Submarine fibre cables and public policy

Three cable breaks in submarine cables in one region in one week. It's enough to get the conspiracy theorists going. For me it's the trigger to write down some ideas I've been having on submarine fibre optic cables. I'm going to argue that nations need more/different connectivity than the market can provide, that therefore it will need to be treated as a public good and the pricing will have to be set accordingly.

In an information society fibre optic cables are the nerves that keep the country moving. You need them in your country to every extremity (house), but you also need them from the country to the rest of the world. No fibre, no information society. The flow of information enables the flow of goods, money, people. For a significant part of the world this flow of information is a Single Point of Failure (SPoF). Most countries have only one cable coming into the country. The only backup is satellite, which is due to latency and a limited bandwidth is so 1970. If your country is not connected to the world via fibre, you're still living in the seventies.

The dependency on a handful of fibres for international connectivity (and trade) should make fibre as important as oil and gas lines or airports. So how many do you need. Given the risks involved one would want at least 3 different lines on different routes coming in and out of the country. The routes should be undersea, because these tend to be less prone to damage than the ones over land. There are more idiots with backhoes than boats. (Yet another reason not to want to be a landlocked country) And that is where the first problem lies: How do you get three international routes of the more expensive kind to almost every country in the world Currently most lines are Trans North Atlantic or Trans North Pacific. They run from rich country to rich country, poor country to the north and never south-south. A redundant network would look much more like a web, instead of a like spoke and hub system it now is. Unfortunately fibre follows money. South America is connected to the world via the US. Africa via Europe. Asia- Europe mostly goes via the US. In an ideal situation South America would have multiple direct links with Europe, Africa and Asia via both the Atlantic and the Pacific. And Asia and the Middle East wouldn't send all their traffic over the US or the Suez Canal.

The trouble is money. Long distance undersea fibre is expensive: hundreds of millions and even billions for the fibre, but only a couple of million a year for operational expenditure. But making money when multiple submarine fibres compete is almost impossible. A submarine fibre has the capacity to carry 7 terabits/s these days and more is becoming possible. So you've got an instant oversupply of capacity. Multiple competing lines lead to competition on marginal costs and mutually assured destruction. This has happened on the Trans Atlantic route where there were several new entrants in a few years, while one fibre was more than able to carry (almost) all Europe-US traffic. The price of traffic dropped to whatever sales could get per mbit/s instead of how much they needed to pay the banks. Bankruptcy was assured. Bankrupt networks were bought for almost nothing and kept prices low, which killed the business for the initial winner, which led to the winner becoming a loser too. Mutually assured destruction it is.

The high investment in northern routes has made the US, Europe and South East Asia the natural hubs for traffic to less connected regions. A telephone call to Europe from South America is cheaper when it runs from South America to the US and then towards Europe. A more direct connection might be logical and redundant, but the low prices on the north Atlantic route are a cheaper alternative than going direct. At the moment there is only one direct connection from Brazil to Europe. If you look at the fibre map: a lack of fibre is clear in South America, the Indian Ocean and Africa.

When it doesn't make economic sense to have fibre going southern routes, because its cheaper to route it over existing northern routes, there might be a reason for the government to step in. Security in the supply of connectivity can be regarded as a public value. The trouble is: how do you price it. If one fibre route can substitute others, the result might be that all traffic will flow over the cheapest one, leaving the others empty. Another problem may be that governments (and their monopolist telco's) tend to collect monopolist rents from international connectivity. Africa's lack of connectivity is as much the result of the general poverty as it is of its monopolist telco's, who keep international connectivity expensive to finance corruption and inefficiency. The price per mbit/s stays much the same in many countries, but demand increases every year, leading to ever increasing profits and a much lower economic growth than would have been possible. It would be preferable that the monopolist is paid a fixed amount for the fibre and every month or every quarter set the price on the basis of the volume in the preceding period. Since traffic is growing at a rate of 50% in most countries, prices would drop with 33% per year accordingly (see graph for price (green) vs volume (red).

There are two solutions to the connectivity problem. One is outright government financing of submarine fibres. Pay for them the way you do with bridges and roads and write it off in one year. (If necessary work together with neighboring countries) The cost of connectivity would then only be in the costs of operation. Since operational costs are only a small fraction of the total costs, the price of connectivity could be very low. Another option is to use a revolving fund where the income from writing off one line is used to finance a second one. It would then be possible to combine the costs of submarine fibre and to have the more popular routes subsidize the less popular ones by adding the total costs of the fibres and spreading the costs equally over the users of the fibres. Neither is perfect. They may lead to adverse effects like, suboptimal routing, freeriders, bankruptcies in of commercial networks etc, because the price might be below the market price in other regions. The latter one might also suffer from being too expensive at first and therefore stifle growth. All in all it's not an easy problem and I don't have a perfect solution. However from a public policy perspective it can't be a good idea to have your nation dependent upon only one piece of glass with the thickness of a hair.

BTW for nice pictures of a Cable ship see my blog entry of a week ago.