WSJ article on bandwidth:
TORONTO -- Greg Maffei was in for a shock as he prepared to address
a conference here last month. He hoped to convince the 250 investors
and analysts that the company he heads, fiber-optic communications
carrier 360networks Inc., was as hot as the company's then-strong
stock price.
But a survey at the conference offered a surprising insight: Some 49%
of the assembled investors expected a glut of fiber-optic capacity
within three years.
Consoling himself that 51% didn't predict a glut, Mr. Maffei remarked
to a banker, "I guess we've got a slight majority with us."
Many Internet and telecom gurus scoff at the notion of an actual glut
of available fiber-optic bandwidth. But the investors' response
underscores a pressing dilemma for companies such as Mr. Maffei's:
Bandwidth -- the capacity of communications lines to carry data and
phone calls -- is quickly becoming a commodity for long-distance
networks. Companies such as 360networks that have incurred billions
of dollars in debt to build tidal waves of new bandwidth must now race
to sell it to corporations, phone carriers, Internet providers and
others as its price plunges.
Meanwhile, the technology keeps improving, allowing the same fiber
cables to move ever-growing amounts of information. The cost of
creating bandwidth has plunged 99% over the past 10 years, and
fast-improving technology means "the same thing is going to happen
over the next five years," says Greg Mumford, president of optical
networks for Nortel Networks Corp. The Brampton, Ontario,
networking giant is a key company making breakthroughs in
fiber-optic technology and a supplier to 360networks.
360networks, based in Vancouver,
British Columbia, is spending some
$5.7 billion -- and has taken on
more than $2 billion of debt -- to
develop its fiber network. Those
are hefty figures for a newly public
company that had just $234
million of revenue in the first half
of this year and is expected to
produce negative cash flow and
losses for at least another year.
Competitors such as Global
Crossing Ltd. of Bermuda and
Level 3 Communications Inc. of
Broomfield, Colo., are also
investing furiously. The growing
availability of bandwidth has
resulted in several markets where
bandwidth capacity can be bought
and sold, much like corn or oil.
There are now 14 big-capacity national networks operating or under
construction in the U.S. and the companies are "all burning cash at a
pretty sharp rate," says Paul Sagawa, a Sanford C. Bernstein analyst
who recently became bearish on the sector. The companies' rate of
revenue growth is falling behind their rate of spending, which he calls
"an untenable long-term circumstance" that is likely to lead to "a
messy period of consolidation," including asset sales or slowed
spending.
Already, shares of Global Crossing and Level 3 are trading at less than
half the levels of early this year. 360networks stock fell 75 cents to
$14 Wednesday in Nasdaq Stock Market trading, down sharply from
more than $24 early last month, returning the shares to their initial
public offering price of $14 in April.
Competition is growing fierce. Take Cogent Communications Inc., a
Washington, D.C., start-up that plans to offer 100 megabits per second
of Internet access to more than 500 corporate customers in several
U.S. cities for $1,000 a month starting in November. That's more than
60 times the capacity of a standard high-speed office hookup -- at a
lower cost.
Big "backbone" carriers such as 360networks, which usually provide
wholesale transport service for carriers that actually serve businesses
and consumers, face other obstacles. One is the "last mile" problem,
the fact that the phone lines that connect consumers and small
businesses to the Internet usually are too slow to take advantage of
the high speeds. Moreover, there aren't enough applications, such as
video-on-demand services, to soak up all the bandwidth.
The rapid growth of backbone networks "will result in a capacity glut,
a situation that is likely to persist until well after 2005,"
telecommunications consulting firm Adventis Corp. said recently.
All this means headaches for Mr. Maffei, who resigned as chief
financial officer of Microsoft Corp. last year and became president and
chief executive officer of 360networks in January. Since then he has
seen 360networks through a blitz of deals, helping the company build
one of the world's largest high-capacity networks. By mid-2002, the
81,530-mile maze is expected to link more than 100 major cities
around the world.
Now Mr. Maffei and his team must fill 360networks' fat pipes by selling
bandwidth and related services as quickly as possible.
On a recent whirlwind trip, Mr. Maffei and other 360networks officials
met with customers and prospective customers in Spain one day, then
flew a leased jet to Paris for breakfast the following morning, to Rome
for lunch, and to Britain for dinner. There is no time these days for golf
or other leisure time with customers, says Jim Brennan, the
company's marketing chief, who logs some 40,000 miles a month on
commercial airlines.
Knowing that it won't always offer the cheapest deal, the company
stresses its technology and global reach. But pressure from
competitors cutting prices won't go away. Mr. Brennan says he is in
contact with Mr. Maffei and Vice Chairman Larry Olsen at least four
times a day, trying to decide what contract terms the company can
accept. The hardest part comes when the executives must pass on a
potential sale because a competitor is offering rates that
360networks believes are unprofitable, Mr. Brennan says.
The price of bandwidth in a competitive area of the U.S. is about a
tenth of the price four years ago and less than 1% of the price in the
mid-1980s, though prices for bandwidth connecting various regions
of the world aren't falling as fast. To avoid pure price competition,
360networks often sells its capacity in conjunction with data-center
services and other add-ons.
Mr. Maffei says he also is mining long-time associates for potential
sales leads as well as strategic guidance. John Malone, chairman of
AT&T Corp.'s Liberty Media unit, is a 360networks director, as is Kevin
Compton, a partner in Silicon Valley venture-capital heavyweight
Kleiner Perkins Caufield & Byers. Mr. Maffei says he also has held
preliminary talks with Dell Computer Corp. CEO Michael Dell, a
360networks shareholder and adviser, about potential business with
the computing giant. He called on Rupert Murdoch, another adviser,
to help with a network joint venture with Singapore
Telecommunications.
"I'm very optimistic about the long-term demand" for bandwidth, Mr.
Maffei says. Just as lower mobile phone charges have greatly
multiplied the number of customers, lower bandwidth prices will lead
to many more bandwidth-hungry applications, he predicts. And
360networks says only a few networks can match its relatively low
building costs and global scale.
In a few years, "we'll all be buying our music and our videos online,
and those are unbelievable file sizes," says Mr. Olsen, the vice
chairman. Moreover, 360networks is in talks with a company seeking
to broadcast sports over the Internet, says marketing chief Mr.
Brennan. The service will allow viewers to customize their viewing
and watch, say, just one star's play at a golf tournament, he says.
"That application hogs bandwidth," he adds. |
