Why the Glut In Fiber Lines Remains Huge
By SHAWN YOUNG Staff Reporter of THE WALL STREET JOURNAL
May 12, 2005; Page B1
http://online.wsj.com/article/0,,SB111584986236831034,00.html?mod=technology_main_whats_news
Four years ago, after the collapse of the telecommunications bubble, much of the world was awash in fiber-optic communications lines. Not to worry, said some technology seers: New uses would arise that would suck up all that capacity.
But despite a surge in Internet usage since then, the fiber glut is as bad as ever.
Today, researchers estimate that about 85% of the fiber lines in the ground in the U.S. still are "dark," or inactive. Even the fiber that is being used isn't close to having its full capacity exploited. In fact, less than 5% of the total transmission capacity of all the fiber lines is being put to use -- about the same amount as in 2001.
What happened?
For one thing, some of the fiber-optic network companies that faltered, including Global Crossing Ltd., have continued to operate instead of going away as many assumed would happen. Meanwhile, technological advances keep boosting the capacity of the fiber that already is in use. And while millions of Americans now have high-speed Internet connections and use bandwidth-hungry applications such as online video, no new data-heavy "killer application" has arisen to sop up the excess capacity of those high-tech lines.
Still, the endurance of the fiber glut has sparked some creative uses of the capacity.
Cable-TV giant Comcast Corp. is forming its own nationwide fiber network so it won't have to rely entirely on satellites to beam TV signals among its local cable systems. Universities have been snapping up lines at discount prices to form their own data-sharing networks. Some banks, trading firms and large corporations have stepped up their interest in buying and maintaining their own fiber lines so they can save money and have more control over their connections, say people involved in the industry.
"We're seeing a very sharp increase in interest [in buying fiber lines] among firms that have the wherewithal," says Steve Strong, a managing partner at Telecom Asset Management LLC, a San Francisco company that brokers fiber deals and researches the fiber market.
Depending on the route, buyers can snap up dark fiber lines on the secondary market for as little as $35 a mile, though the average price is closer to $350 to $400, Mr. Strong says. A buyer would likely pay $750 to $1,000 a mile to lease a desirable route, down from the $1,500 to $2,000 a mile it would have cost in 1999 or 2000, he says.
Many of the new buyers are smaller phone and Internet companies that have decided it is cheaper to own their lines than to rent capacity on a network operator's system. But despite the sales activity, experts caution that an end to the glut isn't in sight.
Some $90 billion of fiber was laid at the height of the Internet boom. These cables are filled with glass strands, each thinner than a human hair, that transmit data and phone calls through pulses of light. The fiber-laying frenzy was driven by predictions from some telecommunications and technology executives and Wall Street analysts that Internet traffic would double every 100 days, with no end in sight. When those predictions fell flat, the telecommunications industry crashed into a prolonged downturn in 2000.
One reason there hasn't been a stampede to buy up the cut-rate dark fiber is because it is expensive to equip, or "light," these lines with the electronics needed to make them active -- and relatively few businesses move enough data to make this endeavor worthwhile. It also is costly to maintain these lines. A connection between New York and Los Angeles, for instance, would cost millions of dollars to equip and prime for use, and $45,000 to $50,000 a month to maintain and operate, Mr. Strong says.
That is why many companies that want to take advantage of the fiber surfeit turn to fiber-line operators such as Level 3 Communications Inc. The Denver company is one of the few survivors of the fiber meltdown that avoided a trip through bankruptcy court. It has signed a spate of deals to lease its fiber network to companies including Comcast, though it continues to burn cash and faces financial pressures.
James Crowe, Level 3's chief executive officer, concedes that the glut that helped paralyze the telecommunications industry persists. Still, he thinks the days of an excess of "lit" fiber are numbered, particularly since investments in new fiber lines have dried up. In addition, new uses for fiber such as Internet-based phone service are growing, he says.
"It has been painful, it has been difficult," Mr. Crowe says of the effort to work through the overcapacity. Yet he thinks it will be a matter of quarters, not years, before the picture brightens.
Among the new players getting into fiber is the University of Minnesota, which plans to buy its own link to a research hub in Chicago in collaboration with the University of Iowa, Iowa State University and the University of Wisconsin. It will cost each school $2.5 million to $5 million over five years, says Steve Cawley, chief information officer at the University of Minnesota. "The expense is significant," Mr. Cawley says, but he adds that the universities will be able to use the network for engineering experiments they wouldn't be able to do with a rented fiber system.
Such uses are "one of the few good outcomes of that irrational bubble," says Andrew Odlyzko, a University of Minnesota professor. A former researcher at AT&T Corp., Prof. Odlyzko and a colleague became among the first to publicly challenge the wild Internet growth forecasts of the late 1990s.
Despite the misguided projections, Internet traffic has grown drastically. Ten years ago, about 16 terabytes of data whizzed around the Internet each month, Mr. Odlyzko estimates. That is the equivalent of about 8,000 movies. Now, he puts the total at around 300 to 500 petabytes a month. A petabyte is 1,000 terabytes. "In many ways, the Internet has been phenomenal," he says.
Yet many experts remain skeptical that fiber-network companies such as Global Crossing or Level 3 can ever have a sound business. For one thing, advances in technology have created exponential amounts of new capacity in existing lines. New electronics, for example, can send multiple streams of data traffic over one fiber strand by using different colors of light to transmit each stream, instead of the single stream of old.
"The technology that powers the fiber generates more capacity, so you never catch up," says Andy Belt, president of Adventis, a technology research and consulting firm. There aren't any realistic scenarios under which a healthy chunk of the fiber capacity would be used up anytime soon, he says.
Executives in the fiber-leasing industry are hoping for a consolidation among the players -- especially if any company that is bought is mothballed, as Internet carrier Genuity was when Level 3 bought it.
"Eventually, someone is going to make money" on the fiber glut, says Mr. Odlyzko of the University of Minnesota.
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