federalreserve.gov
"The creation of the long-haul fiber optic network, the part of the network that runs from city to city, provides perhaps the best illustration of the excesses that can develop as firms rush to establish their market positions.
The creation of these networks may also indicate the complexities involved in determining the size of a capital overhang in a particular industry. In 1995, just three firms had significant long-haul fiber optic networks in the United States. By 2000, however, there were nine such firms, and by the end of this year, there will be several more. In some regions of the country, the numbers are larger still, with some major cities in the Midwest being served by as many as twenty long-haul firms.
The competing long-haul firms have laid huge amounts of fiber over the past few years. Not only do numerous firms compete, but each firm also has the incentive to put in place more fiber than it might need in the immediate future. As I mentioned before, the optical fiber itself is long-lasting, and the quality of new fiber has tended to increase only slowly over time. Thus, with the risk of obsolescence low, investment could be targeted more toward anticipated long-run needs. Moreover, fiber itself is relatively cheap. By contrast, the vastly greater expense in building a network is the construction cost associated with laying the fiber. Indeed, back-of-the-envelope calculations suggest that the cost per mile of fiber is something like $170, whereas the cost of installation is more on the order of $125,000 per mile. In that context, it is not surprising that firms would lay excess amounts of fiber in a given trench once the ground is broken.
In contrast to the fiber itself, the equipment that is used to transmit and receive data over the network has been subject to very rapid technological change, and the economic considerations of investing in this type of equipment are similar to those for computers and other types of capital goods that rapidly become obsolete because of the fast pace of technological change. Although some overhangs of the transmitting and receiving equipment may be present, the stock of such equipment has likely been tied more closely to current and near-term demand than is the case for fiber. Accordingly, the extent of overcapacity for this equipment is likely to be less severe. Moreover, two forces should operate in the direction of resolving any overhang in relatively speedy fashion--namely, that the equipment depreciates rapidly, and also that the amount of information being transmitted over the Internet is still growing very rapidly, roughly doubling each year since the start of the 1990s.
Meanwhile, there is a shortage of what is sometimes referred to as "last mile" capacity, the component of the network that runs from a long-haul node in a particular geographic area to individual businesses and homes. In view of that shortage and of the excess amount of long-haul fiber, patterns of investment are shifting. Industry analysts expect that in 2001 more fiber will be laid by cable companies and short-haul providers than by long-haul providers, and this gap is likely to widen in coming years. Thus, even in the hard-pressed
telecommunications industry, we are probably going to see continued rapid expansion in some types of capital, even as overhangs of capital may persist in other areas." |
