The Economist speaks (pay attention, little boy): "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.
economist.com |
