The deployment of a new international submarine cable for New Zealand is still a topic for discussion in the telecommunications industry. Although the Pacific Fibre failure back in 2012 may have discouraged other similar projects, the idea of building an alternative link is still attractive for some industry players.

Resilience, additional capacity to deal with future data traffic demand, and increasing competition are all factors that support the business case for an alternative link. It is generally agreed that there is a need for a new submarine cable for New Zealand, which currently depends on the Southern Cross Cable (SXC) for its international connectivity.

Three new projects have been announced since the cancellation of Pacific Fibre: two trans-Pacific links and one trans-Tasman. Operators that already own other cables have supported these initiatives either as investors or committing the acquisition of capacity. The New Zealand Government will also contribute funds and has committed to be an anchor customer.

Is there a real need for an alternative cable?

Since its launch in 2001, SXC has been increasing capacity and decreasing prices on almost a permanent basis. On average SXC prices have decreased by around 20% annually and lit capacity increased by 38% annually since 2001. In January 2014 SXC announced that a further increase in capacity was scheduled for later in the year. This new upgrade will take SXC’s total lit capacity from 2.6Tbps to 3.6Tbps, and will increase the potential capacity to 12Tbps – a 70% increase from its previous 7Tbps.

According to the June 2014 Cisco Visual Networking Index, total IP traffic in New Zealand will increase more than two-fold from 2013 to 2018 – a similar increase was forecast for Australia. Assuming that an upgrade of the SXC to its potential capacity of 12Tbps is technically feasible and achievable in timely manner – which represents more than a four-fold increase from its 2013 lit capacity – Cisco’s projected increase in IP traffic demand can be supported by the cable system (Exhibit 1). Furthermore, according to the New Zealand Government’s view the SXC is expected to meet New Zealand’s capacity requirements until “at least 2020”.

Exhibit 1: Cumulative percentage increase since 2013 – IP traffic forecast vs capacity on SXC [Source: Cisco and Southern Cross Cable]

Despite the fact that there will not be a real need for extra capacity in the short term, the situation changes when considering the medium and longer term. The ongoing Ultra-Fast Broadband (UFB) roll-out will bring ultra-fast broadband to 75% of New Zealanders by 2019 and this could be a major factor which drives up traffic demand beyond current projections.

According to the Government the success of the UFB does not depend on a second international cable being built. However, with faster access speeds being provided to UFB users their data consumption will naturally increase, and in the absence of further generation of local content and/or more local caching, additional pressure will be put on either the trans-Pacific and trans-Tasman routes.

As a result of intense competition in the New Zealand broadband market, ISPs have been dropping prices and increasing data allowances for their broadband plans, with the result that data consumption is also increasing. Recently Vodafone and Telecom New Zealand (recently rebranded as Spark New Zealand) which together account for more than 80% of New Zealand’s fixed-line broadband connections began offering unlimited data plans, joining other companies such as Orcon and Slingshot that already provide uncapped plans.

There are also concerns about relying on a single cable which is approaching the half-way point in its life. Originally the SXC was designed to last until 2020 but an upgrade implemented in 2010 extended its life expectancy by five more years – according to the company the cable will continue to provide service until at least November 2025.

While capacity and reliability on the SXC will be a concern in the medium and long term, lack of competition and cable diversity are two of the issues which currently characterise New Zealand’s international connectivity market. Clearly, as regards the lack of competition, only an alternative link could change this situation.

The New Zealand Government is well aware of this and has signed a NZD65 million anchor tenancy contract with Hawaiki Cable – a project to build a trans-Pacific cable linking Australia, New Zealand and the US. According to the Ministers for Communications and Information Technology, and Science and Innovation:

Building a new cable will further increase the resilience of New Zealand's international telecommunications links and raise the level of competition…the cable will add more capacity to meet the growing requirements of New Zealand’s research, education and innovation communities, as well as commercial traffic.

The Government’s deal secures a 25-year anchor tenancy on the cable for REANNZ, a Crown-owned company which owns and operates a high-speed research and education broadband network. The agreement consists of an initial contribution of NZD15 million and annual fees over the 25-year period, and is conditional on Hawaiki Cable securing sufficient presales contracts from other telecommunications companies.

Receiving Government support may raise the interest of new players in investing in a trans-Pacific link. However, past experience suggests that such a contribution won’t necessarily be transformative for a project of this magnitude. As part of a similar agreement, NZD91 million was offered by the Government to the Pacific Fibre Cable project but despite this contribution the project failed to raise the needed funds for its completion.

Cable projects for New Zealand

There are currently three projects for building an alternative international link for New Zealand: the Hawaiki Cable and APX-East, both covering the trans-Pacific route, and the Tasman Global Access Cable (TGA), a trans-Tasman link backed by three telecommunications operators (Exhibit 2).

Exhibit 2: Projected submarine cables [Source: Network Strategies]

Hawaiki Cable

Hawaiki Cable aims to build a trans-Pacific optic cable that will link Australia, New Zealand, Hawaii and the US west coast. The proposed cable initially has a planned design capacity of 20Tbps, and it will connect via spurs to the main trunk a number of Pacific islands located next to the cable route, including Norfolk Island, New Caledonia, Fiji, Wallis, Samoa and American Samoa. The cable is scheduled to be ready for service in early 2016 and has an estimated building cost of USD350 million.

In addition to the agreement with the New Zealand Government, the project has also attracted the interest of several ISPs on both sides of the Tasman. The Australian ISP TPG has issued a letter of intent confirming its intention to acquire capacity on the cable system. Similarly iiNet – Australia’s second largest DSL ISP – signed up to acquire fibre capacity from Sydney to the US and on the trans-Tasman segment.

In New Zealand two ISPs (Orcon and Voyager) have committed to buy capacity, both on the trans-Tasman and trans-Pacific segments. Orcon will purchase 40Gbps capacity in year one, with substantial increases planned in additional years. Voyager meanwhile confirmed its intention to purchase capacity over the next ten years.

The project also has shown progress in relation to equipment providers and permissions. Hawaiki Cable has already secured landing sites on the US west coast, in Sydney through an agreement with Equinix – a global interconnection and data center company – and Whangarei (New Zealand). A memorandum of understanding with Northland Inc – a New Zealand regional economic development body – was signed to land the cable in Whangarei. One of the singular characteristics of this deal is that Northland Inc will aid both with the landing and the funding of the cable, and notably Whangarei represents an alternative site location (SXC currently has both its landing stations located in Auckland). An alternative location from that of existing submarine cables will give additional protection in the case of natural disaster.

Hawaiki Cable will face the challenge that some of its potential customers (for example Spark New Zealand, Telstra, TPG, and Verizon) have ownership in submarine cables that will be direct competitors. However, companies will not risk their operations if there is a real need for additional capacity or diversity, and this seems to be the case. For instance one of the ISPs which intends to acquire capacity on the Hawaiki Cable – TPG – already operates a subsea system (PPC-1) which connects Australia and Guam with onwards connectivity to US and Japan.

APX-East

Sub-Partners – a new venture headed by carrier-neutral entrepreneurs – is also planning to build a trans-Pacific cable (APX-East). The cable will connect Australia to the US with spurs into New Zealand and Hawaii, and many of the Pacific islands along the route. Unlike the Hawaiki Cable, New Zealand is not included in the initial deployment plan. While the Australia-US link is scheduled to be ready for service in Q4 2015, there are no announcements for the New Zealand spur to date.

The cost of APX-East is expected to be around USD300 million, and the cable will provide 40Tbps of total capacity – two times the design capacity of the Hawaiki Cable and more than three times SXC’s potential capacity after the upcoming upgrade.

APX-East is part of Sub-Partners’ ambitious project of building a submarine network that connects Singapore with the US through Australia. APX-West and the recently announced APX-Central complete the three segment link. APX-West will link the Australian west cost (Perth) with Singapore and Indonesia. APX-Central will traverse the Southern Ocean and Tasman Sea all the way from Perth to Sydney, where it will link with APX-East.

Tasman Global Access Cable

In addition to the Hawaiki Cable and APX-East there is one other project which is focused on the trans-Tasman route. In February 2013, Telecom New Zealand (now Spark New Zealand), Vodafone New Zealand and Telstra announced the signing of a non-binding memorandum of understanding (MoU) to co-invest in the construction of a new submarine cable between Auckland and Sydney – the Tasman Global Access Cable (TGA). There are rumours that Telstra had decided not to participate in the proposed cable. However Spark New Zealand Managing Director Simon Moutter has said that the carrier would be prepared to increase its investment in the proposed submarine cable should Telstra decide to pull out.

The cable is expected to cost less than USD60 million and it will have a design capacity of 30Tbps, around 300 times the current Internet data out of New Zealand. A tender for the construction of the cable was issued in June 2013 and it is expected to be operational by 2015. If the proposed link goes ahead, it will bring increased resilience, capacity and choices for international connectivity in the trans-Tasman corridor.

The proposed cable will provide much-needed redundancy to this route. Currently two systems provide international connectivity between Australia and New Zealand, SXC and Tasman-2. The latter, which was built in 1992, is close to the end of its design life and its 1.12Gbps capacity is now largely irrelevant, hence connectivity over this route is dominated by SXC.

Naturally there are doubts as to whether this new cable will create a healthier market scenario with increased competition. Given that it already holds a large share in SXC, Spark New Zealand will have a significant influence on wholesale bandwidth prices – not the ideal environment for a market which aims to increase competition. Furthermore, there are no details on whether ISPs other than Spark, Vodafone and Telstra would get wholesale or other access to the new cable, and on what terms. If access to the cable is not offered on competitive terms, we might not see any improvement in the current market structure.

Some commentators have viewed TGA as Spark’s defensive play to protect its investment in the SXC. TGA will provide New Zealand with cable diversity and further capacity at a lower building cost than a trans-Pacific cable, making it more difficult for any competitor to justify building a New Zealand-US link. Furthermore, a new trans-Tasman system would mean the strengthening of Australia as the regional hub, which could lead to a potential scenario that diminishes the need for a New Zealand-US link due to an increasing traffic flow into New Zealand served over the trans-Tasman link.

Australia: a new regional hub

Historically both New Zealand and Australia have had a strong dependency on international Internet content. A large proportion of the traffic generated by consumers is to and from hosts located offshore – Asia, Europe, and in particular the US. However, there is a growing trend to bring the content closer. While New Zealand has not been successful in attracting companies to host content locally and build big scale data centres – probably due to its lack of cable diversity – there is an increasing presence of content delivery network infrastructure (CDNs) in Australia. Nowadays more international content is being hosted and served to New Zealand out of Australia instead of the US. According to Spark New Zealand and Vodafone, around 40% of their Internet traffic is now trans-Tasman, versus just 10% in 2000, and this trend is likely to continue with companies such as Amazon and Microsoft building regional data centres in Sydney, Melbourne and Singapore.

With a total of three cable projects to link the Australian west coast with Indonesia and Singapore, and a recently announced plan to build a Brisbane-California link by an US defence firm (General Dynamics), servicing both the defence and commercial sector, Australia is becoming a key player in the region. New Zealand’s role will depend on whether or not it increases its connectivity with the US and potentially other regions such as South America – rather than relying on Australia as its hub.

What are the chances of getting a new submarine link?

Despite Pacific Fibre’s failure and even with the continuous upgrades of the SXC there is serious interest in building an additional international link for New Zealand. However, there may not be enough demand to support more than one new cable on the trans-Pacific route. If the need for cable diversity is not enough to produce the level of revenue required to justify an investment of this magnitude, it will be difficult to see more than one of the projects being fulfilled.

A trans-Pacific link will bring more benefits than a trans-Tasman link – it provides a direct and lower latency connection to the US and it will place New Zealand in a better position on matters of international connectivity, making it more attractive to companies to host here and build global data centres. On the other hand, a trans-Tasman cable such as the TGA is easier to fund. It provides further capacity and resiliency at a much lower building cost, and there is also a reduced need for capacity sales as the TGA is led by operators that will generate much of the demand.

Even though capacity and reliability of the SXC are not issues right now, they will be in the medium- and long-term, and with a high interest in increased competition and resiliency there is no reason to think that the conditions are not suitable for building a new cable. If only the TGA goes ahead we will not see a healthier market structure, and New Zealand may miss the chance to became an important player in the region. New Zealand needs to take one step forward in matters of international connectivity – ideally with a trans-Pacific link – and hopefully we will see at least one of the announced projects finally getting off the ground.