Will lucrative times end for fiber-optic firms?
By John Borland and Ben Heskett
Staff Writers, CNET News.com
January 26, 2000, 12:30 p.m. PT
Once network capacity becomes commonplace, the market will turn resources more broadly to
applications that use this bandwidth, she said.
what ? broadband services like 3dSL and LMDS
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In the current high-speed networking craze, a simple rule applies: If you build it, they will
come.
A combination of an insatiable appetite for capacity on networks, the entry of new
competitors in the communications industry, and technology innovation has prompted an
almost unprecedented boom for network operators and their suppliers.
Centered around fiber-optic technology, communications companies and their "arms dealer"
equipment makers are reaping huge gains. Collectively, they are betting that the demand for
capacity--or bandwidth--on networks will grow exponentially as more and more people do
more complicated, pipe-clogging tasks on private connections and the public Internet.
Much like when the high-tech industry coalesced around Internet-based communications, the
networking market is rapidly embracing the notion that optics is the only technology that can
conceivably meet the demands users will place on networks.
As a result, new entrants in the market such as Level 3
Communications, Qwest Communications International and
Global Crossing, among others, are preparing to duke it out
with entrenched global network providers such as AT&T
and MCI WorldCom. These upstarts hope their more
state-of-the-art technology will reap competitive benefits vs.
older competitors.
On the equipment front, a renaissance has taken hold in the
market, with high-flying upstarts such as Sycamore
Networks, Juniper Networks and Redback Networks offering
alternative technologies to larger firms such as Cisco
Systems, Nortel Networks and others.
And as the year 2000 unfolds, others will follow, such as
Optical Networks and Corvis, as more firms focus on how to
get more out of a fiber-optic line. In addition, these firms will
likely revel in the high valuations currently placed on
entrants in the optical-equipment niche.
Fiber-optic technology sends information encoded in pulses of light through long strands of
"glass" fiber. On their own, these fibers can carry much more information than traditional
copper wires. Recent advances in technology pioneered by the likes of Ciena, Lucent
Technologies and Nortel---including techniques that involve carrying information on different
wavelengths of the light pulse---have greatly improved the strands' capacity.
Interest in adding technology that can increase fiber's capacity has heightened also since fiber
already has been laid throughout the country.
But in every boom is the threat of a bust. Amid overwhelming evidence of demand for network
bandwidth and the associated technology to make it work, even the most astute experts admit
there is no single user-driven technology at the moment that will fill the network capacity. This
could be a telling admission. Use of personal computers didn't take off until software
applications such as word processors and spreadsheets became available, for example.
But many believe the growing availability of bandwidth will spark development of the
applications and software that will finally justify the massive network construction projects.
"People want more bandwidth as it gets cheaper," Infonetics Research founder and principal
analyst Michael Howard said.
"Demand truly is elastic," John Roth, chief executive at Nortel, added. "The more available
(bandwidth) is, the more people use it."
Wall Street--and the industry itself--is betting that demand for bandwidth will continue to
climb at exponential rates. Most agree that's likely to happen, as network-taxing applications
like video-on-demand, videoconferencing and even virtual reality applications are made
feasible by faster high-speed connections to homes and offices.
According to consultants Forrester Research, business demand for network bandwidth will
continue to double each year through the next few years. Total corporate demand in 2003 is
likely to be about 12 times what it was in 1999, the analysts predict.
But that's still in the future. Today the focus is on building the networks that will make these
applications feasible--and that's driving money and market attention to the Qwest's and
Sycamore's of the world.
"What ends up happening is a cycle effect," said Erica Henkel, an analyst with Frost and
Sullivan. "Right now you have a bandwidth shortage, so companies are building out
networks."
Once network capacity becomes commonplace, the market will turn resources more broadly to
applications that use this bandwidth, she said.
For the companies laying fiber themselves, this kind of cycle can be risky. As more companies
build long-haul networks, competition drives the price down, at least until new
high-bandwidth applications once again clog the pipes. Already the price of bandwidth has
fallen substantially in the last year.
Some of the network companies seek to hedge their bets by selling off pieces of their
network early, while the price for bandwidth is still high. Qwest, for example, sold
pieces of its network early on to what was at the time Frontier Communications, which
in turn has sold smaller pieces to third parties, each avoiding the necessity of selling
the extra bandwidth themselves at a discount later on.
But analysts say it's a different story for the equipment companies, which are even
now struggling to keep up with network operator demands, as evidenced by Lucent's
recent missteps and Nortel's plans to add optical manufacturing capacity.
Vinod Khosla, a partner at Silicon Valley venture firm Kleiner, Perkins, Caulfield &
Byers and a member of Qwest's board, said the biggest obstacle to the
communications company's growth is finding enough cutting-edge equipment to put
in its network.
"I don't see any excess bandwidth for the next three to five years," Khosla said.
Most of the big network operators are upgrading their infrastructure to take advantage
of the latest in fiber-optic technology. They're even looking a few upgrade cycles
ahead, analysts say, building in extra capacity so they won't find their brand-new
networks completely filled in a year or two.
If all the network companies in the world worked on the same schedule, this could lead
to a kind of boom-and-bust pattern for the equipment providers. But the newcomers
like Level 3 are building from scratch now, while established companies like AT&T or
the Bell phone companies work more slowly, trying to get as much use out of their old
switches and infrastructure as possible before selling it.
Overseas companies also lag behind the leaders in the United States, promising
demand for high-tech fiber equipment for years to come.
And while this cycle is running its course, content providers and application builders
will be finding new ways to fill the networks, driving demand for bandwidth and
network equipment even higher, analysts say.
"It's a great long-term play," said Ross Mayfield, president of RateXchange, an online
site where network companies trade and sell their excess bandwidth. "The cycle will
always come back around in (the equipment makers) favor."
Frost and Sullivan says the total worldwide market for fiber-optic telecommunications
equipment was about $10.4 billion in 1999. That would jump to nearly $17.7 billion by
2003, and to $28.6 billion in 2006, Henkel said.
"If you've got thousands of people to move, it favors a big plane," said Corvis's chief
David Huber, an industry veteran who also founded Ciena. "Optics is a big plane." |
