This article is about GLW, but it certainly puts the optical buildout in perspective.
Baton
fortune.com
FORTUNE
Monday, March 19, 2001
By Stephanie N. Mehta
It starts as a glass cylinder of unimaginable purity, formed by heating an exotic blend of silica and germania to temperatures exceeding 1,200 degrees centigrade. This mother lode--shaped like a giant stalactite--is placed in a furnace, until the tip, known as the gob, melts and separates from the cylinder. The rest of the glass then begins to drop, falling some four stories, in slow motion at first, until it is as thin as a human hair yet capable of carrying much of the telephone traffic in the U.S. at once on a single strand.
If it seems paradoxical that something as slender as an optical fiber can carry an almost infinite amount of information, here's another contradiction: Amid a slowdown in the market for almost all things optical, Corning is predicting that sales of fiber--the foundation of optical networks--will help it achieve bottom-line growth of 14% to 16% this year. That's the same estimate it gave analysts earlier this year, before optical turned ugly. "I am optimistic that we will hit our numbers this year, given everything we know today," Corning CEO John Loose said in late February.
Most people probably think of fiber as cool stuff yet generic--a dumb pipe that's already in the ground, with practically limitless capacity. Corning is betting otherwise. More than any other company, Corning sees optical fiber as an enabling technology of the broadband era--one that can be improved continually to let phone companies carry growing loads of digital data. In this view, fiber is perhaps even more important than gadgets like lasers, which are also part of broadband networks, and which Corning happens to make as well.
If Loose is right about fiber--and Corning produces some 40% of the world's supply, more than any other company--Corning may be one of the few big optical players to sidestep the sector's problems. Nortel Networks, citing U.S. economic woes, last month said it would lose 4 cents a share in the first quarter--analysts had projected earnings of 16 cents a share--and now expects earnings to grow only 10% for the year, down from the 30% gains that analysts had anticipated. Nortel stock fell to a 52-week low. Investors also took down shares of other optical outfits, including Corvis and Ciena. In late February component maker JDS Uniphase said it would slash 3,000 jobs.
Corning wasn't spared. The day after Nortel's bombshell, Corning shares tumbled 20% on concerns that Nortel would pare back its purchases. Analysts estimate that Nortel accounts for about 15% of Corning's sales of photonic components, including such gear as optical amplifiers, which boost light pulses as they travel along a fiber.
Corning quickly admitted that the concerns were justified, initially issuing a news release saying that Nortel's difficulties would hurt revenue growth in Corning's photonics unit, which had been on track to grow 75% to 90%. A few days later, as expected, Corning said it would cut 825 photonics jobs. Several analysts have lowered their ratings and stock-price targets, though they are almost apologetic. "Corning is one of the best companies we follow, and we follow two dozen companies in the electronics and optics supply chain," says Steven Fox, a Merrill Lynch analyst, who nonetheless has twice this year cut his earnings estimates on the company and calls management's targets "somewhat challenging."
So what? Corning is sticking to its profit-growth story. CEO Loose says that photonic products make up a relatively small percentage of overall sales--about 14% in 2000. The real cash cow is optical fiber. Last year Corning sold about $2.85 billion of fiber and cabling, or about 40% of its total revenue of $7.1 billion. And the company was selling fiber as fast as it could make it. This year Corning is filling back orders and selling to some customers it couldn't serve in 2000. This is a double blessing: Not only did Corning have some business in its back pocket, but the tight supply of fiber has also helped keep prices from falling.
Still, there sure does seem to be an awful lot of fiber already in the ground. The global deregulation of telecommunications, coupled with easy financing, brought a flurry of fiber-optic construction projects over the past five years. In 2000 alone, carriers installed 35.6 million kilometers of fiber just in the U.S.--enough to circle the earth nearly 900 times. Much of this new fiber hasn't even been equipped with the expensive components that turn the fiber into live networks.
For all that fiber, though, many of the dozens of new networks in the U.S. remain only partly complete, and fewer than 10% of office buildings have direct fiber links. So even cash-constrained carriers will keep buying fiber. As devalued as their assets are today, these companies would be worth even less to investors or potential buyers if their networks were missing key routes. Metromedia Fiber Network, for example, has committed itself to build networks in 51 North American cities. So far it has systems in only 18.
Carriers insist that their fiber installations are justified because data and Internet traffic volume is doubling every three or four months. They say new applications such as streaming music and video will soak up bandwidth. It's not surprising, then, that fiber analysis firm KMI expects U.S. companies to install another 44.3 million kilometers of fiber in 2001, up 24% from 2000.
This buoyant demand has led to an abundance of innovation by optical-equipment and component makers, all striving to help carriers build faster, more efficient networks. And in recent years Corning too has set out to innovate, in an effort to build better fibers that can carry more data at faster rates over longer distances. If Corning can charge a premium for these new fibers, that might help offset, say, any slowdown in volume.
Corning is also counting on these high-priced, high-margin designer fibers to drive its growth. Between 1990 and 1997 the company introduced five transport fibers. Since 1998, Corning has introduced 15 premium fibers, and 12 more will be launched this year. It expects premium fibers to make up 35% of its fiber sales in 2001, up from 30% last year.
Corning hopes that the new fibers will snag new customers too. Its latest targets are builders of metropolitan networks, which could potentially consume even more fiber than long-distance operators, because of all the cities that need to be served. In any fiber network the costliest part isn't the optical fiber itself but the lasers, amplifiers, and switches. So Corning set out to build a fiber that lets carriers use cheaper gear.
Last year the company unveiled MetroCor, a fiber that essentially changes the way light signals travel in glass. Corning won't say exactly how, but it tweaks the ingredients used to create the glass block from which the fiber is drawn. (An amazing fact about glass--the drawn fiber retains the identical light-propagating characteristics, in miniature, of the original glass block.) The payoff: Carriers that install MetroCor can use lasers that are some 50% cheaper than the ones they must use with conventional fiber.
If John Loose is feeling pressure from the telecom downturn, he doesn't show it. During a chat at Corning's corporate headquarters in western New York, he is affable and relaxed. Still, he has quite a legacy to uphold. He is only the second CEO in the company's 150-year history who isn't a descendant of the founding family. The first, Roger Ackerman, is widely credited with repositioning Corning, still best known for a line of cookware it no longer makes, as a tech company.
Loose's hopes for premium fibers like MetroCor are not without precedent. When fiber orders from Asia dropped off in 1997 and 1998 because of the economic crisis there, Corning introduced Leaf, a special fiber that improved the performance of light in long-distance networks. "For all intents and purposes," says Kevin Slocum, an analyst with Wit SoundView, "Leaf pulled their butts off the bottom in 1998."
Such game-saving technology plays go far toward explaining the culture of innovation at Corning. "When it comes to development of new fibers, R&D has a blank check," says Loose. Corning's closest competitor, Lucent, reportedly is weighing the sale of its optical-fiber unit. Loose says the potential sale of that unit would have little effect on the industry. He declined to comment on whether Corning would consider buying the business.
The MetroCor story is also proof that Corning is willing to seek renewal by destroying itself. All technology companies say they're "eating their young." But Corning seems to mean it. MetroCor's success would mean phone companies could do without buying certain gear--including Corning's photonic products. "We have a real dedication to innovation. Whatever's best should win," shrugs Wendell Weeks, executive vice president for optical communications. Just weeks after completing a new state-of-the-art fiber manufacturing facility in Concord, N.C., company executives told their designers to get to work on creating a next-generation plant that would outperform it. Says Weeks: "We've told them to go off and make obsolete that $1 billion we just spent."
This way of thinking may seem unusual coming from one of America's oldest companies. But Corning has shown a remarkable knack for reinvention in recent years. In the mid-1990s it began selling off its consumer-products businesses and focused on three high-tech markets--telecommunications, advanced materials, and information display, mainly LCD screens. Telecom is by far the biggest unit, and glass has played an important role: Fiber and cabling sales rose 67% in 2000.
But how long can Corning keep it up? Worldwide fiber projects do appear to be slowing. Carriers and corporations increased fiber installation 43% last year, but that growth is expected to slow to 27% in 2001 and 21% in 2002. This slackening is in part a function of large numbers; the increase in volume is still enormous. Yet talk of a fiber-capacity glut, dismissed only a few years ago, has become a legitimate topic of debate--much to the chagrin of some at Corning.
Executives at Corning hold to their view that demand for bandwidth will keep growing. To some degree, too, fiber begets fiber. High-capacity cross-country networks have encouraged regional fiber projects such as Metromedia Fiber's cluster of networks from New York to Washington, D.C. The regional networks, in turn, encourage construction of intracity fiber networks that can deliver more capacity to corporate customers. And increasingly, corporations themselves are purchasing fiber. Consider a recent buyer of Corning's MetroCor fiber: Procter & Gamble, which aims to build a network linking its operations in Cincinnati.
Now Corning is eyeing the Holy Grail of broadband pipelines--fiber to the home, for which it could also create a premium fiber. Skeptics say this is a pipe dream--that no carrier would be likely to rewire every home it serves with fiber. Perhaps. But over the past decade, optical fiber has pushed closer and closer to the home as cable operators and local telephone companies have tried to upgrade their networks and deliver high-speed data services to consumers. If anyone does take fiber all the way home, Corning may well be the company supplying the glass pipe that goes from block to block. |
