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Optical/IP

Alcatel's Submarine Prospects Sinking

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) is hacking away at its submarine cable business and will close yet another plant by the end of 2003 (see Alcatel Lays Off Hundreds).

While Alcatel's already eliminated hundreds of jobs worldwide related to its undersea cabling business (see Alcatel Further 'Adapts' Workforce), the latest announced cuts fall closer to French headquarters. Citing "an unprecedented crisis" in submarine networking, Alcatel says it will close an optical fiber plant at Conflans Sainte-Honorine outside Paris, letting go of 290 employees and relocating 90 others to an R&D center in Douvrin, France. Another 350 employees will be axed at Alcatel locations in Calais and Ormes.

The layoffs are part of Alcatel's efforts to resize its business by reducing headcount to about 60,000 employees by the end of 2003, down from 2001's census of 99,000. Several rounds already have taken place, cutting staff across a range of business areas (see Alcatel Optronics to be Slashed, Alcatel Optronics Cuts Back Hard, Alcatel to Lay Off Another 10,000, Optical Hearts of Darkness, and Alcatel to Lay Off 2,500 in US).

"We're going step by step, country by country, responding to market conditions," says an Alcatel spokeswoman.

For Alcatel, the submarine cable market is ripe for generous cuts. It's been among the hardest hit areas of the telecom downturn, mainly because it was one of the most overblown. Financially beset carriers such as 360networks Inc., FLAG Telecom Group Ltd. (OTC: FLHLQ), and Global Crossing Holdings Ltd. invested heavily in capacity during the bubble years, helped along generously by Alcatel (see FLAG Telecom Awards Alcatel Contract , Alcatel, 360networks to Partner, Alcatel, Flag Combine on Asia Cable, GlobalX: The Burst Bubble, and FLAG to Finish Asian Loop).

"They just wouldn't listen," says one industry analyst, who asked not to be named. "We talked to lots of carriers at the time and told them they were overbuilding and putting in too much vendor financing, but companies just went forward anyway."

There's been a grim reckoning indeed. In its press release, Alcatel says subsea cabling is down "more than 80 percent" since 2000. Market research firm KMI Corp. says the amount of subsea cable installed dropped 75 percent this year, after falling 36 percent last year. Between 2001 and 2002, the market lost 51 percent of its dollar value, topping out at about $2.9 billion, according to KMI.

The specific impact on Alcatel is tough to determine. The vendor reports submarine cable sales as part of its optics business, which generated €2.7 billion (23 percent of total revenues) for the first nine months of 2002 and €5.7 billion (32.4 percent) for the first nine months of 2001 (see Alcatel and FT: Vive la France!).

Market researcher RHK Inc. says Alcatel's revenues account for a majority of the submarine market. "Alcatel always ruled the SLTE [Submarine Line Terminal Equipment] market (41% share in 2001, about 66% in 2002)," writes analyst Stéphane L. Penzo in an email today. Major competition comes from Fujitsu Ltd. (KLS: FUJI.KL) and NEC Corp. (Nasdaq: NIPNY), he says, because those vendors are the only established players besides Alcatel to offer both terrestrial and undersea optical networking gear.

The only emerging player in this bereft market, Penzo says, is Dorsal Networks, the transoceanic cable company bought by Corvis Corp. (Nasdaq: CORV) early in 2002, in a move that's raised many questions (see Corvis Dorsal Deal: A Huber Spin-In?, A Survey of the Corvis Food Chain, and Corvis Posts $1.4M Quarter).

Still, despite Alcatel's announcement and the overall malaise, there are signs of life in the Submarine Systems market -- small, submerged signs. According to Thomas A. Soja, CEO of T Soja & Associates Inc. (TSA), a telecom consultancy, there's some building going on of feeder networks, which link specific regions to well-known undersea connections. A festoon line in Vietnam has been underway for several years; projects are in various stages in Indonesia, East Asia, the Middle East, and Eastern Europe. "The market will eventually come back," Soja says. "Eventually, more networks will be needed."

Soja doesn't entirely blame overbuilding for the submarine market's woes. He says a range of factors helped put it into the tank. Carriers, burned by investor fears and financial controversy, stopped ordering long-term IRUs from wholesalers like 360networks, demanding short-term leases instead. Investors lost confidence, causing projects to flounder and halt.

Soja thinks some geographic areas will pick up sooner than others as the market makes it way forward. In some places, such as the transatlantic subsea region, buildouts were numerous enough during the boom to guarantee plenty of capacity for the foreseeable future.

For now, though, Alcatel isn't banking on the return of the subsea market. "We're not making any predictions," its spokeswoman says. "No one can tell what will happen."

— Mary Jander, Senior Editor, Light Reading
Almost Alcacent 12/4/2012 | 9:14:53 PM
re: Alcatel's Submarine Prospects Sinking Mary Jane:

I know times are tough, but I believe that the Alcatel revenue figures you quote should be Billions of Euros, not Millions.

Almost Alcacent.
Mary Jander 12/4/2012 | 9:14:50 PM
re: Alcatel's Submarine Prospects Sinking Good point. Thanks for the heads up! Problem fixed.
flanker 12/4/2012 | 9:14:45 PM
re: Alcatel's Submarine Prospects Sinking "Carriers, burned by investor fears and financial controversy, stopped ordering long-term IRUs from wholesalers like 360networks, demanding short-term leases instead. Investors lost confidence, causing projects to flounder and halt."

This is a wivestale originally spun by the same equity analysts that had buy ratings on Global Crossing back in the fourth quarter of 2000.

Short term leases are, in theory, more lucrative than a long term contracts. It cost more to buy a 12 month STM 1 ten times over than it costs to book an STM-1 for a single 10 year contract.

It also costs more on a per kilobit basis to buy an E-1 than an STM-1. If anything, wholesale carriers should be jumping up and down banging pots and pans if their customers are moving from long term, high capacity contracts to (a lot of) low capacity, short term agreements.

The simple truth of the matter is that demand has not met projections, and none of the carriers (nor the equity analysts or the industry analysts) want to admit it. This shift away from long term IRUs is just a red herring that shifts attention away from the fact that the carriers (idiotically) overbuilt on major routes.







tiadakola 12/4/2012 | 9:14:41 PM
re: Alcatel's Submarine Prospects Sinking I notice that Tyco Telecommunications (formerly TyCom) isn't mentioned...they had multiple (4+) oceanic cable laying vessels and a couple of pretty large facilities manufacturing the long-haul fiber optic cable itself (along with R&D)...has that been completely shuttered?
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