By The Short Fiber
By Bill Scanlon, Inter@ctive Week
October 29, 2000 7:19 PM ET
zdnet.com
This year, enough optical fiber will be laid worldwide to make the round trip to the moon 117 times. It won't be nearly enough to keep up with demand.
With a 16-month lag between new orders and delivery, carriers that haven't secured ironclad contracts with fiber manufacturers are in trouble, and slipping behind the carriers that have.
"Those who have been slow locking in their contracts are between a rock and a hard place," says Patrick Fay, an analyst at fiber-optic market research firm KMI. "There is a fiber shortage worldwide, and it will continue next year and through 2002, as well."
Fiber optics -data, voice and video traveling on photons of light through glass fibers - is the future. Most visions of converging networks see fiber optics playing the key role in the long-haul, regional and metro markets.
Emerging telecom carriers boast of plans to build networks connecting major cities. Competitive and incumbent carriers are anxious to switch from copper to glass, and are eager to expand their networks. They have set completion dates that may be optimistic, given the fiber shortage.
"Some of these new network providers making grandiose announcements about how much fiber they want to put in - I question if they really are going to be able to get as much as they want," Fay says.
The shortage stems from a classic imbalance between supply and demand. It means manufacturers can pick and choose customers, shunning the more casual buyers in favor of those with greater long-term strategic value.
"It doesn't take a rocket scientist to figure out that the infrastructure for producing fiber hasn't increased dramatically over the past couple of years," says Charlotte Denenberg, vice president of optical infrastructure at Metromedia Fiber Network. "Anytime there is a paradigm shift, you bump into a shortage of an infrastructure commodity."
Major fiber manufacturers Alcatel, Corning, Lucent Technologies, Pirelli and the leading Japanese companies have committed hundreds of millions of dollars to expanding their plants. But, for now, they're in the ramping-up phase, not at maximum operating capacity.
When demand exploded, it wasn't just the manufacturers who were caught by surprise - so were the analysts and everyone else, says Nancy Veres, director of marketing communications at Alcatel.
Burgeoning use of the Internet and insatiable demand for bandwidth fueled the clamor for fiber, Veres says. "We knew it would continue to grow, but, no, we didn't envision it would grow this fast."
It's a crisis that few carriers want to talk about. Those that do tend to be the ones with something to crow about - contracts that ensure completion of at least the current generations of their networks.
"There is an acute scarcity of fiber right now," says Peter Geddis, chief executive at Aerie Networks, which last month closed a round of financing for the 20,000-mile, $5 billion American network it hopes to complete in 3.5 years. "There is just none to be acquired unless you have a pre-existing order."
In July, Aerie placed the largest single order anyone has placed for fiber when it signed a deal with Corning for 5 million optic miles, Geddis says.
In September, Level 3 Communications announced an order for Corning's new-generation LEAF fiber, an indication of the solid relationship the company enjoys with the world's largest fiber maker, Level 3 spokesman Paul Lonnegren says.
Others are having more difficulty. In April, Broadwing tried to place an order for fiber to connect San Diego to Los Angeles, and was told it couldn't be delivered until November 2001, says Bill Muckle, vice president for Network Construction at Broadwing.
"Everybody has been caught by surprise. I certainly was when I placed that order," says Muckle. He was able to negotiate a quicker time with another vendor and doesn't expect delays in the company's build-out plans.
"We're probably in better shape than some other people, because we try to be proactive," Muckle says. "But I haven't seen it this bad in 20 years."
Manufacturers want firm commitments and prefer cash up front. Would a carrier requesting fiber from Corning today get a contract? That "would depend on who they are," says Elizabeth Wright, marketing communications specialist for optic fiber at Corning. "It would depend on what our previous relationship with them is. We're very selective."
Corning has vowed to fill all its orders, but is not anxious to make more deals. "We don't promise any fiber we can't deliver," says Wright. "We're at maximum capacity right now."
Other companies are singing the same song. One would-be customer of Lucent, the second-largest fiber manufacturer in the world, was quoted a 19-month wait. Lucent is "expanding drastically to meet demand," explains Charles Reavis, vice president of sales and marketing for optical fiber solutions at Lucent. "Everyone in the industry is sold out."
A carrier without a far-sighted business plan will flounder.
"Clearly, it's very critical that the new players plan ahead, so they understand what their business is and what their network needs are going to be," Reavis says.
Manufacturers are asking customers for forecast plans. The planning ends in long-term contracts. "We may tell them that we might not be able to give them what they want in 2001, but we'll look at 2002 and beyond," Reavis says.
Alcatel can't keep up with demand either, says Veres. "We're sold out until 2001. Demand is beyond the reach of about every supplier now," she says.
In June, Alcatel announced plans to triple fiber-making capacity by expanding plants in Germany, North Carolina and Paris. The expansions will improve Alcatel's ability to deliver fiber next year and cut down on waits.
But unless and until the shortage abates, how long a customer has to wait for fiber depends "on the strategic value of the relationship with Alcatel," Veres says. "Customers in the strategic best interest of Alcatel will get a different set of lead times than someone who just wants to come in on a spot-buy, short-term relationship."
KMI estimates that $2.6 billion will be invested in expanding fiber-optic manufacturing capacity between now and the end of 2002. Another $3.7 billion will be required in 2003 and 2004.
Corning earlier this year announced it will spend $750 million to expand fiber manufacturing plants in North Carolina and Australia; more recently Corning said it will put $50 million into expanding its Wales plant. The expansion, which won't be complete until 2002, is intended to boost manufacturing capacity by 50 percent.
Lucent is spending $1 billion to expand manufacturing at plants in Brazil, China, Denmark, Georgia and North Carolina, Reavis says. Its Norcross, Ga., plant, Lucent's largest, already has doubled its capacity.
Lucent is also devoting research and development to new manufacturing processes to boost the capacity of its fiber. Company scientists keep tabs on university research and conduct experiments of their own.
Chubbier Networks
But every breakthrough in fiber purity and capacity means manufacturers have to ramp up again - and carriers have to get in line again.
A few years ago, the carriers installing big optical networks could be counted on a hand or two. Now, more and more players are installing chubbier and chubbier networks.
Metromedia, for example, stuffs 432 or 864 fibers into a single conduit and has installed a million fiber miles of its 3.6 million-mile network.
"We planned ahead," Denenberg says. "We're a large customer and we know what we want, so we got our order in well in advance of when other folks realized they had a problem."
In 1998, according to KMI, 46 million fiber kilometers were installed around the world. Last year, it was 63 million kilometers, and this year should end with 90 million new kilometers installed. Analysts see growth, and therefore a likely shortage, through at least 2004.
Denenberg compares the fiber shortage to the recent spike in gasoline prices caused by a lag in investments in domestic oil refineries. "It's an extraordinary time. Demand goes up, and they're not able to keep up."
Currently, copper wire and Digital Service Lines dominate the "last mile" linkage from the network to the business or home. But as the price falls and the technology is tweaked to use optic fiber for that final connection, it could exacerbate the shortage.
Meantime, there is smiling or squirming in the board rooms of companies that did - or didn't - arrange long-term contracts for landing the fiber they need to build out their big dreams.
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