European Bandwidth bonanza
By Alan Cane
Published: September 10 2000 20:56GMT | Last Updated: September 11 2000 09:07GMT
news.ft.com
They call it the "Golden Square", but the "glass diamond" might be a better description of Europe's busiest electronic highway.
Over the past several years, London, Frankfurt, Paris and Amsterdam, the continent's principal financial centres, have been progressively linked by thick sheaves of optical communications fibres buried deep in subterranean ducts.
Each fibre is no thicker than a human hair, but in total they are capable of carrying the world's entire telecommunications traffic many times over.
This awesome concentration of capacity is the consequence of frenzied network construction across Europe by more than a score of telecoms companies. However, a fierce argument is raging within the industry over whether their activity is producing a glut in capacity, leading to falls in prices that could threaten the survival of the weaker companies.
The debate took a menacing turn last week with the collapse of Iaxis. The UK-based company slid into administration owing about $200m (£140m), an early victim, it seemed, of the overcapacity and price cutting.
The traditional operators need not fear. British Telecommunications, for example, which is developing a network called "Farland" that links its joint-venture partners in Germany, France and Spain, could ride out almost any glut.
But Iaxis is far from the only newcomer in the race to install fibre. Entrepreneurs at companies such as Carrier1, Global Crossing, Level 3 and Viatel are also investing heavily in new infrastructure. They are counting on the internet and other online services igniting huge growth in the demand for transmission capacity.
They have been aided by the investment houses, which are determined to share in the booming international telecoms market. With the bankers' help, the start-ups have found it easy to raise money through venture-capital financing, high-yield bonds and flotations.
Those who have handed over money to the new entrants will take comfort from analysts' comments that Iaxis was, in some ways, a special case. In their view, it had been apparent for almost 12 months that Iaxis was doomed.
The company suffered from several weaknesses. An attempt at an initial public offering earlier in the year was pulled, leaving the company short of funds to weather the price war. Managers were divided over strategy, leaving the business plan and the marketing approach at odds. There were questions about the quality of service. "It is not good enough to be average in this business," a competitor says. And the company had remained chiefly at the commodity end of the market. While it sold wholesale raw transmission capacity that it had leased from other suppliers, its competitors had been looking for ways to add value: linking up, for example, with internet service providers to keep their "fat pipes" filled.
On the other hand, nobody can ignore the threat posed by the glut of transmission capacity. Surprisingly, according to Renaissance Strategy, a US consultancy, the scale of the potential oversupply is greater in Europe than in the US. "This is due," it says, "to the larger number of new market entrants in Europe, with at least 18 new players investing in networks covering Europe's core economies."
Although some routes, such as Spain, Italy and Portugal, remain short of the fat pipes capable of carrying heavy internet traffic, areas such as the Golden Square are groaning with fibre.
And there is no sign of any slackening in the pace at which new capacity is being added. Philippe Moin of Nortel Networks, the Canadian manufacturer that is supplying equipment for many of the new European networks, claims the company is finding it hard to keep up: "We do not seem able to make or ship enough equipment. Last year the UK was booming. This year it is Germany".
The extra capacity has led to staggering price declines. The new companies have created from scratch a market for international bandwidth - or transmission capacity - which has become one of the most dynamic sectors of the telecoms industry. According to Telegeography, the US consultancy, "the number of suppliers is increasing rapidly, new products are emerging monthly and prices are falling faster than in almost any other sector of the market".
A transatlantic circuit that could be leased for 15 years in 1997 at a cost of $16m will next year be priced at only $850,000 for the same period. A 10-year lease on a circuit on the Hermes Ring, the first pan-European network, cost $18m in 1998; this year it costs less than $6m.
Prices are continuing to fall at 50-60 per cent a year, according to Tim Stronge, director of research for Telegeography.
New technologies, such as dense wavelength division multiplexing, which uses individual colours of light to carry transmissions, provide immense capacity. But the stimulus for the emergence of this new international bandwidth market was market liberalisation, pushed through by the US and the EU in 1996.
Before that time, each national operator supplied its own half of a leased telecoms line between two countries. Prices were high and quality indifferent. Negotiations with all the parties involved could take months. "There were no pan-European networks," says Susen Sarkar of Yankee Group Europe.
Liberalisation opened the door to competition and new providers rushed through, anxious to provide customers with better services at attractive prices. Some leased "dark" or raw optical fibre from suppliers and added their own electronics. Others laid their own cables, seeking lower unit costs and the opportunity to lease spare capacity to others.
And yet demand has not met the operators' forecasts. Optimists believe that technology will come to the rescue. Cable modems or digital subscriber-line services, such as that offered by BT, will improve local access. This in turn will increase internet penetration and the volume of traffic.
But demand has proved extremely difficult to predict. Renaissance believes there will be substantial overcapacity to 2004 and beyond. If so, operators will need deep pockets to survive. Consolidation between some of the smaller companies seems inevitable over the next few years. Indeed, a few have already made clear that they would welcome an approach. |
