The boring investment that will protect Australia

The boring investment that will protect Australia

Today, I bring to you the most boring investment idea in Australia.

I know that’s no way to start a newsletter.

I’m meant to dazzle you with exciting news.

But there’s a problem with that.

Just because an idea is exciting doesn’t make it a good investment idea.

I prefer the slow-burn investment ideas.

The sorts of investments that are part of a five-year or decade-long trend.

Something that, while small, is a crucial piece to a puzzle.

Because without this key infrastructure, the whole of Australia stops.

Staying connected

We kicked off yesterday’s edition with an introduction to how the internet reaches Australia.

And that’s through nine subsea cables.

That’s right. A grand total of nine subsea cables lay on the ocean floor and give us our digital connection to the world.

Let me point out, too, that there is a total of 378 subsea cables…it’s just that Australia has only nine of them.

When the subsea cables break — and they often do — Australia’s internet traffic is rerouted to the other cables in use. Think of all those times the internet has been slow for no reason.

You’ve probably blamed it on a satellite. Or your telco. Or the heat. Or your neighbour piggybacking on your bandwidth.

While those are plausible explanations, the real reason Australia’s internet slows down for days at a time is often due to subsea cable damage.

Boat anchors damage them, as do natural events like tectonic plates shifting, and sharks taking the odd nibble out of them.

So when these subsea cables go dark, we all feel it.

More to the point, reliable internet is vital to the Australian economy. So much of our lives are online.

Even if you shove aside social media and Amazon bargain-hunting addictions, businesses run their operations online.

For example, the Agora Financial Australia customer service team uses a VoIP (Voice over Internet Protocol) operated service. That means our calls rely on the internet, not copper cabling.

Then consider cloud storage, for example. Most companies use cloud storage to store their data.

However, there is no guarantee the business you work for is using a cloud server based in Australia.

More and more cold-climate countries are setting up cloud storage facilities, as it is cheaper to keep the servers cool where the temperature stays low.

And Microsoft is dabbling in underwater server facilities. That way, it can use the low ocean temperatures to keep servers cool.

The point is, all of this information is stored offshore. Yet we need it here on this giant, sunburnt patch of dirt.

Furthermore, the usage of subsea cables in Australia alone is growing at 30% per annum, says Telstra.

In 2014, around five terabytes of data transmitted daily. As at the end of last year, it was 14 terabytes.

That’s not an increase. That is an explosion of data.

Those nine subsea cables are critical to the transfer of information to Australia.

Not only that, subsea cables have a minimum lifespan of 25 years. Half of our subsea cables were laid in the late 90s to early 2000s. Meaning some of them are only a couple of years away from being ‘decommissioned’.

Given the unprecedented rise in internet traffic, they not only have to be replaced…but new ones have to be laid down as well.

Threat level: High

When Edward Snowden revealed the US had been spying on the world, most of us were shocked.

Then, we adapted to this invasion of privacy. We reopened our social media accounts and joked about the FBI agent who monitors our daily habits.

Brazil, on the other hand, took action.

On the back of the Snowden leaks, Brazil began planning a subsea cable that links the country directly to Portugal — completely bypassing the US and the UK in the process.

This move would drastically reduce the US’s ability to spy on Brazil.

Because subsea cable warfare is not a new tactic.

While Snowden brought to light the US’s abuse of privilege by spying on the world, subsea cables have been sabotaged since the First World War.

Both Germany and England would attempt to damage telegraph cables to cut off their respective enemies’ communications.

Back then, a cut telegraph cable simply meant phone communication was down. Very few people had access to this anyway.

Today, however, it’s different.

A damaged subsea cable doesn’t just stop telephone calls. It prevents the Aussie economy from sharing information…something that is vital to our modern lives.

With so few physical internet links to the rest of the world, Australia is increasingly vulnerable to espionage from outsiders.

We are seeing this threat to national security being publicly recognised by our governments.

Last year, the Australia government confirmed that it would not allow Huawei to ‘land’ a subsea cable from China to Australia.

The Aussie government continued to step on China’s toes by interfering with potential developments in the Solomon Islands and Papua New Guinea.

China had been wooing the Solomon Islands with the offer to build a ‘free’ subsea cable link to ensure the island nation’s digital connection.

Australia swooped in and booted China out of the discussion. Taxpayers will now foot the bill for the estimated $90-200 million subsea cable link to PNG and the Solomon Islands.

Will this be another waste of government spending?

Hardly.

Think of subsea cabling as critical government infrastructure. No different to the railways, bridges and roads that connect people in a city.

The difference with the subsea cabling to smaller island nations, however, is about the Australian government protecting the South Pacific.

Australia’s biggest security risk isn’t a rising Chinese military power. It’s about being able to maintain our digital link to the rest of the world…in order for our economy to continue.

Laying expensive subsea cables is part of ensuring that economic security.

Without our internet connection, we are looking at a national blackout.

Critical to national security

Subsea cabling isn’t a trendy or stock-of-the-moment investment idea. Laying data cabling is an extraordinarily long process, costing hundreds of millions of dollars.

And any cables put down are there for decades.

Our reliance on the digital economy means Australians need constant and continuous digital access.

Furthermore, the Aussie government is taking steps to block China — our biggest trading partner, no less — from connecting subsea cables to our neighbours.

These are two factors that signal the importance of these cables to Aussie investors.

Sure, subsea cables aren’t sexy. I’m sure this may be the most boring idea you’ll read about this week.

But they play a crucial role in keeping the Aussie economy moving.

And there’s a strong chance additional subsea cables will be a joint private/government infrastructure project in a few short years.

Australia’s economic prosperity and national security will rely on it.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia