Level 3 made waves in the subsea capacity market last week when the company announced the purchase of up to 600 Gbps of capacity on the Apollo trans-Atlantic submarine cable system. With the immediate purchase of 300 Gbps and an option to acquire an additional 300 Gbps, this sale represents the single largest purchase of lit subsea capacity ever by an individual carrier. Overall the purchase of 300 Gbps represents 6% of the 5.2 Tbps of lit trans-Atlantic capacity.
What factors drove this purchase? First of all, internet traffic across the Atlantic is growing rapidly. TeleGeography data reveals that average trans-Atlantic internet traffic grew 42% between 2004 and 2005. Level 3 announced that their traffic has doubled in the past 12 months, which is significantly faster than the aggregate traffic growth.
Second, and perhaps more importantly, trans-Atlantic prices appear to have bottomed out. The price for a 10 Gbps wavelength — under USD20,000 per month — has sunk below both operational and replacement costs. Although the price and terms of the agreement between Level 3 and Apollo were not announced, this purchase could signify a shift from short-term annual leases driven by cost considerations to a long-term strategic approach to network building. According to TeleGeography analyst Alan Mauldin, “This purchase is a big step by Level 3. They recognize that prices are at unsustainably low levels and that they are confident in their networks’ need for a significant amount of additional capacity over the long-run.”
Trans-Atlantic cable operators stand to benefit if other carriers follow Level 3’s lead and make plans to secure long-term capacity. Another bulk capacity purchase by a consortium of major carriers reported by TeleGeography in July 2005 is still in the works, which could bring additional stability to the market.
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