Venture Capital, Telecom Infrastructure, and the Houthi Headaches

Venture capitalists have a poor infrastructure investment record. Their senior management typically has no startup telecom experience complemented by naive ideas that surging Internet traffic guarantees price stability. In addition, they have little idea of the operational challenge of creating a lean, mean sales machine that includes great customer experience and network performance. A really good company requires really good people. Digital 9's liquidation of its telecom infrastructure portfolio highlights a host of key issues. The portfolio includes the ailing Aquacomms cable network which Digital 9 is shopping. I speculate EXA will buy it as part of a wise strategy to consolidate the wholesale Trans-Atlantic market into a two carrier EXA/Telxius duopoly. Aquacomms was an attempt to double down on the Atlantic and Irish Sea routes despite glaring overcapacity that caused NYC/London 10Gs to fall from $38K in 2005 to $850-$1300 today. Yes, optical technology improved dramatically over that period lowering per bit costs. But not as fast as prices dropped. I was an exclusive Hibernia Atlantic sales contractor at the time when Aquacomms appeared on the scene. I was flabbergasted by the idea of even more competition on a route that had Level3 (2 cables), Hibernia (2 cables and eventually 3), Apollo (2), Flag (2), TAT-14 (2), TGN (2), etc. Any business plan to jump into an intensely competitive market makes no sense unless you have an edge, but Aquacoms did not. It was as generic as American Wonder bread. Furthermore, traffic flows were changing. Most traffic was heading to Ashburn Equinix which made landing near NYC a high latency path. Indeed, cables landing in Long Island had to traverse NYC which simply increases the risk of something going wrong. 

Digital 9 is also selling its stake in an unfinished subsea cable project, EMIC-1, whose route traverses the Red Sea. The Houthis allowed the AAE1 repair this summer because the cable lands in Yemen. It was in its self interest to do so. But the rebel group is now blocking all new subsea cable construction via the Red Sea and shining a very intense light on the poor risk management of the consortiums. The consortiums made virtually no effort to diversify routing even through traffic across most cables was single-threaded through the Red Sea and despite the severe impact of Telecom Egypt's transit fees This is what I call 'the mediocrity factor' of the PTT dominated consortium cable model. This model lives and dies by consensus which invites the path of least resistance. No controversy and conflict equals a happy, early retirement. In defense of the consortiums it can argued that geography gives them a very poor hand to play. The only viable alternative option is via South Africa and up the West African Coast. At the same time it does makes sense for the consortiums to be paying $100K to light a 100G on TE's transit network for subsea cables. Clearly alternative routes via Israel should have been developed. 

See article for more details: https://thetechcapital.com/digital9-sells-stake-in-unfinished-red-sea-cable-project/.