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Optical components

Solution for the Fiber Glut: Turn It Off?

Is it time to turn off some optical networks? It's a new question that's beginning to come to the forefront in the telecom industry.

With large bankruptcies such as Global Crossing moving slowly toward restructuring, the market may indeed pressure some ailing networks to "turn off" lit capacity.

While no one will say for certain which companies might be turning off capacity, the most obvious guesses would be the companies now struggling through bankruptcy proceedings. One carrier that's come up as a potential candidate: 360networks Inc. The company filed for chapter 11 last June, but its reorganization has consisted of nothing more than a sale of many assets. 360networks confirmed with Light Reading on Tuesday that the company has dropped some of its dark-fiber routes but maintained that none of its lit routes had been switched off.

This raises the question of whether some other bankrupt carriers should turn off parts of their networks or simply sell their assets to improve the demand/supply imbalance, rather than proceed with restructurings that attempt to keep them in business while maintaining the bulk of their capacity. Other bankrupt fiber carriers include Global Crossing Ltd. (NYSE: GX), Williams Communications Group, McLeodUSA Inc. (Nasdaq: MCLD), FLAG Telecom (Nasdaq: FTHL; LSE: FTL), and Yipes Communications Inc. Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) has been delisted and is in default of its debt. Even carriers such as Qwest Communications International Inc. (NYSE: Q) and Level 3 Communications Inc. (Nasdaq: LVLT), once considered more stable, are struggling to reduce debt and improve revenues and cash flows in order to avoid running afoul of credit agreements.

In 360Networks' case, it's important to note that the company has yet to turn off lit capacity. The distinction between dark fiber and lit fiber is at the center of the debate on the fiber glut (see OFS: What Fiber Glut?). Companies like Corning Inc. (NYSE: GLW) and OFS claim that the rumors of a fiber glut originated from a misconception: There may be an abundance of dark fiber in the ground, they say, but if you look at lit fiber, it’s much more in balance with demand.

Plummeting bandwidth prices are the main concern for carriers. According to a study published last month by research firm TeleGeography Inc., lease prices on long-haul routes have dropped an average of 70 percent over the last two years. To take just one example: While the yearly OC-3 lease price for the route between L.A. and New York was $1.8 million in the first quarter of 2000, the price for the equivalent period this year was $200,000.

Still, some analysts maintain that this bandwidth flood is only temporary.

"There is definitely more fiber in the ground than is ever going to be used at any time at all. But that is only half of the equation,” says Seth Libby, an analyst with the Yankee Group. He claims that when it comes to bandwidth, there’s only a “temporary imbalance of capacity.”

"We need to be prepared for the coming bandwidth shortage,” says Jeff Kagan, an Atlanta-based telecom industry analyst. “But we’re not, because we think there’s a glut. At some point over the next couple of years we’re going to see that glut sucked dry, and when it happens it will happen quickly. We’ll be complaining when it takes a day for e-mail to arrive.”

Others, however, say that the idea of running out of bandwidth is ludicrous, since the expected demand curve has been way off and the supply curve has consequently been many times too large. "There’s no chance we’ll run out of bandwidth," says Blaik Kirby, vice president of Adventis Corp. "That’s like saying that Canada will run out of firewood, or that Iraq will run out of oil." [Ed.: And how could we ever run out of oil?]

Fiber glut or not -- most people seem to agree that there are too many carriers competing on price and that they need to be consolidated.

According to Kirby, a national market can usually support about four or five large service providers -- compared to the 16 to 18 players on the market today. The fact that most of them have jumped into the same segment of the market, connecting the largest cities, has driven prices down to a fragment of what they were at the height of the boom in 2000.

"You can’t party that hard without a hangover," says Scott Cleland, CEO of The Precursor Group, an investor-side research group.

With only three or four carriers playing in the sub-sea market, the ocean floor might not be as crowded as the long-haul routes, but that doesn’t mean there isn’t an underwater fiber glut. Kirby points out that demand in this area has grown even more slowly than in the domestic market, while the capacity has continued to increase in leaps and bounds. "It might be 400 years before they use all the capacity on that route," he says of the Trans-Atlantic lines.

In addition, there isn’t much to differentiate the sub-sea networks besides price. This has created a price war that has pushed more than one carrier over the edge, most notably Global Crossing.

The question remains whether or not turning off already-lit fiber is likely to increase demand on lines that remain lit. "If enough [bandwidth] were removed, it could help the market," says one analyst, who asked to remain anonymous.

But Yankee Group's Libby believes that, while companies are refraining from lighting new capacity, they’re not contemplating turning capacity off. "That would surprise me," he says, pointing out that lighting fiber costs 10 to 20 times more than the dark fiber itself. "It seems like a waste of money."

Even analysts who believe that we will soon be facing a bandwidth shortage say consolidation is inevitable. "The networks will survive, the fiber will survive and the hardware will survive," Kagan says, "but the ownership will change."

In addition to consolidation, a refocusing of attention could help instigate a market turnaround.

"There are plenty of customers that have needs that are not being fulfilled," Libby agrees, pointing out that the companies serving these markets are in nowhere near as bad shape as the carriers serving the Tier 1 market. "There are bright spots."

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com
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WolfLarsen 12/4/2012 | 10:23:25 PM
re: Solution for the Fiber Glut: Turn It Off?

Who are you going to sell the equipment to?

Are you going to ask them to not use it?

Another idea: There are too many cars on the road today, everyone should sell their second car...Then we can take all that "extra" money that we all have from selling our cars and throw a big party...

Now I only took ONE econ class for my engr. degree... maybe we should consult some experts...

AAL6 12/4/2012 | 10:23:24 PM
re: Solution for the Fiber Glut: Turn It Off? It seems that nobody knows anything around here -"internet is growing by 50-100% every year", "fiber glut", "too many cariers", "bandwidth is infinite", "bandwidth is limited". Too many mirrors and too much smoke.

These guys haven't finish partying - some of the analysts are still high as they were in '99 and '00.

Customers are pretty much bored with the internet surfing, wireless is slow to pick up services (some of those useless), and there are no "killer apps" on the horizon (maybe we should re-wamp Napster ;)
Most of the companies do not need high speed access to the internet (more than OC-3) and it is cheaper now to have a leased line between remote offices.
So, this leaves us with what? I don't know - this reminds me of the war scene from the Gladiator: night, forest, smoke, screams, blood, and fightning to survive. When the morning comes, whoever is alive will be a winner.
skeptic 12/4/2012 | 10:23:24 PM
re: Solution for the Fiber Glut: Turn It Off? The question remains whether or not turning off already-lit fiber is likely to increase demand on lines that remain lit. "If enough [bandwidth] were removed, it could help the market," says one analyst, who asked to remain anonymous.
---------------------
Turning off lit fiber will accomplish nothing.
The only way things will improve is to reduce
the number of carriers. Data communcations is
a bulk business. Economies of scale are the
only direction that will improve profitability.



dljvjbsl 12/4/2012 | 10:23:23 PM
re: Solution for the Fiber Glut: Turn It Off? The article quotes an analyst who compares the possibility of a bandwidth shortage to the possibility of Iraq running out of oil. The article asks rhetorically and perhaps ironically how could we run out of oil.

The answer is that both oil and bandwidth are commodities that are highly sensitive to substitution. If oil becomes short, people will switch to other energy source and more interestingly to conservation measures. People will conserve oil by changing their behavior. The changes of running out of oil are effectively nil.

The same is true for bandwidth. Technologies such as photonics that attempts to increase bandwidth are in competition with technologies for compression and changed user expectations. Any dramatic shortage of bandwidth will be met almost immediately by the rapid deployment of intelligence. Just as people use intelligence in the from of conservation measures to compensate for any possible shortage of oil, compression and other technologies will be quickly implemented and installed to compensate for widespread shortages of bandwidth.

I have never seen any convincing argument that there is a need for a dramatic increase in the amount of bandwidth supplied. Certainly the most popular applications on the Internet do not need it.

MP_UK 12/4/2012 | 10:23:22 PM
re: Solution for the Fiber Glut: Turn It Off? The question remains whether or not turning off already-lit fiber is likely to increase demand on lines that remain lit. "If enough [bandwidth] were removed, it could help the market," says one analyst, who asked to remain anonymous.
---------------------
Turning off lit fiber will accomplish nothing...
---------------------


Got to agree with skeptic here. I think the notion of switching off capacity to create demand is a very strange idea. I don't suppose it matters much what you're selling, if buyers have as much as they need / want already, there's no market. The idea that taking away the option of buying more of something than you need is likely to make you want more than you need is just plain odd!

Thinking logically about this, I assume the problem is that the excess of product i.e. b/w, has driven the selling price below the operating cost, making it a non-profitable business? Therefore the consolidation process comes down mainly to which players have deep enough pockets to keep afloat until the competition goes away, and the price of the service becomes higher than the cost of operating it.
JustWantToSaySomething 12/4/2012 | 10:23:22 PM
re: Solution for the Fiber Glut: Turn It Off? The truth is: all will file for chapter 11 soon! Why? Consider this example:

Once upon a time, carrier 1 (c1) thought there is a total market of $5b in annual revenue for backbone services. He (the CEO with some VC's) made a simple calculation:
- I have to spend about $1billion to build a backbone
- I will finance this with $500m debt and $500m equity
- I have to pay 10% interest on the debt (so $50m annually)
- I will have revenues of maybe $500m annually (10% market share should be possible, we are the Number 1 !)
- I will have operational expenses of $300m annually
- I will have further capital expenses of $100m annually to upgrade my equipment

Whats left: profit of $50m (revenue-opex-capex-interest=500-300-100-50=50) annually. Great, lets do it!

Unfortunately, 10 other carriers came up with the same business case, and guess what? A few years later we had 10 backbones out there - the $5b must be divided by 10 carriers, leaving exactly $500m in revenue for each of them. So what?

Unfortunately, one of those carriers, lets say c9, had less market share, i.e. 5%. So he had got only $250m in revenue. Subtract his costs and you will see, those guys burn $200m each year! The banks (or VCs) and shareholders were not that happy, soon c9 filed for chapter 11. "Great" thought c1, c2, c3, GǪ, "they are gone. Now we share the revenue with 9". But what's this? The banks sold the assets of c9 (worth $1b) for just $200m to c11 (most probably it was a new player from another planet)!!! And guess what, those guys sold their services really cheap (they did not need to pay so much interest for their dept, because they paid just $200m for the backbone).
The other carriers lowered their prices. Because now revenues were even lower, c7 filed for chapter 11, little later c5, c4, c3, GǪ Finally, all carriers c1-c10 are replaced by new carriers c11-c20, all loaded with only very little amounts of dept (no interest payments) - so they can make sufficient profits out of their operations.

Finally, the ordenary shareholders of c1-c10, the VCs (also backed up by some kind of shareholders), the banks, all lost.

Where is the money? You are right: its in Real Estate - all the CEO's, employees of c1 , c2,GǪ,c10 spend it for their houses and Porsches GǪ
dljvjbsl 12/4/2012 | 10:23:22 PM
re: Solution for the Fiber Glut: Turn It Off? The article quotes an analyst who compares the possibility of a bandwidth shortage to the possibility of Iraq running out of oil. The article asks rhetorically and perhaps ironically how could we run out of oil.

The answer is that both oil and bandwidth are commodities that are highly sensitive to substitution. If oil becomes short, people will switch to other energy source and more interestingly to conservation measures. People will conserve oil by changing their behavior. The changes of running out of oil are effectively nil.

The same is true for bandwidth. Technologies such as photonics that attempts to increase bandwidth are in competition with technologies for compression and changed user expectations. Any dramatic shortage of bandwidth will be met almost immediately by the rapid deployment of intelligence. Just as people use intelligence in the from of conservation measures to compensate for any possible shortage of oil, compression and other technologies will be quickly implemented and installed to compensate for widespread shortages of bandwidth.

I have never seen any convincing argument that there is a need for a dramatic increase in the amount of bandwidth supplied. Certainly the most popular applications on the Internet do not need it.

skeptic 12/4/2012 | 10:23:21 PM
re: Solution for the Fiber Glut: Turn It Off? I have never seen any convincing argument that there is a need for a dramatic increase in the amount of bandwidth supplied. Certainly the most popular applications on the Internet do not need it.
-------------------

Its not a question anymore of a need for
more bandwidth, its a question of what to do
with a large amount of already-existing
bandwidth. And drawing on your oil analogy,
there is a negative subsitution effect that
occurs when the price of a commodity falls too
low. Witness people burning corn for home
heating in certain place in the US now.

The amount of bandwidth being used continues
to increase. But its not going to make a dent in
the fiber capacity glut for a long time.

But there isn't necessarly proportional over
capacity in other portions of the network like
there is in fiber.



lkuav8r 12/4/2012 | 10:23:21 PM
re: Solution for the Fiber Glut: Turn It Off? This reminds me of the government paying farmers not to grow anything.
BobbyMax 12/4/2012 | 10:23:21 PM
re: Solution for the Fiber Glut: Turn It Off? The emergence of so many useless carriers, equipment suplier was broght about by access to easy money from the investment bankers and VCs. Then there were crooked CEOs who made a lofty and ubrealistic business plan in order to extract cheap money so that they can pay them handsomely. They creared stock options, loan schemes and other fraudulent schemes to get rich. This has caused trillions of dollars to evoprate from the market.

A mere cursory look at the qualifications of many CEOs would reveal that they do not have outstanding qualifications but are simply frauds capable of lying and distortions.

If this was not the case companies like, Lucent, Nortel, Global Crossings, all RBOCS,Williams Communications and Yipes etc, wopuld not be facing troubles. The after effect has been tremendous capital losses, and millions of people without jobs. The country has been practically bankrupted.

In spite of glaring situation, I have not seen any changes in the regulatory and monitoring environments.
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