C&B Notes

Optical Delusion?

After a decade of distress and consolidation thanks to an oversupply hangover from the late ‘90’s, the optical fiber business is experiencing another building boom.  We are hard-pressed to believe that the story will be much different this time around.  Our perception is that this industry remains a bad commodity business with industry participants unable to realize any competitive differentiation and consumers reaping all of the benefits.  Combining high fixed investments with low marginal costs and near-perfect competition usually does not work well for investors.

It is early days in what some in the fiber-optic business are calling a new boom for their long-beaten-down industry.  Demand is being driven by skyrocketing Internet video traffic, requests from the financial sector for ever-faster trading connections, and soaring mobile phone use — which has to be tied into landline networks.  Even the 2009 economic stimulus plan, which set aside $7.2 billion for telecom projects, is pitching in.

But already some skeptics caution whether enough demand exists to warrant more building. While trading firms are currently willing to pay a premium for faster connections, some worry that potential new regulations governing high-frequency trading could crimp the market.  Skeptics also question how large a mobile traffic surge will materialize given the high cost of delivering wireless data.

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There is also plenty of excess capacity available on the nation’s core fiber-optic networks, according to TeleGeography, a telecom market research firm.  And capacity is expected to increase as engineers find new ways of squeezing more data traffic into a single strand of glass.

“A lot of us look at the current construction boom and question if history may be repeating itself,” said Will Hughs, the top U.S. executive for Australian telecom giant Telstra Corp., which sells long-haul telecom services to U.S. customers.  In the underwater-cable market, he said, “the possibility for system excess is even greater” than it was a decade ago because technological advances mean that new cables can be built more quickly.

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“The notion there’s a fiber glut is not true,” Mr. Newby says, arguing that much of the fiber-optic cable that is available is simply not in the right place — not at the suburban office parks and cellphone towers that need it.

Another fiber-optic arms race is emerging under the Atlantic.  Since the heyday of 1998 to 2003, when bullish investors built 10 different cable systems from North America to Europe, the route hasn’t seen any new construction.  Perhaps for good reason: The price of sending data between New York and London has dropped 25% since 2007, as improved laser technology has caused capacity on the cables between the two cities to rise faster than demand.

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