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

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