The Future Of Fiber - Industry Trend or Event

My first real job in journalism involved covering telecommunications for a trade newspaper, and my first big scoop involved a company called Fibertrak. The firm had a grandiose plan to build a nationwide fiber-optic communications system along railroad rights-of-way. The idea was to lay down lots and lots of fiber and create a "carrier's carrier" that would sell bulk capacity to long-distance companies at very low prices.

The company had the backing of the railroads and of a seasoned executive who, while at Southern Pacific, had helped launch Sprint (kudos to anyone who knew that name was originally an acronym). But the timing was off. A number of smaller, regional companies were already laying lots of fiber, the big long-distance firms weren't ready to rent infrastructure rather than build their own, and market forecasters spoke ominously of a pending capacity glut. My scoop was that the Fibertrak system was not going to be built after all.

Some 17 years later, telecom investors are wishing that a few more companies had shelved their fiber plans. As Jason Krause discusses in this issue, the wildly optimistic forecasts about Internet traffic growth that everyone took at face value two years ago are turning out to be wrong. That reality has helped produce a panic about telecom in the capital markets. And that, in turn, has led to carnage among the many telecom upstarts that suddenly don't have the cash to carry out their plans, and among the equipment makers that counted on selling them gear.

The most comforting lesson to take from the analogies between the early 1980s and the current situation is that we're working through a familiar cycle. A new market opportunity draws an army of ambitious competitors, who collectively build more capacity than the market can support. Some of them die off, others consolidate, and over time the market works back to equilibrium. It's a pattern that's been repeated for decades in many corners of the high-tech world, and it's now hitting almost every part of the Internet business.

But it's not hard to see the situation as far more ominous than that. The Internet mania of 1998 to 2000 was so intense that the cycle did not correct itself soon enough; in contrast to the Fibertrak case, big investment plans were not shelved before they got started. Some observers believe the result is an over-capacity crisis that will take 10 to 15 years to work through.

That would be a bad thing for a lot of telecom companies. Yet in many ways it wouldn't necessarily be so bad for the rest of the Internet industry, and for consumers. Overcapacity, after all, means low prices.

Indeed, the great paradox of the current situation is that the new generation of Internet-focused telecom carriers are suffering from the logic of their own business models. Companies like Level 3 and Qwest set out to build very-high-capacity networks based on the latest technology, which in turn would let them offer prices far below those of the established firms. Prices are indeed plunging -- but unfortunately for the carriers the volume growth that was supposed to make this all work is not materializing.

That doesn't mean it won't materialize in the future. Robust traffic growth may not happen soon enough to help the most overextended telecom firms, but the availability of cheap capacity will, sooner or later, spur the development of new, bandwidth-hungry applications. Obstacles to the development of new services remain: Most of the overcapacity is in the long-haul fiber networks, and bottlenecks still exist on the "last mile" connections to households and businesses. But these are not insurmountable.

It's always been assumed that video applications of various kinds would be the thing that filled all those fiber-optic pipes. But my bet is that the next big thing will be something out of the blue. Consider that the biggest single bandwidth consumer on the Net last year was Napster. And you can bet that wasn't in any fiber carrier's business plan.

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