[Reader-list] The next dot-com crash- bandwidth

[Ravi Sundaram]

The one of the issues of the Economic Times in Delhi last week carried
stories about the crisis of bandwidth companies in India. In the last year,
a number of companies have been feverishly laying fibre all over India;
Reliance, Bharti, , Dishnet, Zeenet, Spectranet...the last three have been
active in Delhi. Today a score of smaller players have fallen by the
wayside, and there is a glut in the market. Very little of this has
actually made a difference on the ground, where bandwith remains limited.

Fibre is important to large media companies in India to ensure proprietory
control over content, and to set in motion a pay system for cable
televsion. In the recent past Star, zee and sony have introduced set-top
boxes, and scrambled signals, leading to sharp conflicts with grey-market
operators.......Till this day cable TV in India was the best deal on earth,
with costs remaining very low for the customer....There are also a number
of 'local' channels, run by the neighbourhood operator. With a proprietory
regime things will change, for the worse 
--------------------------
June 18, 2001 


Once-Bright Future of Optical Fiber Dims

By SIMON ROMERO (New Yrok Times)

n the last two years, 100 million miles of optical fiber — more than enough
to reach the sun — were laid around the world as companies spent $35
billion to build Internet-inspired communications networks. But after a
string of corporate bankruptcies, fears are spreading that it will be many
years before these grandiose systems are ever fully used.

There is a glut of capacity of high- speed, long-haul information
pipelines, but a shortage of the high- speed, local-access connections that
consumers and businesses need to gain access to the Web. It is as if
superhighways stand nearly empty while traffic backs up at the Holland and
Lincoln tunnels.

Few people have fast Internet connections, and prices are rising for those
who do. Computer users with common dial-up Internet connections find their
Web browsers stalled, and people trying to make regular phone calls
complain increasingly of busy signals.

Meanwhile, investment in the communications industry, especially in fiber
optic networks, has sharply declined, leaving companies with fiber that may
never be "lit," as commercially available wire is called. Only 5 percent of
fiber in the ground is on, and lighting fiber can cost large corporate
clients about $500 million and 15 months, according to Salomon Smith Barney.

"There may be a significant amount of dark fiber in the ground, but it
takes a lot more money to light fiber than to lay it and even more to
deliver it to the end user," Howard E. Janzen, head of Williams
Communications, said in a recent interview. "The challenges will force the
flakes to drop out."

The industry bubble has had an impact on the rest of the economy, too.
Billions invested in telecommunications companies now appear to have been
wasted. The drying up of capital investment is one reason that the economy
has slowed sharply, and some economists argue that while the Federal
Reserve's efforts to lower interest rates will stimulate some parts of the
economy, it may be years before growth returns to the areas that were so
hot only a year ago.

The pain is spreading to many companies, their investors, their creditors
and their workers.

On Friday, Nortel Networks of Canada said it would lose an astonishing $19
billion this quarter because its phone equipment sales were falling. And
360networks, also of Canada, failed to make an interest payment on Friday,
raising concern that the developer of a huge fiber optic network could seek
bankruptcy protection or default on its debt.

The buildup of networks was expected to usher in a prosperous era of vast
new commercial applications for the Internet, fed by soaring supplies of
bandwidth, the range of frequencies used to transmit communications signals.

Some entrepreneurs were so optimistic that they suggested sending
high-altitude aircraft to circle above big cities, beaming signals down to
consumers. Today, only about 10 percent of American homes have high- speed
access to the Internet, through conventional cable networks and digital
subscriber lines.

In Europe, anxieties run high for different reasons. Companies spent large
sums there to acquire licenses to provide advanced wireless services.
Deutsche Telekom, British Telecom and other companies are now seeking to
renegotiate their agreements to pay $125 billion for these licenses. To
reduce overwhelming debts, some companies are trying to sell assets and
agreeing to share some network costs.

Back in the United States, the stakes are perhaps highest for the companies
that built transcontinental and transoceanic fiber optic networks capable
of carrying huge amounts of voice and data traffic.

The problems are similar to those in the railroad industry after the Civil
War, when an economic boom fueled speculation by financiers.

"In the railroad age, speculators built rail lines but often left it up to
the locals in town to build the roads to each station," said Brian Kinard,
a venture capitalist in San Francisco who focuses on communications
companies. "Today, it's the responsibility of the capital markets to fund
construction of all parts of the network. And suddenly, it's not clear
whether investors will continue to do so."

By the early 1870's an abundance of cheap financing, rather than business
fundamentals, led to a doubling of railroad mileage from the previous
decade. Then, in 1873, the collapse of the Northern Pacific Railroad ruined
its principal owner, the Philadelphia banking firm Jay Cooke & Company,
leading to a market crash.

In the following years, two-fifths of railroad bonds went into default, and
railroad miles built fell by 80 percent. It was not until the end of the
1870's that investment began to resurface. Still, railroads, the leading
technology of their day, were never again seen in the same light.

Similar clouds may be gathering over the telecommunications industry. So
far this year, companies have defaulted on $13.9 billion of
telecommunications bonds, resulting in investor losses of $12.8 billion,
according to Fitch IBCA Duff & Phelps, a debt-rating company. For all of
last year, investor losses amounted to $5.2 billion on such bonds.
Companies as large and influential as GE Capital, the financial arm of
General Electric, are said to be exposed to substantial losses by their
roles in the financing of telecom and related companies. And investors in
the companies' stocks have seen their value plunge.

In the 1980's companies began laying fiber optic cable, sometimes alongside
rail lines. But the value of the long-haul networks, or backbone, over
which Internet data could travel soared in 1996 when WorldCom acquired MFS
Communications, a fiber optic network, for $14 billion.

Newcomers were also emboldened by the Telecommunications Act of 1996, which
helped to deregulate the communications industry. The stage was set for a
company called Global Crossing.

The brainchild of Gary Winnick, a banker and former successful Wall Street
sales executive under the tutelage of Michael R. Milken, Global Crossing
was formed in Beverly Hills in 1997 with the goal of building a fiber optic
network linking the Americas with Asia and Europe.

After Mr. Winnick, without much strenuous effort, secured $750 million and
laid a fiber optic cable across the Atlantic Ocean, Global Crossing went
public.

The company's shares soon hit a high of $73.375, valuing Global Crossing at
nearly $30 billion. That was many times what its network had cost, and
encouraged similar ventures, like 360networks and Level 3 Communications.
(Global Crossing shares closed at $8.66 on Friday.)

Financiers feverishly raced to provide the post-cold war economy with
communications capacity, much the same way financiers backed railroads
seeking to increase transportation after the Civil War.

New competitors joined the fray. Cincinnati Bell, a local phone company,
acquired a fiber optic network operator and was reborn as Broad wing. The
Williams Companies, a Tulsa, Okla.-based gas-pipeline operator, formed
Williams Communications, which built a national fiber optic network partly
by laying fiber along its parent company's pipelines.

"Build it and they will come," became the mantra of billionaire fiber
barons. Venture capitalists began financing companies with plans to deliver
data quickly to computer users in other ways, like using satellites and
even high-altitude aircraft.

The optimism peaked last July when JDS Uniphase, a little-known Canadian
maker of laser filters used to light fiber, announced a plan to acquire
SDL, a little-known competitor, for stock then worth $41 billion and now
valued less than $6 billion. It was the biggest merger in the history of
the technology industry.

Then concern began to build about market valuations. At about the same
time, technology ventures began to have trouble securing financing. The
share prices of many communications companies plunged.

The swelling supply of fiber led to a decline in prices of bandwidth, which
is increasingly traded like barrels of oil or pork bellies. Prices could
fall 60 percent this year, on top of similar declines last year, according
to estimates by Morgan Stanley Dean Witter.

The IDT Corporation, an international phone company based in New Jersey,
says a 10-year contract for a phone line that can carry nearly 600
conversations has fallen to $1.8 million, from $12 million in 1999.
Competition has led to even steeper declines for lines that can carry four
times as much traffic. Carriers say that any glut is temporary, and that
measurements of supply should not include dark fiber. Moreover, Internet
use and the demand for bandwidth continue to climb.

While carriers bet on a recovery in bandwidth prices, problems have arisen
in other parts of the communications industry.

One-time titans in communications equipment, like Lucent Technologies and
Nortel, have reported giant losses as sales have declined. Some of the
credit extended by these companies to clients to buy equipment is at risk
of default, making it riskier for banks to lend money to even the biggest
equipment companies. More than 100,000 jobs have been eliminated from the
communications industry since last year.

NorthPoint Communications, a provider of fast Internet access, shut down in
March, leaving more than 100,000 customers scrambling to find new service.
Several similar but smaller high-speed Internet companies have also closed.
Others are teetering.

The ranks of bankrupt telecommunications companies include Winstar, whose
corporate trophy, a 200- foot blimp that still flies above New York, seems
little more than an eerie relic of the late 20th-century telecommunications
boom. Winstar paid for the blimp last year when the outlook for the
telecommunications industry was still bright.