Got it. Here is the USA Today article on the "Impending Broadband War?" So what is the take on this article?
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Mike
03/02/00- Updated 01:17 AM ET
Broadband war may halt tech stocks' climb
By David Henry, USA TODAY
NEW YORK -- Onward and upward, the Nasdaq is back on its blissful
record-setting trajectory again, as though investors in its fabulous tech
stocks will never have another worry.
The index has not even dipped as much as 10% this year to rest after
1999's 86% climb or fret over Fed Chairman Alan Greenspan's rising
concern over speculation and surge of paper wealth.
Sure, it feels good to imagine the trend continuing, but logic says the future
won't always be so smooth. What might go wrong, aside from an economic
slowdown or unpredictable political or financial shock? A sudden cooling
and breakup of hot stocks in a key tech sector, such as broadband
telecommunications.
A plausible scenario for just that is clear if you can escape the fever for fiber
optics for a minute. What is shaping up is a bloody price war among
long-distance broadband carriers who are customers of fiber-optic
equipment companies such as JDS Uniphase, Sycamore, Corning, SDL,
Nortel and Cisco. If the carriers are wounded in the war, they'll cut back on
orders. The cutbacks wouldn't necessarily be devastating to the equipment
companies. But the slightest hiccup in revenue could be awful for their
stocks, which have been bid up as though nothing will ever go wrong.
Ironically, the odds of a brutal price war are being increased by
technological advances of the equipment companies, the same advances that
have made the stocks' stories sparkle. The equipment includes new
generations of fiber and devices that break up beams of light into colors and
send them over longer distances with fewer amplifiers, dramatically
increasing the carriers' capacity and the chances for a glut of bandwidth.
Indeed, no new infrastructure has ever been built with the cost of additional
capacity falling as rapidly as for the Internet backbone. One carrier, Level 3
Communications, says its cost of moving bits of information is falling 80% a
year. The firm plans to win business by cutting prices ahead of its
competitors again and again.
The result: "There is going to be a lot of red ink in the industry," says P.
William Bane, a telecommunications consultant with Mercer Management,
who accurately foresaw similar overbuilding in wireless communications
capacity five years ago.
If you want to hear the predatory plans of Level 3, go to www.level3.com
and listen to CEO Jim Crowe's discussion with stock analysts of "Silicon
Economics." He plans to be a victorious low-cost producer who keeps
installing the latest lasers and pushing the latest fiber through tubes that his
company has buried all over the nation.
Sure, demand will increase as the carriers cut prices. But the journey to
eventual balance with supply is full of pitfalls for the stocks involved. While
supply of Internet backbone is being added with technological ease and low
cost, the tools to enable potential demand are lagging, Bane says. Fiber
pipes are one thing, but "it is going to take some years for the new software
architecture to be put in place" in an installed base of computers and
appliances that will use the supply to make video conferencing,
video-on-demand and virtual tours of houses commonplace. Also, the
demand is being held up by slower technological development of the "last
mile" between the Internet backbone and business and residences.
Roger Wery, who knows the carriers through his consulting work at
Renaissance Strategy, says, "In private, the bottom line is that everybody is
keen to generate the killer combos of applications (of bandwidth) to fill
those pipes." Just how much of a glut develops depends on how
aggressively carriers light fiber . At a minimum, he expects "drastic
reductions" in pricing and stops and starts in equipment orders.
Equipment companies might be able to ease some of that volatility if they
can get orders from Asia and South America, Wery says. Europe is already
being criss-crossed with fiber.
Before long, the equipment stocks will be as risky and volatile as those of
suppliers to the cyclical semiconductor industry, says Fred Hickey of The
High-Tech Strategist. "The orders can just stop," he says. Stocks will
plunge, and the shares of companies that do not come up with the next
generation of equipment won't recover. And, perhaps some investors will
remember that once upon a time investors did not pay premiums for
companies at high risk of obsolescence. |
