How will USA get more fiber in its telecom diet?
Thu Mar 21, 6:09 AM ET
Kevin Maney USA TODAY
If you think the crashing telecommunications industry is in chaos now, just wait until it all flips around and the world is choking on Web traffic and too many phone calls squeezing through too few fiber-optic lines.
Instead of a bandwidth glut, a bandwidth shortage.
It will happen sooner than conventional wisdom dictates.
When it does, a shortage will push up consumer phone bills, hamper businesses getting swamped by their data communications needs and hurt a technology industry that thrives on the Internet. A shortage also should boost the stocks of some telecom companies and give rise to a new set of upstart telecom companies.
Shortages could start appearing late this year. In one worst-case scenario, fiber networks that were intended to have enough capacity for 20 years would get filled up in five.
While telecoms form a conga line to bankruptcy courts, forces are aligning to serve up a shortage. Including:
* Construction of networks and the ''lighting'' of dormant fiber-optic lines -- which turns them on -- have come to a standstill.
* The telecom collapse is crushing innovation and starving new telecom companies of capital. While some new companies are getting modest funding, the pace of innovation has slowed considerably.
* Meanwhile, bigger, older telecom companies -- which have more resources to survive the shakeout -- are already starting to buy networks and smaller companies at fire-sale prices.
That trend is expected to continue. Companies such as Verizon Communications and SBC Communications, which own older circuit-switched networks as opposed to newer, more efficient networks based on Internet protocol, don't want to be shoved into obsolescence, notes industry consultant David Isenberg, a former AT&T strategist. As the older phone companies again dominate the industry, Isenberg and other analysts say, they'll try to slow the pace of change.
But while those factors plunge the industry into a deep freeze, a curious thing is happening. Total demand for communications worldwide keeps rising at 7% to 15% a year. Internet traffic grows at least 80% a year. At some point, the two trends -- stagnating telecom capacity and zooming demand -- will cross.
Demand will keep rising, and capacity growth will be stalled.
''It's not like you can put this stuff in in a minute,'' says James Crowe, CEO of Level 3 Communications. ''If you want it nine to 18 months from now, you need to start today.''
The clashing trend lines will lead to an undersupply of bandwidth.
It's not a question of whether this will happen. It's when.
Bad news continues
The telecom industry probably won't get much happy news in 2002.
Telecom is Wall Street's pariah du jour. Investors won't touch it. Those who held telecom stocks bailed after watching Global Crossing file for Chapter 11 bankruptcy and Qwest Communications and WorldCom get queries from the Securities and Exchange Commission (news - web sites).
Capital markets and debt financing are basically closed to telecom. Struggling companies will continue to have trouble funding ongoing operations. More will file Chapter 11. Boston consulting company Adventis figures that an additional $70 billion to $100 billion worth of telecom networks will get written off over the next three years.
Half of telecom carriers are cutting their 2002 capital budgets, according to Forrester Research. An additional 23% will keep those budgets flat.
Meanwhile, the fire sale has begun. Time Warner Telecom, for instance, bought telecom service provider GST Telecommunications for $690 million, or about 50 cents on the dollar. In other cases, the big carriers won't buy struggling little ones -- the big guys will just let the little ones die, leaving the upstarts' fiber networks forever dark and their competition forever removed from the marketplace.
For start-ups, venture capital is hard to get. ''There's a lot less money available, and it's in smaller increments,'' says Vinod Khosla, a partner at venture firm Kleiner Perkins Caufield & Byers.
In the telecom boom, Khosla was telecom's most visible of the venture capitalists who fund young companies. A select few companies are able to raise money, but, Khosla says, ''Some good companies that should get funded are not getting funded.''
All the woes result in an industry stuck in quicksand. ''Innovation will slow because only the incumbents will make investments,'' says Blaik Kirby of Adventis. With so many companies crippled or gone and so few new ones coming up, competitive pressures inside the industry to build bigger, better, faster networks have vanished.
Is the glut for real?
A huge, key question for the industry is: How much of a glut is there?
Many reports focus on the enormous amount of fiber that's been put in the ground by companies such as Level 3, 360networks and Global Crossing. The building boom created what at first seems like a giant oversupply. Only 2% to 5% of the fibers in the USA are lit, hooked up and carrying traffic. The rest are dark, lying in the ground in anticipation of demand.
But it's not that simple.
Dark fiber is not the same as capacity. Even though a fiber is in the ground, it's far from being usable. For every $1 spent to put a fiber in the ground, a company has to spend $20 to attach it to all the equipment, configure it and turn it on.
One way to think of it is to consider a farmer's crop. Putting in a fiber is like buying seed. That's the relatively easy part. Planting, growing and harvesting are like lighting that fiber. It's the expensive, hard part. Just because a farmer has tons of seed doesn't mean he has a crop. The seed isn't going to meet a surge in demand.
''Is the market really facing an oversupply of network capacity? In a word, no,'' says a report from research firm TeleChoice. The report adds that 63% of busy routes -- those between big cities -- are running at or near capacity.
All the while, demand keeps rising. Even in a recession, businesses generally don't cut their spending on communications. It's too vital. Companies will first cut spending on computers or hires.
Consumers increasingly eat up bandwidth. In 2000, 4 million homes had cable modems, according to the National Cable Television Association (news - web sites). In 2001, it jumped to 7.2 million. A similar growth rate is expected this year. Broadband over phone lines has passed 4 million U.S. subscribers.
Yet cable modems and high-speed digital subscriber lines, or DSL, are together reaching only a fraction of U.S. homes. Most consumer Internet users still dial in on slow lines.
Few compelling new applications -- such as online movies -- take advantage of higher bandwidth. Dial-up lines and lack of applications are ''choke points'' -- they could be holding back a potential surge in consumer demand for bandwidth.
''It's not a business of excess capacity,'' says Francis McInerney of research firm North River Ventures. ''It's not overbuilt. It's not built enough. The problem is capacity surrounded by choke points.'' If the choke points get loosened, he says, a wave of consumer demand could make shortages even worse.
When will a shortage begin? Level 3's Crowe thinks it will start late this year. Kirby at Adventis pushes that out a few years. Danny Briere, CEO of TeleChoice, says shortages will start soon and could get serious in four to five years.
In one scenario, TeleChoice lined up all the factors -- from a hot economy to consumers downloading movies -- that would increase demand for bandwidth. The firm found that within five years the USA could fill up all the lit AND unlit fibers.
Telecom companies have generally planned for all that fiber to last 20 years.
Higher prices, slower service
When a shortage comes, what will happen?
High school economics says that prices will rise for everything from companies' virtual private networks to home Internet access and all kinds of phone calls, including wireless calls, which need fiber lines to carry calls from city to city.
Networks could get overloaded. That would slow Internet traffic and perhaps cause network glitches that interrupt traffic. Almost half of any network is kept idle as a backup. In a pinch, the idle space can carry excess traffic -- but then that space isn't available if something goes wrong.
A shortage will create a vacuum. Frustrated businesses and consumers will be ready to try new companies or technologies to get the bandwidth they desire. Perhaps another generation of network builders, using more advanced technology, will spring up.
A technology such as 802.11, or Wi-Fi, might leap to prominence, carrying data wirelessly over short distances at speeds 10 times that of DSL and cable modems.
Although start-up funding is tight, it's still available for companies that create ''a significant level of innovation,'' Khosla says.
Dev Khare, founder of a start-up that's building telecom applications, in March landed $6 million in funding from Nokia (news - web sites) Ventures and two other investors.
''Two to three years from now, you'll see a set of companies emerge that are significant in terms of innovations,'' Khosla says.
McInerney and others predict that a shortage will once again trigger a shakeout, reshuffling winners and losers. The industry will get flipped on its head.
''Investors will get a second big wake-up call in telecom,'' McInerney says.
Telecom chaos won't go away anytime soon. |
