From a copyright story in this week's Economist. Has anybody ever heard of the Renaissance Strategy consultants? Why are they the only ones to foresee a massive glut in fiberoptic capacity? This is the second article recently (the other was in the NY Times) that describes this as a merger of "two companies that no one has ever heard of". Where do they get these reporters?
Optic verve
WHEN the biggest merger in technology-industry history
involves two companies that most people—even some within
the industry—have never heard of, it suggests that something
is amiss. And sure enough, there is something odd about the
announcement, on July 10th, that JDS Uniphase, a
Canadian-turned-Californian maker of light filters, amplifiers
and other fibre-optic gear, had offered a $41 billion share
swap for SDL, a nearby firm that makes similar equipment. To
wit: how on earth did each of these glass and gizmo makers
come to be worth more than, say, all of America’s airlines
combined?
The simple answer is that glass is hot and planes are not. Both
JDS and SDL are at the core of what George Gilder, a
technology seer whose monthly newsletter has the power to
send share prices into orbit, sees as a new order, in which
fibre-optic networks take the dominant role that computers
play today. After Mr Gilder anointed JDS the “Intel of the
Telecosm” in 1998, its shares shot up; SDL has enjoyed a stellar
run in the past year after joining Mr Gilder’s list of telecosmic
firms (see chart).
Mr Gilder was right to praise the two companies: both are
growing by more than 40% a year, and JDS in particular has
shown an enviable ability to snap up other firms (including
E-TEK Dynamics, bought for $15 billion five days before the
SDL deal) and integrate them without missing a step. But their
current valuations assume that this sort of growth will continue
indefinitely. That is far from certain.
The problem is that most demand for optical gear has been to
build bigger-capacity “backbone” networks, which travel long
distances or combine traffic from many smaller networks. This
business has been one of the hottest bits of the telecoms
industry for years, as investors piled into firms such as Global
Crossing and WorldCom that were expanding their backbone
capacity. Indeed, one of the main reasons why JDS wants SDL is
for its manufacturing capacity: JDS has been unable to meet
demand from these telecoms firms.
But all this backbone investment, driven more by stockmarket
sentiment than by actual data demand, has created a massive
glut in fibre-optic capacity. Renaissance Strategy, a
consultancy based in Boston, calculates that even the most
optimistic projections of demand over the next five years will
consume only half the fibre-optic capacity that will be
activated over that period.
Normally, user demand can be counted on to rise to fill
available capacity. But in this case there is a bottleneck: the
“last mile” between the backbones and millions of home and
small-business users. Today only 2% or so of American homes
have high-speed Internet connections that can make use of fast
backbones. Within five years that may be 20%, but progress
has been slow. In Europe, the imbalance between backbone
capacity and access-network roll-out is even greater. Some
technologies, such as high-speed wireless data, may accelerate
broadband to the home, but not enough to eliminate the
backbone glut in the foreseeable future. Seen this way, much
of JDS’s and SDL’s amazing growth has been a bull-market
phenomenon only tenuously linked to user demand. And that,
sooner or later, is bound to dim. |
