Qwest expands amid concerns of fiber glut
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06/18/01 03:50 PM
Source: News.com
URL: investor.cnet.com
[1PARA OPEN] Qwest Communications International expanded its global network Monday even as concern spreads that massive construction in recent years has led to a glut of fiber-optic capacity.
By adding 7,000 miles of fiber-optic lines in Asia and the Middle East, Qwest has increased its network to total more than 113,000 miles worldwide.
The expansion--15 months in the making--allows Qwest to offer broader global networking options for its business customers. Qwest executives believe customers will continue to want bandwidth for data services and high-speed Internet connections.
"We expect this demand to continue to grow throughout 2001 and beyond," Qwest Chief Executive Joe Nacchio said in a statement.
But a host of massive and costly construction projects, begun in the mid-1990s by Qwest and competitors such as Level 3 Communications, Global Crossing and 360networks, has raised fears that there is more optical fiber than will be used.
Only a fraction of the capacity of these networks is being used today. As a result, some Wall Street analysts and investors fear that too much supply for the demand could make it difficult for these new carriers to recoup the billions of dollars they've spent to build these gleaming global networks.
"There's certainly an issue with many similar carriers attacking the same market," said Imran Kahn, senior broadband analyst at market research firm The Yankee Group. "There's certainly an overcapacity of providers building fiber-optic networks. That's one of the reasons why we see all these people come in and then have operational issues."
Other analysts say it could be many years before these new networks are brimming with data traffic, but that will eventually occur.
"With utilization rates as low as they are now, it will take a long time before even current capacity is filled, much less the doubling of the capacity planned for the next five years," said Zia Daniell Wigder, communications industry research director for Jupiter Research. "However, as broadband penetration increases, and as both more broadband content becomes available and users become more active users of broadband content, that will start to drive demand."
Evidence of overzealous network construction is hard to miss in the communications sector these days. Some companies have filed for bankruptcy, and most carriers have reduced their spending, which has resulted in poor sales for equipment makers such as Cisco Systems, Nortel Networks and Lucent Technologies, as well as for the component parts manufacturers that supply them.
For example, Level 3 announced substantial layoffs, reduced spending and revised financial projections Monday. Stock in the company plunged.
In the past week, 360networks failed to make an interest payment on its corporate debt, and Nortel and JDS Uniphase, a major optical component maker, issued new profit warnings.
Wall Street investment banking analysts hinted at the overcapacity in research reports Monday.
"Capacity utilization still remains low in portions of the networks such as long-distance terrestrial and the submarine market," Merrill Lynch wrote in a report addressing the implications of Nortel's warning on the European communications equipment market. "Internet traffic in (the first quarter) declined for the first time, which also does not bode well for network upgrades in the short term."
In a similar report downgrading its recommendation on Level 3 stock to "neutral" from "buy," Goldman Sachs said "lack of dark fiber demand" is partly to blame for the company's malaise.
And according to May estimates from Merrill Lynch, transatlantic capacity pricing declined by about 30 percent in the past six months, providing another sign that the communications industry may be overbuilt.
"It's pretty clear from pricing that there's some overcapacity in the backbone networks," said Hilary Mine, executive vice president at Probe Research, a communications and Internet industry research and consulting firm. "Backbone and transport costs have been coming down a bit and those are indications that there's some oversupply."
Bill Felix, senior vice president of worldwide network planning and engineering at Qwest, describes the question of whether there is a bandwidth glut as "the great debate in the industry."
But Felix said there is not an overcapacity because the majority of fiber-optic strands have not been activated, or lit, yet. Activating so-called dark fiber by turning on a variety of expensive equipment is more costly than installing the hair-like strands underground and is done only once the demand calls for it, he said.
For example, in most cases Qwest has activated only between eight and 12 of an available 48 strands on its network.
"Yes, there is quite a bit of fiber in the ground, but not much of it has been lit," Felix said.
Regardless of the current situation, some analysts believe that advanced applications and content and increased Internet use will fill these vast networks with traffic.
"Within 15 years we won't be in a glut situation," Mine said. "The question is whether it lasts 18 months or two years or five years. It's hard to imagine it lasting five years...But telecom has always been a long-term investor play."
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