The MEA Submarine Cable Wars (1996 - 2018) - Episode I - Part 2

What was at stake?

At a national/country level, the sought-after prize in the MEA Cable Wars was the so-called “Regional Hub” status; which is the promise to be to the Telecoms industry what Frankfurt or Dubai is to the Air Travel industry. Those MEA countries that - either overtly or covertly - harbored those regional hub ambitions wanted to put themselves on the global map through facilitating as many cable interconnections as possible, and so offering global/regional Telcos traffic switching from one network to another. With the advent & explosive growth of The Internet, there was an emerging gap in the market that needed to be filled; that of a common hub location, and the war was on around that coveted position.

There are indeed such globally successful Telco hubs that players in MEA aspired to replicate. Marseilles & Singapore were two recurring names being beamed - via bright projectors - on the walls of the region’s boardrooms within “dense” PowerPoint slides. Of course, what those “mature” hubs managed to - over time - provide was much more than cable capacity hubbing or traffic switching (it was a true “Connectivity Ecosystem”, not a mere regional cable hub), but I digress.

It should be noted here that not all players had this vision expressly coded and actioned as a war plan. There were indeed those (in my humble view, just one country fought this war “overtly”) who methodically planned ahead and moved pieces on the regional chessboard to reach that objective. Other countries, however, were not aware of the full implications of this regional race or what was at stake down the line (when the DNS/IPT/IPX Wars or the subsequent Cloud Wars came along), but still engaged in battles around various MEA markets and on key MEA routes. This “covert engagement” was - rather straightforwardly - actioned through majority control of the national carrier/incumbent, through which development of - and investment in - new regional/global cable projects could be pursued, as well as full control of the regulatory environment.

In biological terms, hubs built their business plans on participating in “inorganic” international/intercontinental traffic routing/switching, while other players were content with handling their national/in-country “organic” traffic needs. Consequently, if you truly wanted to win the war and become a regional MEA hub, then you needed to be “promiscuous” to the greatest degree possible; meaning you had to offer attractive landing services to your regional/global customers as well as be willing to "selectively" invest in building some of those cables yourself (in exchange for an ownership stake/capacity pool), so it would be you (not your neighbor) that is chosen by that cable project to land. You also needed to - rather shrewdly - develop a unique set of regional short-haul cables reaching nearby markets, to act as feeders for the long-haul international cables.

My own observation is that the bigger the country/market, the less incentive that country (and the Telcos within it) had to overtly engage in the MEA Cable Wars. When those market players participated in the regional battles, they did so passively/reactively rather than wilfully/proactively, and so they afforded to be “picky” in their development activities, even to the extent of playing hard to get or trying to block some projects in their own market! Conversely, the smaller the home market, the more ambitious & aggressive their plans were in pursuit of the regional MEA hub “pot of gold” at the end of the Cable Wars “rainbow”. The saying “Size matters” was very true, but in reverse, in this case. 

I would further posit that there was - and weirdly still is today in a few cases - a general case of “Strategic Myopia” across the largest market players as they engaged their partners and - more dangerously - their competitors. Through treating these global/regional network projects as operational/tactical in nature (we need to build more networks because our in-country customers are consuming more traffic) rather than strategic footholds in the international transit space (a true chance to become part of the global economic backbone), many blunders were made. By contrast, those players who had the strategic foresight to fight this war purposefully and with conviction, understood - albeit implicitly back then, but very explicitly today - that the outcome of these early rounds of “Digital Warfare” would determine their fortunes in subsequent rounds; an assumption that was very forcefully validated as the Cloud Wars erupted in the last 3-4 years (stay tuned for that!)

In the cases where those large operators didn’t fully take advantage of their competitive advantages and missed the opportunity to develop their hubs (or “connectivity fabrics”, to expand our thinking a bit), I would point the finger of blame at the Boards of Directors (BoDs) of those organizations, not on their executive management, and stop there.

Finally, the puritan distinction made here between the national/country war stance and specific operators’ actions was in many cases practically non-existent; a direct consequence of the monopoly status many Telcos enjoyed within their respective markets. Still, I hold the view that maintaining this distinction serves not only a mere theoretical purpose but also highlights the true potential (both realized and wasted) of each MEA market. It is also necessary because some market players were private companies, not sponsored or controlled by a MEA Telco, and so those market participants had a set of objectives that remained independent of national agendas.

In fact, the MEA Cable Wars were actually started by one such private player :-)

How did the MEA Cable Wars start?

The MEA Cable Wars started unceremoniously & quietly in 1996. Funnily enough, it won’t be until a few years later that the key players looked back and understood that this was indeed the first salvo in that battle. That year, the plans for the first “privately-owned” cable came together. The cable was owned not by a group of Telcos (as was the norm up to that point, a reflection of the COOPERATIVE framework referenced in part 1 of this article), but rather by a group of private investors who pledged the capital needed to build this global network between Japan and the UK, passing through the MEA region. The cable directly connected to (or “landed at”, as we say in Hollywood :-) ) UAE, KSA, Jordan, and Egypt. Unbeknownst to the investors & management of that company, they were not only injecting much-needed innovation into the stale MEA Telecoms landscape, but they were providing the world’s leading OTTs (unborn at that time) with the commercial & operational blueprint that would wean them off their dependency on Telcos' infrastructure, two decades later!

The MEA Telcos involved in this “private cable” project was faced with a seemingly “benign” proposition (insert your favorite “Trojan Horse” caption here). Instead of being asked to put up capital for a share of ownership in the cable (as in the standard “consortium cable” model at the time), they would pay nothing upfront as the cable would be 100% funded by its owners (hence the name Private Cable). Furthermore, those Telcos (the Landing Parties) would charge that cable for hosting the landing station, as well as for all services provided to facilitate efficient operations of the cable in each market (either through monetary compensation or through free units of capacity on the cable, to be consumed after it went live). Once they have depleted their initial allocation of capacity, they can simply buy more from the private operator, as needed.

The full competitive impact of that pioneering project can easily be the subject of a separate article, but a few of the key ones (relevant for the discussion at hand) are:

• Introducing a non-licensed player into those MEA markets; thereby smoothly circumventing the regulatory iron walls around them. Indeed, after securing the initial beachhead (literally landing in 4 MEA markets!), that private operator started to layer additional services (in partnership with the Landing Parties) and augmented that with other inter-connected cables to ensure their hand of poker always trumped their local partners’.
• Pushing the regional MEA Telcos one rung down the ladder on key “growing” international long-haul routes, by becoming customers of that private cable rather than co-owners of their own infrastructure.
• Those MEA Telcos (the Landing Parties) developed a “dependency” on that cable that ensured a steady stream of orders, and - more importantly - provided them with a huge disincentive to invest in new cable systems (consider that it wasn’t until 2005 when the next major international consortium cable - with multiple landings in MEA - came online).
• Jump-starting (although slowly at first) price competition on the long-haul routes connecting MEA to key global business centers (London, Paris, Hong Kong, Tokyo, Beijing, and later New York).

This cable project, as successful as it was, didn’t end the consortium cable model. On the contrary, the majority of cable projects across MEA (either global or regional) were and still are consortiums/clubs. What the private cable model it introduced (followed by 3 later private cables across MEA) was that it changed - forever - the relation between consortium members, as it became more competitive rather than cooperative. In a clear case of "imitation being the highest form of flattery", that 2005 consortium cable project referenced above was the first-ever in MEA to allow consortium member Telcos to sell full international circuits (landing station to landing station), as opposed to the older "cooperative" half-circuit model; which was clearly a direct consequence of that original private project. Almost every cable project since then implemented the same construct!!

By the mid-2000s, and with the emergence of broadband technologies (3G on the mobile side and ADSL/VDSL on the fixed side), as well as the boom in some key business sectors (Retail, Tourism, Aviation, Logistics), the stage was set for the race to build more global & regional cables to tap into that lucrative opportunity. The traditional/legacy landing sites were complemented with new sites along the Gulf, Red Sea, and Mediterranean coasts, in an attempt to offer diversity and fully utilize some countries’ location advantages. Still, the prevailing logic inside most - not all, mind you! - those organizations when justifying those Capex investments were almost purely based on local market traffic demand/forecasts. As captured earlier, in cases where there was little organic data traffic demand, the Telcos had to play the game as a pure hubbing provider, which allowed more flexibility in making investment decisions.

In cases where a country was a natural terrestrial crossing/transit choice, incumbent Telco operators in that market found it too convenient to adopt the dreaded & now infamous “Toll Booth” strategy; wherein they don’t invest in cables crossing their territory, but rather demand a “King’s Ransom” for the transit service. While this was indeed very rewarding commercially, it was strategically detrimental long-term and caused the global & regional carrier community to actually implement something that was for a lifetime deemed unthinkable (the “Bypass Cable Routing” design).

If one looks at a cable map of MEA today, one can be misled to believe there are so many hubs in this region. After all, there are multiple locations where 7, 10, 13, or 17 cables converge on the map, which is a key requirement for the emergence of a MEA regional hub. The reality of the matter is that not all hubs are created equal, and just because a number of cables land at the same location doesn’t automatically establish it as a regional hub. In fact, the more successful regional hubs have about half the maximum number of cables landing at the big locations. In other words, it took more than the "number of cables landed" to win in this war and become a true hub. The fact is that most of the cross-connects happening between cables crossing the MEA region actually occur OUTSIDE MEA.

So, what determined who were the winners in this war? What weapons afforded the best chances of winning?

Critical Success Factors/Weapons Used in battle

As an analytical framework for the assessment of efficient regional MEA hubs, please consider the above model (my own, and definitely neither complete nor exhaustive), which aims at identifying what factors help establish a regional capacity trading/traffic switching hub at a given location. Some of these factors are beyond the control of Telcos, while others are areas that require diligence & development. As a fun exercise, you can assign a weight (out of 100%) to each one of those factors then score each location/operator (out of 10) on each factor, and you would end up with a numerical score that ranks MEA hubs (albeit in an admittedly rudimentary fashion).

Let’s dive into each of the 4 parts of the proposed assessment framework:

1) Geographic Location: This is clearly a national/country parameter, and it affects all Telco players within that country. It can be a real source of competitive advantage, but - very importantly - it alone doesn’t afford its owner a guaranteed winning position. In other words, a premium location can enable a premium regional hub, but not every premium regional hub has a premium location.

2) Political Stability: A parameter that is also clearly not something a Telco operator can control, but it has been demonstrated to be super important, even when there is a clear location advantage. During the “Arab Spring” events of 2011-2013, a particular country lost its appeal entirely to global carriers/Internet providers, even though it arguably had (and still, of course!) the best possible location. Geopolitical tensions in the Gulf over the past 2 years have also altered a few business plans.

3) Strategic Infrastructure: Sadly this is by far the ONLY topic/area spoken about when discussing MEA hubbing. This is what Capex goes towards, and it covers the actual cables, landing stations, backhaul, transit. backup/redundancy, Colo facilities, Meet-Me Rooms, Digital/Optical Cross Connects, NOCs, and all other infrastructure assets that facilitate & support “Transactions”, which is the key unit of business a hub performs to its customers/partners.

4) Regulatory Environment: This is the most powerful (in my view) and also the most detrimental (when not taken care of properly) element. A transparent regulatory environment is the best tool to attract global operators & technology investors to a particular hub. This covers both Telecom regulations (can you say “licenses”?) as well as general business/foreign investment regulations. In the final analysis, this is the area most affected by the "Strategic Myopia" syndrome reference earlier.

In fact, the most competitive disadvantage the MEA hubs had compared with other global sites was their exorbitant prices for all services provided to their global partners at their landing sites; which is a direct result of ill-advised regulatory policy (lack of oversight, and an obsession with "revenue per transaction").

It’s interesting to observe that all four of these factors relate to a “location”, not a specific cable. Regardless of the relative commercial success/failure of a specific cable project, its global reach, and whether it was a private or a consortium cable, it still needs the support services of a MEA hub to be of value. This means that regional hub operators - in a “long-drawn” war - have a stronger hand of poker to play against global operators (a European airline that doesn’t fly through Frankfurt is clearly competitively disadvantaged with trans-Europe passengers). Borrowing from modern warfare literature, Private Actors can disrupt the Status Quo of a region/market, but it is still State Actors who have the required arsenal & depth of resources to control it. The "Asymmetric" nature of those opposing sides in some projects requires solid strategic acumen on the hub operators to defend their turf, persevere, and ultimately prevail.

End of Part 2

Part 3 (next week): Battle Dynamics & Outcome, Winners & Losers, Side Skirmishes, and Closing Commentary.