I'm back! I couldn't stand it, though I may regret it. Happy to miss most of yesterday, though.
cnbc.com
Is the Fiber-Optic Boom Nearing the End?
by John Borland and Ben Heskett
Staff Writers, CNET News.com
Special to CNBC.com
Amid the current high-speed networking craze, a simple rule applies: If
you build it, they will come.
A combination of an insatiable appetite for capacity on networks,
the entry of new competitors in the communications industry and
technology innovation has prompted an almost unprecedented
boom for network operators and their suppliers.
Centered around fiber-optic technology, communications
companies and their "arms dealer" equipment makers are reaping
huge gains. Collectively, they are betting that the demand for
capacity -- or bandwidth -- on networks will grow exponentially as
more people do more-complicated, pipe-clogging tasks on private
connections and the public Internet.
Much like when the high-tech industry coalesced around
Internet-based communications, the networking market is rapidly
embracing the notion that optics is the only technology that can
conceivably meet the demands users will place on networks.
As a result, new entrants in the market such as Global Crossing
Ltd. {GBLX}, Level 3 Communications Inc. {LVLT} and Qwest
Communications International Inc. {Q}, among others, are
preparing to duke it out with entrenched global network providers
such as AT&T Corp. {T} and MCI WorldCom Inc. {WCOM}. These
upstarts hope their more state-of-the-art technology will reap
competitive benefits vs. older competitors.
On the equipment front, a renaissance has taken hold in the
market, with highflying upstarts, such as Juniper Networks Inc.
{JNPR}, Redback Networks Inc. {RBAK} and Sycamore Networks
Inc. {SCMR} offering alternative technologies to larger firms, such
as Cisco Systems Inc. {CSCO} and Nortel Networks Corp. {NT}.
And as 2000 unfolds, others will follow, such as Corvis and Optical
Networks, as more firms focus on how to get more out of a
fiber-optic line. In addition, these firms will likely revel in the high
valuations currently placed on entrants into the optical-equipment
niche.
Fiber-optic technology sends information encoded in pulses of
light through long strands of "glass" fiber. On their own, these
fibers can carry much more information than traditional copper
wires. Recent advances in technology pioneered by the likes of
Ciena Corp. {CIEN}, Lucent Technologies Inc. {LU} and Nortel --
including techniques that involve carrying information on different
wavelengths of the light pulse -- have greatly improved the strands'
capacity.
Interest in adding technology that can increase fiber's capacity has
heightened also since fiber already has been laid throughout the
country.
But in every boom is the threat of a bust. Amid overwhelming
evidence of demand for network bandwidth and the associated
technology to make it work, even the most astute experts admit
there is no single user-driven technology at the moment that will fill
the network capacity. This could be a telling admission. Use of
personal computers didn't take off until software applications such
as word processors and spreadsheets became available, for
example.
But many think the growing availability of bandwidth will spark
development of the applications and software that will finally justify
the massive network construction projects.
"People want more bandwidth as it gets cheaper," Infonetics
Research founder and principal analyst Michael Howard says.
"Demand truly is elastic," says John Roth, chief executive officer of
Nortel. "The more available [bandwidth] is, the more people use it."
Wall Street -- and the industry itself -- is betting that demand for
bandwidth will continue to climb at exponential rates. Most agree
that's likely to happen, as network-taxing applications, such as
video-on-demand, videoconferencing and even virtual reality
applications, are made feasible by faster high-speed connections
to homes and offices.
According to consulting firm Forrester Research, business
demand for network bandwidth will continue to double each year
through the next few years. Total corporate demand in 2003 is
likely to be about 12 times what it was in 1999, the firm predicts.
But that is still in the future. Today the focus is on building the
networks that will make these applications feasible -- and that's
driving money and market attention to the Qwests and Sycamores
of the world.
"What ends up happening is a cycle effect," says Erica Henkel, an
analyst with Frost & Sullivan. "Right now you have a bandwidth
shortage, so companies are building out networks."
Once network capacity becomes commonplace, the market will
turn resources more broadly to applications that use this
bandwidth, Henkel says.
For the companies laying fiber themselves, this kind of cycle can
be risky. As more companies build long-haul networks,
competition drives the price down, at least until new
high-bandwidth applications once again clog the pipes. The price
of bandwidth has already fallen substantially in the last year.
Some of the network companies seek to hedge their bets by
selling off pieces of their network early, while the price for
bandwidth is still high. Qwest, for example, sold pieces of its
network early on to what was at the time Frontier Communications,
which in turn has sold smaller pieces to third parties, each
avoiding the necessity of selling the extra bandwidth themselves at
a discount later on.
But analysts say it's a different story for the equipment companies,
which are even now struggling to keep up with network operator
demands, as evidenced by Lucent's recent missteps and Nortel's
plans to add optical-manufacturing capacity.
Vinod Khosla, a partner at Silicon Valley venture firm Kleiner
Perkins Caulfield & Byers and a member of Qwest's board, said
the biggest obstacle to the communications company's growth is
finding enough cutting-edge equipment to put in its network.
"I don't see any excess bandwidth for the next three to five years,"
Khosla says.
Most of the big network operators are upgrading their
infrastructure to take advantage of the latest in fiber-optic
technology. They're even looking a few upgrade cycles ahead,
analysts say, building in extra capacity so they won't find their
brand-new networks completely filled in a year or two.
If all the network companies in the world worked on the same
schedule, this could lead to a kind of boom-and-bust pattern for the
equipment providers. But the newcomers, such as Level 3, are
building from scratch now, while established companies, such as
AT&T or the Bell phone companies, work more slowly, trying to get
as much use out of their old switches and infrastructure as
possible before selling it.
Overseas companies also lag behind the leaders in the United
States, promising demand for high-tech fiber equipment for years
to come.
And while this cycle is running its course, content providers and
application builders will be finding new ways to fill the networks,
driving demand for bandwidth and network equipment even higher,
analysts say.
"It's a great long-term play," says Ross Mayfield, president of
RateXchange, an online site where network companies trade and
sell their excess bandwidth. "The cycle will always come back
around in [the equipment makers] favor."
Frost & Sullivan says the total worldwide market for fiber-optic
telecommunications equipment was about $10.4 billion in 1999.
Henkel says she expects that to jump to nearly $17.7 billion by
2003 and to $28.6 billion in 2006.
"If you've got thousands of people to move, it favors a big plane,"
says Corvis's CEO David Huber, an industry veteran who also
founded Ciena. "Optics is a big plane." |
