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Bursting at the Seams

Fri, 08/31/2001 - 8:00pm
Craig Kuhl, Contributing Editor


Shortage? What shortage?

The lengthy and often-times frustrating wait for raw fiber and optical components is over. In fact, fiber is readily available, cheaper and likely to stay that way for some time to come. Gone are the days of nine-month or longer wait times and the heady demand for all things fiber.

Demand for fiber and related optical equipment has fallen dramatically in the past eight months, with its growth curve spiraling downward more than 35 percent. The U.S. fiber market in particular is expected to see a paltry 10 percent growth rate this year, versus the 47 percent spike it saw during the go-go days of 2000 and the mid-30 percent gains of the previous few years.

Photo courtesy of Alcatel

"The shortage is over. Worldwide growth this year will be 10 to 15 percent, off nearly 35 percent. The demand isn't there," says Patrick Fay, an analyst for KMI Corp., a fiber optics market research and consulting firm.

The demise of the CLEC industry, whose initial appetite for fiber was voracious, coupled with cutbacks by some key RBOCs and a slumping economy, have all contributed to the falling demand for fiber, creating what most experts agree is a glut of fiber-related products.

"Network operators all wanted a big footprint, so fiber counts and demand kept going up, and those new operators were driving demand. That's halted now," Fay reports.

The U.S. cable industry, experts say, is doing its part to lessen fiber's freefall. This year, cable's fiber miles will total nearly 7 million kilometers, up from 5.6 million last year, KMI reveals. "The RBOCs had big growth last year, but are flat this year, and long distance providers have dropped quite a bit. Some of the cable operators have been humming along," Fay says.

Yet for many others playing in the fiber space, the humming has turned to moaning, albeit with glimpses of a turnaround perhaps as early as next year.

"The fiber glut is clearly on people's minds, and it's absolutely slowed down production at some of our plants. But it's oversimplified, and we're not walking away from our strategy of expanding and adding capacity," insists John Sharkey, vice president of strategic planning and analysis for Corning Optical Fiber.

The drop in fiber demand is prompting a "walk, don't run" mentality at Corning, which last year announced a $750 million plant upgrade and a 50 percent increase in plant capacity. Fiber's falling demand is also sparking a refocusing of the company's fiber market strategies.

"Clearly, the long-haul market was a very significant market for our fiber, but it's only 10 percent of our worldwide market. There are still markets we need to participate in like metropolitan and local access markets. Last year, we wouldn't have gone to them, but that's where the buildouts are happening," Sharkey says.

Corning, he maintains, will see about a 25 percent increase in its worldwide fiber business this year, with much of it coming from emerging markets such as China and Western Europe. "Premium fiber is down and singlemode fiber is up. It's a different mix now, and we're seeing demand for our fiber products where we weren't supplying last year," he adds.

At year-end 2000, Corning was supplying 110 million kilometers of fiber worldwide, with 45 percent being in the U.S. and 25 percent in Western Europe. It recently bolstered its overseas fiber interests by acquiring Lucent Technologies' Shanghai and Beijing Fiber Optics companies for $225 million.

The fiber equipment market isn't immune to the widespread availability and falling demand for fiber, either. "The fiber and optical equipment business was $20 billion last year. This year, it will be 23 percent less at $17.7 billion. There's slower spending in fiber markets. It's slowed down to as-needed purchases," says Shin Umeda, principal analyst for the Dell'Oro Group, a networking industry market research firm.

Couple that decline with back-to-back 49 percent growth rates the previous two years, and clearly, it's the fiber equipment manufacturers who are feeling the pain of a softening fiber market.

Nortel, for example, announced an astounding $19 billion loss last quarter, and Lucent Technologies is stumbling. "It's had a very big impact on fiber equipment vendors, and it will be about 18 months before we see equilibrium with the amount of equipment and purchases picking up. They're (fiber vendors) all being forced to retrench and refocus on their core strengths and are rethinking their business models to include a more targeted approach to markets they can best compete in. Times are tough," Umeda concludes.

When the going gets tough, the tough go overseas, especially during a free-falling U.S. fiber market. The growing appeal of international fiber markets is helping many fiber-related companies hedge their domestic fiber bets.

"The U.S. market has been 40 to 50 percent of our global sales, and it's dropped. Now, the shift is to underserved markets which have pent-up demand, and we'll see 25 percent growth in our global market, where the demand is growing. But it's not like last year," explains Altaf Ladak, director of marketing strategy and communications for the optical fiber division of Alcatel, a leading global supplier of fiber optic products.

Emerging international markets such as China, Eastern Europe, India, Latin America, Southeast Asia and Western Europe are easing the pain of falling fiber demand in the U.S. Says Ladak: "In the next 10 years, they will be reaching the level of U.S. fiber. Clearly, Western Europe and Southeast Asia will be the fastest growing regions, along with China and India. The U.S. will still grow and remains a strong piece of our business, but it has dropped."

Bowick

Dropped for some, but for a majority of cable operators, the demand for fiber is still there. "Fiber requirements are down, but we'll spend the same amount of money this year as last on fiber and string. I don't think we're contributing to the downturn," says Chris Bowick, senior vice president of engineering and CTO for Cox Communications.

Cox's company-wide upgrade will be 92 percent complete by 2003, Bowick says, and its 15 largest systems 99 percent completed, which translates to fewer fiber needs for Cox two years from now. "As we get closer to the end game, there's less fiber demand and we're seeing some price decreases and over-capacity. We appreciate that."

For now, Cox's strategy is to build 3,000 miles of new plant a year, 600 of which will be fiber. Just how much of that fiber remains dark isn't clear, however. Adds Bowick: "We all have dark fiber in the ground, but for a reason. It's to serve businesses, future customers and handle growth like newbuilds."

A recent report by Salomon Smith Barney maintains that only five percent of fiber in the ground has actually been lit, and that lighting fiber can cost large corporate clients about $500 million and 15 months. Those figures, however, reflect the telecommunications market as a whole. "Our dark fiber is nowhere near five percent," Bowick insists.

The dark days of fiber over-capacity and falling demand are affecting other fiber-related businesses as well. "A year ago, we had jobs shut down because MSOs (multiple system operators) couldn't get fiber fast enough to satisfy their buildout plans. Since then, it's turned completely around. Some can get fiber right off the shelf. It's all about availability now," maintains Larry Warren, CTO of Worldbridge, a network construction firm and wholly- owned subsidiary of C-COR.net.

It's about burgeoning fiber inventories, too, a result of over-achieving overbuilders, over-aggressive CLECs and a slumping economy. "There were some pretty scary deals because of the worldwide shortage of fiber, and overbuilders ordered fiber without having franchises, then never took delivery. That left factories with a glut they couldn't get rid of; then AT&T turned its fiber spigot off. The past six months we've had to work very hard for opportunities," Warren admits.

If there is an upside to the fiber glut, it's the resultant cost correction. "Fiber prices have actually dropped the past four months after a 15 percent increase," he notes.

Despite falling prices, the fiber space remains in the doldrums. Says Warren: "Orders dropped significantly when overbuilders couldn't get financing and CLECs went belly-up. They were expected to be big fiber users."

Consequently, Worldbridge is being forced to revisit its fiber strategy. "Most rebuilds will be complete in two to three years, and once they're built out, there will be even less demand for fiber. That will have a big impact on the fiber vendors," Warren says.

The cable industry is likely to have a deepening impact on the fiber business as well. "From a financial perspective, it's (fiber glut) prompted us to pull back in some areas. Yet cable has actually been a robust side of our business. But, we've absolutely scaled back new fiber projections. Now, it's pay-as-you-go," says Patrick Harshman, president of the broadband access division of Harmonic Inc., a supplier of fiber optic equipment.

Harmonic reported 20 percent growth in Q2 of this year and Harshman expects similar numbers in the future, but has some trepidation. "The fiber panic is gone, but now there are real business plans and projections that aren't spurred by artificial urgencies and a hyper-sense of impending competition. It's just more conservative now, and business models are more grounded, and that's better for us," he says.

Pricing is better, too. "It's now a cost game, and several cost reductions have occurred. The cost of FTTH (fiber-to-the-home) has dropped from $3,500 per home to less than $2,000 in less than a year. Transceivers have dropped 40 percent to about $150 each. These cost reductions have set up a great opportunity for us," says Darryl Ponder, chairman and CEO of Optical Solutions Inc., a provider of FTTH products.

Those aren't the only costs that are falling. For instance, ports for fiber optic splitters have dropped from $150 to less than $40, and fiber splicing has fallen from $60 per strand to $15. Singlemode fiber cable now costs 20 percent less and is readily available. Admits Ponder: "It's a good time for us. Our biggest challenge now is to ramp up."

The ramp for overbuilders such as WINfirst is steeper as a result of a nervous capital market and the near non-existence of capital. Nevertheless, WINfirst is scheduled to inaugurate service in Sacramento, Calif. this month. "We've built fiber into the homes and neighborhoods and will continue to expand our fiber networks," says Shiraz Moosajee, vice president of business development for WINfirst.

That could be good news for fiber vendors. Yet some aren't so sure it will happen anytime soon. "Capital dollars have gone away for overbuilders and the demand for fiber has dropped off the cliff, with pipelines already filled. It will come back, but not to the ludicrous level of last year when lots of people lost their heads," maintains Mike Lynch, vice president of marketing for ICS Inc., a fiber reseller.

Once prudent heads prevail, experts say, the demand for fiber is expected to level off. In the meantime, fiber's mythical status as a scarce commodity is quickly being dispelled. "Wait times are under two weeks for fiber, and last year, it was nine months. The whole lead time is in a non-shortage period, but at some point, the growth rate will be back to over 20 percent," concludes Fay.

Just when that occurs is likely to depend on the timing of an economic rebound, the emergence of the global fiber market and the re-entry of the RBOCs and other service providers into the fiber market. Until then, most experts agree the fiber market will be a buyers' market.

E-mail: cakuhl@compuserve.com

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