The Fiber-Optic "Glut" -- in a New Light
By Olga Kharif
Since the 1980s, telecommunications companies have deposited 283 million miles of optical cable into the ground, according to fiber-optic consultancy KMI Corp. That cable powers phone networks and the Internet, enabling most of the high-speed communications of the Wired Age. Strung together, those cables would circle the earth 11,320 times.
Investors think that may be be a few loops too many. Over this year, the market has scorned the stocks of fiber-optic-cable makers, telecoms, and telecom-equipment builders. The declines of such stocks as fiber-gear makers Lucent (LU ) and Corvis (CORV ), fiber-centric telecom carriers such as Global Crossing (GX ) and Level 3 Communications (LVLT ), and fiber-cable producers like Corning (GLW ) have largely stemmed from a growing belief that it will take years to make a dent in excess capacity.
That belief, however, may be deeply flawed, or so say many industry analysts. They claim that the world remains underwired, and they expect fiber-optic networks that must handle increasing volumes of Internet traffic to expand rapidly. Interviews with industry experts reveal a general consensus: Worldwide sales of fiber-optic cable -- a leading indicator for the overall industry -- will be up around 20% in 2001. Over the next five years, KMI estimates that the world's carriers will bury an estimated 617 million miles of cable.
While such growth may seem incredible, experts say it pales in comparison to the phenomenal 40% sales increase in 2000, a direct result of the dot-com boom. When judged against other tech sectors, fiber optics looks comparatively healthy and far from glutted. "All we are seeing now is a market normalized to its usual rate of growth," says Rick Grubbs, analyst with Credit Lyonnais Securities.
How so? Well, Eastern Europe, Asia, and Latin America have yet to slake their thirst for cable -- even though 70% of the fiber optic already laid is outside the U.S. On Aug. 13, Corning struck a three-year fiber deal with Russian outfit Saranskkabel Optika. That comes on the heels of the June 13 cable deal it closed with Russian telecom TransTeleCom. Still, on Aug. 29 Corning adjusted its outlook, saying it "now expects overall market growth for optical fiber in 2001 to be significantly less than the previous 15% outlook."
However, things are also quite active in Asia. In just one of many fiber deployments on the subcontinent, Indian utility Tata Power announced on Aug. 17 that it would spend $70.2 million laying fiber-optic cable in the cities of Delhi, Mumbai, Chennai, Pune, and Hyderabad. And Global Crossing is planning to spend $2 billion laying fiber-optic networks in Latin America.
Even in the Internet-active U.S., large swaths of the country remain fiberless, including plenty of smaller U.S. cities. Moreover, many individual buildings within metro areas have yet to be connected to the networks. So far, U.S. carriers have installed 83 million miles of fiber, estimates Patrick Fay, an analyst with KMI. From 2001 to 2006, he estimates, an additional 186 million miles will be buried.
In fact, cash-strapped telecoms have yet to cut back on fiber purchases. While telecos' earnings have plummeted because brutal competition has led to commodity pricing on many of their products, demand for cable remains strong. At Sprint (FON ), the rate of cable-purchasing hasn't declined, notes Fred Harris, the company's vice-president for research, architecture, and design. The industry can ill afford to reduce cable deployments aimed at serving high-margin customers demanding speedy Internet connections and high-bandwidth services.
The growth of new services, such as video-on-demand, also is expected to fuel fiber purchases. "The financial health of the carriers is going to be determined by demand for those services," predicts Brian Van Steer, a senior analyst at telecom consultancy RHK. "They will buy regardless of whether they are financially healthy."
Combine those factors with an additional 25% of U.S. residents coming online from 2000 to 2002, according to IT market consultancy eTForecasts, and analysts say by 2003, the communications-network utilization rate will once again reach the levels it experienced during the '80s. When today's excess capacity is absorbed by the expanding market, says Merrill Lynch analyst Simon Leopold, carriers will be forced to upgrade their networks yet again -- inspiring another round of telecom spending. The upshot? Reports of the fiber glut appear to have been greatly exaggerated.
In reality, some level of overcapacity in telecom networks is both normal and necessary. Since the total cost of laying cable can reach $1 million per mile -- including everything from digging trenches to obtaining permits -- telecoms often drop as much fiber into a ditch as they can. That's far cheaper than installing capacity as demand dictates. Even if much of the unused fiber isn't activated in the near term, the strategy is cost-effective, explains Jim Slaby, an analyst with tech consultancy Giga Information Group.
Furthermore, telecom networks are built to handle periods of peak traffic, when utilization runs to 90% and above. That's particularly true with voice systems that, by law, must be available more than 99% of the time to deal with emergencies. For that reason, over the course of a 24-hour period, average network utilization generally runs at less than 9%, according to Merrill Lynch. So, what might look like a glut is actually why traffic on the Information Superhighway is able to run smoothly.
Moreover, traffic on today's networks is dominated by the data demands of Web surfers and big companies. That has proven much more fickle and unpredictable than voice traffic, and carriers need much more capacity to handle it, say analysts. As a result, to accommodate peak traffic, telecoms will have to overbuild even more than they have in the past.
The frantic optical build-out of the past few years mainly involved the construction of "fat pipe" connections between large cities. Carriers must now extend fiber connections to smaller towns and individual homes, a step that will dramatically improve download speeds and allow companies to truly recoup the costs of building the big backbone connections. That's why optical equipment designed to wire smaller areas is selling so briskly right now, while the rest of the optical market is dragging.
Not surprisingly, cable sales don't feel healthy now to companies in the business. Fiber-optic cable shortages have subsided. Many carriers, such as Canada's 360 networks, have filed for bankruptcy. And the price of fiber-optic cable -- which has declined at an historic rate of 10% to 15% a year -- has dropped 20% this year, according to Merrill Lynch analyst Steven Fox.
Yes, analysts have had a poor track record at predicting fiber-optic markets in recent years. So have the fiber makers. This summer, Corning announced it would delay the construction of optical-fiber manufacturing facilities in Concord, N.C., and Oklahoma City. Since Corning produces about 40% of the world's fiber-optic cable, that could leave the telecoms scrambling to get their hands on more cable when the economic pendulum swings back. After all, the whole world is hardly wired yet.
Kharif covers technology for BusinessWeek Online in New York
Edited by Alex Salkever