It is Official !!
WITH RISING INTERNET TRAFFIC, SPARE FIBER-OPTIC LINES FILL UP
By MARK HEINZL and SHAWN YOUNG
April 27, 2006; Page B1, WALL STREET JOURNAL
At long last, the pipes are starting to fill up.
For years, the fiber-optic communications industry has been awash in spare capacity that sent prices for data transmission plunging. Now, thanks to continued growth in Internet traffic, demand is beginning to catch up with supply in many areas of the active global network.
Still, plenty of inactive fiber-optic lines remain -- the majority of the lines put into the ground or underwater have gone unused for years and can be activated on short notice and relatively inexpensively. That means the glut has not come to a definitive end and consumer prices are unlikely to rise. But at the moment, prices for sending data traffic at least appear to be stabilizing, providing a welcome reprieve for companies that operate the so-called backbone of the world's telecommunications infrastructure.
The excess supply was a legacy of the late-1990s technology boom. Armed with billions of investment dollars, fiber-optic telecom carriers went on a colossal building spree that created high-capacity communications links around the world. The frenzied buildout led to a massive glut of bandwidth, or communications capacity used to carry phone calls, Internet traffic and other data.
Network builders had visions of widespread high-capacity applications sucking up huge amounts of bandwidth. But when network traffic failed to live up to those heady expectations, many builders went bankrupt or sold their networks at a fraction of their cost.
According to tech boom hype, consumers by now were supposed to be routinely making phone calls with video linkups and watching any movie or television show at the push of a button. While such applications haven't hit the mass market, similar Internet uses have proliferated enough to help data traffic traveling over fiber lines grow, stabilizing wholesale prices.
Prices for network capacity had been in free fall for much of this decade; but over the past year, the declines have slowed sharply -- and in some cases prices have leveled off, according to industry players.
To be sure, there are still vast amounts of so-called dark fiber-cable in place but not yet "lit," or connected to the network with the electronic gear needed to activate the lines. By one estimate, only 14% of submarine fiber-optic cable will be lit by the end of this year. That means plenty of latent supply could be added relatively inexpensively as demand requires. So there's likely no profit gusher around the corner for fiber-optic carriers. And consumers' monthly Internet bills aren't likely to jump anytime soon.
"We're in the stage where people don't have extra lit capacity," says University of Minnesota professor Andrew Odlyzko.
During the height of fiber mania, many industry officials estimated Internet traffic was doubling every few months. Prof. Odlyzko, then an AT&T Corp. researcher, warned that Internet traffic wasn't growing nearly that fast -- and he turned out to be right. In recent years the growth rate of Internet traffic in the U.S. has stayed around 50% a year, which is "nothing to sneer at" and is helping to stabilize the industry, Prof. Odlyzko says. Telecom-industry consolidation is also helping moderate price declines, he says.
What's behind the increased demand for network capacity? Industry executives and Prof. Odlyzko say video sent via the Internet is a key driver. That includes the increasing distribution of movies online, many sent illegally. On local phone networks that reach into most homes and offices there has never been excess capacity, and carriers like Verizon Communications Inc. are spending billions to beef up local connections to handle tasks like video.
Prices for fiber lines not yet activated have stabilized on many routes and have even risen sharply on some U.S. domestic routes as fewer distressed companies dump capacity at fire-sale prices and acquirers such as fiber-optic carrier Level 3 Communications Inc. remove large swaths of capacity from the market, says Steve Strong, president and co-founder of Telecom Asset Management LLC, a San Francisco-based company that brokers deals for fiber and other network components.
Submarine fiber-optic cables in Asia and across the Atlantic have been filling up the quickest, according to TeleGeography Research, a Washington research firm that tracks global bandwidth usage and declared in a report this month that "the bandwidth glut is over." Across the Atlantic, the industry raised capacity by about one terabit (a trillion bits) per second to about 5.5 terabits per second last year to meet growing demand, TeleGeography calculates.
Prices across the Atlantic have hovered around $3,400 a month for 155 megabits (million bits) per second of capacity over the past year, instead of the annual 30% or 40% price drops seen in previous years, TeleGeography says. "It's a new era of relative stability that we haven't seen in years," says TeleGeography vice president of research Tim Stronge.
Other industry officials see encouraging signs. Anthony Christie, chief marketing officer for Global Crossing Ltd., Florham Park, N.J., which owns data pipes connecting 300 cities around the globe, says "we have hit critical mass for broadband in this country and in others."
Two years ago, wholesale customers typically bought connections that could handle 2.5 gigabits of data a second; now the standard order is four times as large -- 10 gigabits a second of capacity, Mr. Christie says. That's enough to handle tens of thousands of simultaneous phone calls, though the demand is largely for other purposes such as large data files.
As a result, he says, the amount of Internet-based data traffic the company handled increased by 65% last year even as Global Crossing turned away from low-price wholesale business with unattractive margins and continued to build most of its business on selling retail services. The company also is increasing the capacity of some of its most popular connections, including a link between Britain and Ireland, and a loop under the Atlantic that feeds into Latin America.
Hibernia Atlantic, which operates a cross-Atlantic fiber-optic network, says it has found buyers for about 23 of its 32 10-gigabit-per-second connections, and is now planning to light up 40 more such connections on existing fiber lines. Buyers include telecom carriers, financial firms, governments and satellite TV companies that use the trans-Atlantic link for backup purposes, says Hibernia vice president of marketing Eric Gutshall. Hibernia is owned by Columbia Ventures Corp., a closely held Vancouver, Wash., firm that acquired the trans-Atlantic link in 2003.
Responding to renewed interest in bandwidth supply, trans-Atlantic fiber-optic network operator Apollo Submarine Cable System Ltd. last year also boosted its capacity. In February, Level 3 Communications, of Broomfield, Colo., agreed to acquire 300 gigabits per second of trans-Atlantic capacity, with an option for another 300 gigabits per second. Terms weren't disclosed. Apollo is owned by the United Kingdom's Cable & Wireless PLC and France's Alcatel SA.
Level 3 Chief Executive James Crowe admits "our crystal ball got cracked pretty badly there" during the tech boom, but says on Level 3's network now "there's every sign that inventory that was up on the shelf is being drawn down and in some areas even exhausted."
Write to Mark Heinzl at mark.heinzl@wsj.com and Shawn Young at shawn.young@wsj.com |
