The growing availability of Coherent optical transport systems is closing the gap between terrestrial and subsea network operations and, it seems, significantly reducing the cost of upgrading the capacity of the existing submarine systems that network the world.

That's great news for subsea network operators looking to upgrade and meet the growing data traffic requirements of their global service provider customers. But it's maybe not such great news for those companies eager to meet international network capacity demand by laying new ocean cables.

Infinera Corp. (Nasdaq: INFN) Vice President Mike Guess estimates the upgrade cost of subsea cables has come down by a magnitude of between five and 50 times, depending on the network. That's a major reason for the slowdown in new cable builds, despite a global growth in bandwidth demand of 40 percent during the past year.

The main reason is that coherent technology enables submarine links to be upgraded without having to rip and replace the land-based electronics. Coherent offers greater receiver sensitivity, which means extra reach and capacity -- critical for longhaul systems.

Andrew Hankins, head of engineering at Telstra Corp. Ltd. (ASX: TLS; NZK: TLS)'s Global unit, says the greater spectral efficiency "allow[s] us to put more capacity onto an existing cable," resulting in both lower unit cost and a longer economic lifetime.

The introduction of coherent capabilities has enabled the industry to upgrade from 10-Gbit/s wavelengths, which had been the standard for more than a decade, straight to 100 Gbit/s. Infinera's Guess says the subsea industry has been wanting to upgrade capacity for a long time, "but the problem was making [new systems] reach as far as 10G." Coherent, he says, "has the performance base to make 100G practical."

Upgrades to 40 Gbit/s also appear to be benefiting from coherent technology too. (See Telstra Deploys Infinera for Subsea Net and Ciena Signs Pacific Deal.)

It also enables operators to integrate their terrestrial and subsea networks, with the savings and flexibility that that allows. Even today submarine cables are mostly managed as point-to-point networks. "Coherent takes out a lot of the propagation effect," Ciena Corp. (NYSE: CIEN) CTO Steve Alexander told a recent industry event. "Suddenly your wet plant and dry plant all look the same." (See Ciena Lands 100G Subsea Deal.)

Because it's a technology that can be used for all networks, and not just the small subsea segment, vendors are also reaping economies of scale. Eric Handa, co-founder of consultancy APTelecom, says the cost of upgrading a transatlantic cable has fallen about 75 percent in recent years, and by about 50 to 60 percent in the Pacific.

That's having an impact on the subsea construction sector and making life tougher for traditional players such as Alcatel-Lucent (NYSE: ALU) and Fujitsu Ltd. (Tokyo: 6702; London: FUJ; OTC: FJTSY)

Vendors such as Ciena, Infinera and Xtera Communications Inc. (Nasdaq: XCOM) are now battling for upgrade deals, increasing competition and driving prices down. "The traditional turnkey model is being turned upside down," Handa says. (See Tamares Telecom Deploys Xtera, ECOC 2012: Infinera's Tier 1 Traction, Xtera Goes Repeatered With 100G and PCCW Upgrades Subsea Cable With Ciena.)

In the past, a firm such as Alcatel-Lucent (NYSE: ALU) -- the current subsea networks market leader -- would supply and install both the cable and the electronics. Now, though, that's not necessarily the case, though the incumbents are still picking up new business. (See AlcaLu Wins US-Brazil Subsea Deal.)

Julian Rawle, managing partner at Pioneer Consulting LLC , agrees that the boundaries between subsea and terrestrial "are being blurred and they may disappear completely."

Yet while the economics of long-haul undersea cable construction appear to be improving, the number of unsuccessful cable proposals is increasing, according to Rawle. "The gap between the number that get proposed versus the number that get built has widened considerably in the past five years," he says.

That's mainly because it's become harder to raise the necessary capital since the financial crisis, Rawle believes. "Banks appear to be a lot more risk-averse. There are good projects out there with a viable business case that are not getting funded."

The option to upgrade existing plant and the squeeze on capital for new projects means times are getting harder for the marine side of the business, with Rawle suggesting that industry rationalization "is a possibility."

— Robert Clark, contributing editor, special to Light Reading