NY Times article on Fiber glut:
In the last two years, 100 million miles of optical
fiber — more than enough to reach the sun —
were laid around the world as companies spent $35
billion to build Internet-inspired communications
networks. But after a string of corporate
bankruptcies, fears are spreading that it will be
many years before these grandiose systems are
ever fully used.
There is a glut of capacity of high- speed, long-haul
information pipelines, but a shortage of the high-
speed, local-access connections that consumers
and businesses need to gain access to the Web. It
is as if superhighways stand nearly empty while
traffic backs up at the Holland and Lincoln tunnels.
Few people have fast Internet connections, and prices are rising for those who do. Computer users with
common dial-up Internet connections find their Web browsers stalled, and people trying to make regular
phone calls complain increasingly of busy signals.
Meanwhile, investment in the communications industry, especially in fiber optic networks, has sharply
declined, leaving companies with fiber that may never be "lit," as commercially available wire is called. Only 5
percent of fiber in the ground is on, and lighting fiber can cost large corporate clients about $500 million and
15 months, according to Salomon Smith Barney.
"There may be a significant amount of dark fiber in the ground, but it
takes a lot more money to light fiber than to lay it and even more to
deliver it to the end user," Howard E. Janzen, head of Williams
Communications, said in a recent interview. "The challenges will force
the flakes to drop out."
The industry bubble has had an impact on the rest of the economy, too.
Billions invested in telecommunications companies now appear to have
been wasted. The drying up of capital investment is one reason that the
economy has slowed sharply, and some economists argue that while
the Federal Reserve's efforts to lower interest rates will stimulate some
parts of the economy, it may be years before growth returns to the
areas that were so hot only a year ago.
The pain is spreading to many companies, their investors, their creditors
and their workers.
On Friday, Nortel Networks of Canada said it would lose an
astonishing $19 billion this quarter because its phone equipment sales
were falling. And 360networks, also of Canada, failed to make an
interest payment on Friday, raising concern that the developer of a huge
fiber optic network could seek bankruptcy protection or default on its
debt.
The buildup of networks was expected to usher in a prosperous era of vast new commercial applications for
the Internet, fed by soaring supplies of bandwidth, the range of frequencies used to transmit communications
signals.
Some entrepreneurs were so optimistic that they suggested sending high-altitude aircraft to circle above big
cities, beaming signals down to consumers. Today, only about 10 percent of American homes have high-
speed access to the Internet, through conventional cable networks and digital subscriber lines.
In Europe, anxieties run high for different reasons. Companies spent large sums there to acquire licenses to
provide advanced wireless services. Deutsche Telekom, British Telecom and other companies are now
seeking to renegotiate their agreements to pay $125 billion for these licenses. To reduce overwhelming debts,
some companies are trying to sell assets and agreeing to share some network costs.
Back in the United States, the stakes are perhaps highest for the companies that built transcontinental and
transoceanic fiber optic networks capable of carrying huge amounts of voice and data traffic.
The problems are similar to those in the railroad industry after the Civil War, when an economic boom fueled
speculation by financiers.
"In the railroad age, speculators built rail lines but often left it up to the locals in town to build the roads to
each station," said Brian Kinard, a venture capitalist in San Francisco who focuses on communications
companies. "Today, it's the responsibility of the capital markets to fund construction of all parts of the
network. And suddenly, it's not clear whether investors will continue to do so."
By the early 1870's an abundance of cheap financing, rather than business fundamentals, led to a doubling of
railroad mileage from the previous decade. Then, in 1873, the collapse of the Northern Pacific Railroad
ruined its principal owner, the Philadelphia banking firm Jay Cooke & Company, leading to a market crash.
In the following years, two-fifths of railroad bonds went into default, and railroad miles built fell by 80 percent.
It was not until the end of the 1870's that investment began to resurface. Still, railroads, the leading technology
of their day, were never again seen in the same light.
Similar clouds may be gathering over the telecommunications industry. So far this year, companies have
defaulted on $13.9 billion of telecommunications bonds, resulting in investor losses of $12.8 billion, according
to Fitch IBCA Duff & Phelps, a debt-rating company. For all of last year, investor losses amounted to $5.2
billion on such bonds. Companies as large and influential as GE Capital, the financial arm of General Electric,
are said to be exposed to substantial losses by their roles in the financing of telecom and related companies.
And investors in the companies' stocks have seen their value plunge.
In the 1980's companies began laying fiber optic cable, sometimes alongside rail lines. But the value of the
long-haul networks, or backbone, over which Internet data could travel soared in 1996 when WorldCom
acquired MFS Communications, a fiber optic network, for $14 billion.
Newcomers were also emboldened by the Telecommunications Act of 1996, which helped to deregulate the
communications industry. The stage was set for a company called Global Crossing.
The brainchild of Gary Winnick, a banker and former successful Wall Street sales executive under the tutelage
of Michael R. Milken, Global Crossing was formed in Beverly Hills in 1997 with the goal of building a fiber
optic network linking the Americas with Asia and Europe.
After Mr. Winnick, without much strenuous effort, secured $750 million and laid a fiber optic cable across the
Atlantic Ocean, Global Crossing went public.
The company's shares soon hit a high of $73.375, valuing Global Crossing at nearly $30 billion. That was
many times what its network had cost, and encouraged similar ventures, like 360networks and Level 3
Communications. (Global Crossing shares closed at $8.66 on Friday.)
Financiers feverishly raced to provide the post-cold war economy with communications capacity, much the
same way financiers backed railroads seeking to increase transportation after the Civil War.
New competitors joined the fray. Cincinnati Bell, a local phone company, acquired a fiber optic network
operator and was reborn as Broad wing. The Williams Companies, a Tulsa, Okla.-based gas-pipeline
operator, formed Williams Communications, which built a national fiber optic network partly by laying fiber
along its parent company's pipelines.
"Build it and they will come," became the mantra of billionaire fiber barons. Venture capitalists began financing
companies with plans to deliver data quickly to computer users in other ways, like using satellites and even
high-altitude aircraft.
The optimism peaked last July when JDS Uniphase, a little-known Canadian maker of laser filters used to
light fiber, announced a plan to acquire SDL, a little-known competitor, for stock then worth $41 billion and
now valued less than $6 billion. It was the biggest merger in the history of the technology industry.
Then concern began to build about market valuations. At about the same time, technology ventures began to
have trouble securing financing. The share prices of many communications companies plunged.
The swelling supply of fiber led to a decline in prices of bandwidth, which is increasingly traded like barrels of
oil or pork bellies. Prices could fall 60 percent this year, on top of similar declines last year, according to
estimates by Morgan Stanley Dean Witter.
The IDT Corporation, an international phone company based in New Jersey, says a 10-year contract for a
phone line that can carry nearly 600 conversations has fallen to $1.8 million, from $12 million in 1999.
Competition has led to even steeper declines for lines that can carry four times as much traffic. Carriers say
that any glut is temporary, and that measurements of supply should not include dark fiber. Moreover, Internet
use and the demand for bandwidth continue to climb.
While carriers bet on a recovery in bandwidth prices, problems have arisen in other parts of the
communications industry.
One-time titans in communications equipment, like Lucent Technologies and Nortel, have reported giant
losses as sales have declined. Some of the credit extended by these companies to clients to buy equipment is
at risk of default, making it riskier for banks to lend money to even the biggest equipment companies. More
than 100,000 jobs have been eliminated from the communications industry since last year.
NorthPoint Communications, a provider of fast Internet access, shut down in March, leaving more than
100,000 customers scrambling to find new service. Several similar but smaller high-speed Internet companies
have also closed. Others are teetering.
The ranks of bankrupt telecommunications companies include Winstar, whose corporate trophy, a 200- foot
blimp that still flies above New York, seems little more than an eerie relic of the late 20th-century
telecommunications boom. Winstar paid for the blimp last year when the outlook for the telecommunications
industry was still bright. |
