first private cable. FCC PTAT-1 landing license in 1985. NPC: the first private cable in Asia Pacific 1991. The big success of Atlantic Crossing 1 in 1998. Global Crossing sold all initial lit capacity in 1998. IPO and max market value US$38B. Expand global cable network (PC-1 and EAC in Asia Pacific) Followers: Level 3, 360networks, Project Oxygen, etc. Suppliers’ entry into capacity business (Tyco, Alcatel/360). At one time more than 60 submarine cable projects announced in the world. FLAG model Background: Rise of Internet and capacity demand expectation (“traffic doubled in 100days”). Worldwide deregulation and liberalization (1996 US Telecom Act, 1998 EU liberalization, etc.) Abundant fund backed by US economy (“New Economy”) Technology development (DWDM). Success of Atlantic Crossing 1 Oversupply revealed from 2000. Capacity price dived (US-Japan 80% drop, HK-Japan 85% from Q1 02 to Q3 06). Failed private cable projects: Chapter 11: 360 in 6/01, Global Crossing 1/02, FLAG 4/02. Refinancing in most private cables. Ownership change (FLAG, TGN, EAC, C2C, Tiger).


What is IRU Really? : What is IRU Really? Indefeasible Right of Use (User) Two IRUs in cable system (Cable Station IRU and Capacity IRU). Invented by AT&T in Trans Atlantic (TAT-1) Cable System in 1953. To avoid foreign ownership in Landing Stations and microwave terrestrial link. Introduced to Asia Pacific in TPC-1 (1964). IRU to allow then International Record Carriers (RCA and ITT) to use AT&T’s cable system by having them to share the capital costs and O&M costs, but still excluding them from cable management. FCC order to open AT&T’s cable for the IRC’s use. FCC’s rate of return regulation Designed to be a contractual claim infinitely close to a real right (Equitable Ownership?). Except for asset management right, all other features are same as ownership. IRU Agreement provides for IRU purchaser being: liable for all Capital Costs (increase/decrease, hence share profit/loss from liquidation) Liable for all O&M Costs Price = Book Value Change (deterioration) of Capacity IRU Pricing (market price) Additional Capacity given or not in Notional Capacity Expansion Private Cable IRU. Is it IRU or just lump sum payment of long lease?


Slide12 : Legal Interests in Common Carrier Cables Backhaul County B Carrier B Backhaul County A Carrier A Sea C/S B C/S A Asset Owned by A Owned by B Segment S Segment T Segment T Owned by Investing Carriers in common and undivided shares Ownership Capacity IRU IRU Ownership IRU Capacity IRU


Slide13 : Legal Interests in Private Cables Backhaul County B Carrier B Backhaul County A Carrier A Sea C/S B C/S A Asset Owned by A Owned by B Segment S Segment T Segment T Owned by Private Cable Company Capacity Landing service? Landing service? Ownership Capacity for sale IRU?


How Australia Is Served? : How Australia Is Served? Difficulty in constructing cable systems to/from Australia SEACOM, COMPAC, ANZCAN, A-I-S, PacRim East/West, Tasman 2 JASURAUS and SMW-3 Southern Cross and AJC Capacity to/from Australia Design Capacity Lit Capacity Capacity Price Capacity excess and over-competition Bankruptcy of private cables Number of Cable Systems – Issue of Competition


Slide15 : Again Submarine Cables in Asia Pacific


International Bandwidth Usage by Country : International Bandwidth Usage by Country Source: Telegeography


Lit Capacity in the World : Lit Capacity in the World Source: Telegeography


Price Drop - STM-1 Lease Charge : Price Drop - STM-1 Lease Charge Source: Telegeography


How Australia Is Served? : How Australia Is Served? Thank you.