Shrinking Arctic ice and a golden fibre-optic opportunity

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When Douglas Cunningham stands on the Road to Nowhere, a dead-end dirt drag in Iqaluit, he can see an upside to global warming.

The Toronto-based entrepreneur says shrinking Arctic ice is creating a golden opportunity – one that could change the way the world communicates and provide Canada's North with a more affordable path to the information superhighway.

His company, Arctic Fibre Inc., is proposing to build a subsea fibre-optic network that stretches more than 15,000 kilometres to connect Tokyo to London via Canada's Northwest Passage, the frigid waterway that has frustrated explorers for centuries.

Against that history of pioneering failures, Mr. Cunningham's vision might seem like a pipe dream. But industry experts say his idea is more credible than ever because of climate change and technological advances that make it easier to build in harsh environments.

Although the Arctic ice pack has been melting for years, it shrivelled to a record low this past summer. With that trend expected to accelerate, Mr. Cunningham is shopping his idea of a network that could capitalize on escalating demand for Internet bandwidth, while giving domestic carriers a cheaper way to narrow the digital gap between Canada's Far North and its South.

Arctic Fibre's proposal, however, has become a flashpoint in Canada's telecom industry. Detractors, including satellite-based rivals such as Telesat Canada, are dismissing it as madcap – even as some carriers express preliminary interest in the project.

"We wouldn't be continuing on this project if we didn't have sufficient strong indications that it was going to happen," says Mr. Cunningham, who has previously built telecom networks in the Caribbean.

Arctic Fibre's proposed network has various components, including a main "backbone" that would connect Tokyo to London. Laying the cable would involve three ships: one starting from Japan, a second one departing from the U.K., and a third for use in northern Canadian waters.

Once the backbone is in place, spurs would be used to extend secondary branches of the network into northern communities.

"From an engineering point of view, this project is feasible," said Julian Rawle, managing partner at Pioneer Consulting, a Boston-based firm that provides technical analysis to the submarine fibre-optic industry.

"The ice is receding, there's no doubt about that," Mr. Rawle added. "And once the cable is on the sea bottom, that should be a pretty benign environment because there's not a lot of fishing activity or shipping going through there dragging anchors. And those are the two main causes of cable damage."

The big question, however, is whether Mr. Cunningham can get the money he needs to build it. Total project costs are roughly $600-million for the network's main backbone, while the secondary network could cost up to $162-million.

Mr. Cunningham insists no government subsidy will be required for the primary network, but he is seeking a $161-million contribution from Industry Canada to fund the secondary spurs – support that could be critical to getting other investors onside, Mr. Rawle said.

Arctic Fibre is trying to raise $220-million in equity from Canadian institutional investors. (Currently, the business is a wholly-owned subsidiary of Network Research Inc., of which Mr. Cunningham owns 50 per cent.)

If the network is built – Mr. Cunningham's plan calls for it to be running by late 2014 – it could be large enough to handle 32 terabits of data per second, which is the equivalent of 1.6 billion simultaneous phone calls or 3.2 million simultaneous TV channels.

Arctic Fibre, however, would not provide service directly to consumers. Instead, it would sell bandwidth to telcos, governments, content providers and financial institutions including high-frequency traders – wholesale customers that place a premium on network speed.

By providing a shorter route between London and Tokyo, the network's estimated latency would be 29 milliseconds less than existing transpacific and transatlantic routes. (Latency refers to the delay for a signal to get from one end to another.)

Twenty-nine milliseconds may not seem like much, but for traders throwing millions of dollars around every second, the time saved may be worth it.

"There is no question that there is demand and that these high-frequency traders will pay a premium to be on the fastest cable," said Richard Elliott, managing director of Apollo Submarine Cable System Limited, a U.K.-based company jointly owned by Cable & Wireless Worldwide/Vodafone and Alcatel-Lucent. Although Apollo is not currently involved in Arctic Fibre's project, it hopes to offer cable-landing station facilities in Europe.

Mr. Cunningham estimates that international carriers would provide 85 to 90 per cent of the project's total revenues, enabling Arctic Fibre to offer cheaper prices to Canadian wholesale customers – rates that would deeply undercut those of satellite provider Telesat Canada, currently the dominant player in connecting the North.

"We've indicated what bandwidth we'd be prepared to sign up for under certain conditions," said Paul Flaherty, chief executive officer of NorthwesTel Inc., a subsidiary of BCE Inc.

"Our view is some regions are more attractive than other regions. So getting up into Iqaluit, obviously to us, is very attractive if we can make the economics of it all work."

NorthwesTel has also indicated an interest in exploring "a partial ownership" of Arctic Fibre's project, instead of just leasing capacity.

Telesat, though, questions whether the project's economics work at all.

Paul Bush, the satellite company's vice-president of North American business development, says the North's small population and unpredictable weather make building and maintaining a network costly. "What happens in the middle of winter, when there is a failure? How do you deal with that?"

Telesat, which already provides backbone services via satellite, argues there is plenty of existing capacity to serve Northern Canada. The company is proposing to launch a public-private partnership to expand broadband services in the North.

"Over the years we have seen proposals for running wire to Canada's North come and go. The 'wired' proposals have been uneconomical because of the tremendous costs involved in deploying cable to and across Canada's North," said Allison Lenehan, chief strategy officer of rural broadband provider Xplornet Communications Inc., in an e-mailed statement.

"Even if wire could be deployed to Canada's North, that still does not address the issue of getting a high-speed signal to individual homes and businesses scattered over a vast land mass."

The feasibility of Mr. Cunningham's business plan likely depends on the final pricing – and that's unknown because international carriers have yet to make firm commitments to Arctic Fibre.

And there is still a threat that they could defect to a rival Russian project that is proposing to build a 14,901-km submarine cable to connect Europe and Asia through Russia's Arctic waters, providing no benefit to Canada.

Mr. Cunningham finds that prospect troubling: "The economics don't work if it is a Canadian-only thing. The Canadian economics happen because it is part of an international network."