Fiber Firms Smell Threat, Make Contingency Plans
Date: 8/9/99
Author: Reinhardt Krause
Dirt cheap, high-capacity bandwidth - it's what buyers of communications services dream about at night.
But that dream could turn into a nightmare for builders of new long-distance fiber-optic networks. A bandwidth glut could leave them scrambling for customers to pay for these multibillion- dollar ventures.
Some new long-distance players are already leery. They don't want to put all their eggs in the ''wholesale'' fiber-optic basket by selling network capacity mainly to other carriers.
To hedge their bets, they plan to sell services directly to more end users, such as big companies. They're developing software-based services that go hand-in-hand with fiber-optic networks. The services target electronic- commerce activity or big jobs such as full-motion video.
''It's a real question whether companies are able to have a sustainable profit- making machine just based on having fiber,'' said Rob Norcross, a Washington, D.C.-based analyst at Mercer Management Consulting Inc. ''If all you are is a big pipe, you get a commodity profit. You need a way to differentiate your services from the next guy.''
At least five new national fiber- optic networks should be put into service by 2001. Industry upstarts rushed to build them because older phone lines couldn't handle the Internet's growth and other emerging data traffic. Fiber-optic lines promise to deliver data thousands of times faster than conventional phone lines.
Enron Corp., one of the nation's biggest energy companies, is one fiber-optic network builder that's trying to branch out. It plans to finish a 10,000-mile network by year's end.
Houston-based Enron wants to create a futures market in long-distance capacity, much like metals or foods are traded under contracts. The company has taken a similar approach in the electric utility industry.
Enron plans to sell advanced services that take advantage of cheap bandwidth. It's working with Real Networks Inc. to send high-quality video over its fiber network. Enron also plans to optimize bandwidth for such users as financial or medical companies.
''We aren't really selling raw bandwidth in the fashion of a carrier's carrier,'' said Steven Elliott, chief financial officer at Enron's communications unit. ''We view ourselves as developing a broadband e-commerce platform.''
One well-known fiber player, Qwest Communications International Inc., slowly is exiting the wholesale arena, analysts say.
Following a hostile takeover bid launched in June, Denver-based Qwest plans to buy US West Inc. in a $36.5 billion deal. Qwest acquired long-distance firm LCI International Inc. for $4.3 billion last year. These buys mean Qwest may directly sell to consumers services that use bandwidth, such as Internet access.
''The likelihood is that Qwest isn't really selling wholesale bandwidth anymore. They're phasing out of the wholesale business,'' said Berge Ayvazian, analyst at market researcher Yankee Group. ''Their emphasis is on building a very high-end retail portfolio.''
Qwest also has acquired Internet service providers to expand into Web-hosting services. It plans to cater to the needs of small and midize businesses that are jumping online.
Qwest, which has completed an 18,500-mile fiber network, seems to be on the right track. It posted strong second-quarter results.
Not all fiber upstarts are on a roll.
Despite owning a network using the latest in fiber-optic gear, IXC Communications Inc. in Austin, Texas, has been unable to transform those assets into profits.
Cincinnati Bell Inc. in mid-July agreed to buy struggling IXC for $2.2 billion. The nation's 10th-largest phone company, Cincinnati Bell faces a tough job revving up IXC's sales, analysts say.
Data traffic will grow more than 200% annually over the next five years, says market researcher Yankee Group. Data service revenue will grow more slowly, though - about 25% annually. Industry sales should climb to $46 billion in 2002, up from $23 billion in 1999, Yankee Group says.
Depending on how many carriers chase the data market, a bandwidth glut is possible, say company executives and analysts. Established players like AT&T Corp., Sprint Corp. and MCI WorldCom Inc. are adding capacity to existing networks, as well.
One wild card is how much new fiber is actually put in service.
Upstarts typically bury several conduits of glasslike fiber cables along rights of way such as railroad lines. They ''light up,'' or put those conduits into service, in stages.
''The key question is how much fiber will be lit up and how much predatory pricing there's going to be,'' said Roger Wery, an analyst for Renaissance Worldwide Inc.
Still, demand for bandwidth could take off once more businesses and homes get access to high-speed services. To compete with cable modem technology, local phone companies are rolling out high-speed services known as digital subscriber lines.
Fiber upstarts could be well-positioned as Internet links get faster in the so-called ''last mile'' of local wiring.
''An opportunity still exists for pure (wholesalers) to re-enter the market and fill the void left by Qwest and others,'' said Yankee Group's Ayvazian.
Analysts point to the communications unit of Williams Cos., which plans an initial public offering this fall. Williams runs a low-cost network, which helps in a low-margin pricing environment.
''They're lean and mean,'' Ayvazian said.
Tulsa, Okla.-based Williams has signed up a key customer for network capacity, SBC Communications Inc. Williams also has invested in Winstar Communications Inc., a new entrant in local markets that sells wireless Internet access via rooftop antennas.
Another high-profile company is Level 3 Communications Inc. in Omaha, Neb.
It lags other fiber start-ups in building out a network. Its 18,800-mile system won't be complete until late 2001. But Level 3 says it will have an edge being a wholesale bandwidth supplier because it uses low-cost, Internet-style network gear.
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(C) Copyright 1999 Investors Business Daily, Inc.
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