Will lucrative times end for fiber-optic firms?

A combination of an insatiable appetite for capacity on networks, the entry of new competitors in the communications industry, and technology innovation has prompted an almost unprecedented boom for network operators and their suppliers.

Centered on fiber-optic technology, communications companies and their "arms dealer" equipment makers are reaping huge gains. Collectively, they are betting that the demand for capacity--or bandwidth--on networks will grow exponentially as more people do more complicated, pipe-clogging tasks on private connections and the public Internet.

Nevertheless, in every boom is the threat of a bust. Amid overwhelming evidence of demand for network bandwidth and the associated technology to make it work, even the most astute experts admit there is no single user-driven technology at the moment that will fill the network capacity. This could be a telling admission. Use of personal computers didn't take off until software applications such as word processors and spreadsheets became available, for example.

But many believe the growing availability of high-speed pipes will spark development of the applications and software that will finally justify the massive network construction projects.

"People want more bandwidth as it gets cheaper," Infonetics Research founder and principal analyst Michael Howard said.

"Demand truly is elastic," John Roth, chief executive at Nortel, added. "The more available (bandwidth) is, the more people use it."

Such observations could sway those who are skeptical of the latest hyped technology in the industry.

Much like when the high-tech industry coalesced around Internet-based communications, the networking market is rapidly embracing the notion that optics is the only technology that can conceivably meet the demands users will place on networks.

As a result, new entrants in the market such as Level 3 Communications, Qwest Communications International and Global Crossing, among others, are preparing to duke it out with entrenched global network providers such as AT&T and MCI WorldCom. These upstarts hope their more state-of-the-art technology will reap competitive benefits vs. older competitors.

On the equipment front, a renaissance has taken hold in the market, with high-flying upstarts such as Sycamore Networks, Juniper Networks and Redback Networks offering alternative technologies to larger firms such as Cisco Systems, Nortel Networks and others.

And as the year 2000 unfolds, others will follow, such as Optical Networks and Corvis, as more firms focus on how to get more out of a fiber-optic line. In addition, these firms will likely revel in the high valuations currently placed on entrants in the optical-equipment niche.

Fiber-optic technology sends information encoded in pulses of light through long strands of "glass" fiber. On their own, these fibers can carry much more information than traditional copper wires. Recent advances in technology pioneered by the likes of Ciena, Lucent Technologies, JDS Uniphase and Nortel--including techniques that involve carrying information on different wavelengths of the light pulse--have greatly improved the strands' capacity.

Interest in adding technology that can increase fiber's capacity has heightened also since fiber already has been laid throughout the country.

Wall Street--and the industry itself--is betting that demand for bandwidth will continue to climb at exponential rates. Most agree that's likely to happen, as network-taxing applications like video-on-demand, videoconferencing and even virtual reality applications are made feasible by faster high-speed connections to homes and offices.

According to consultants Forrester Research, business demand for network bandwidth will continue to double each year through the next few years. Total corporate demand in 2003 is likely to be about 12 times what it was in 1999, the analysts predict.

But that's still in the future. Today the focus is on building the networks that will make these applications feasible--and that's driving money and market attention to the Qwest's and Sycamore's of the world.

"What ends up happening is a cycle effect," said Erica Henkel, an analyst with Frost and Sullivan. "Right now you have a bandwidth shortage, so companies are building out networks."

Once network capacity becomes commonplace, the market will turn resources more broadly to applications that use this bandwidth, she said.

For the companies laying fiber themselves, this kind of cycle can be risky. As more companies build long-haul networks, competition drives the price down, at least until new high-bandwidth applications once again clog the pipes. Already the price of bandwidth has fallen substantially in the last year.

Some of the network companies seek to hedge their bets by selling off pieces of their network early, while the price for bandwidth is still high. Qwest, for example, sold pieces of its network early on to what was at the time Frontier Communications, which in turn has sold smaller pieces to third parties, each avoiding the necessity of selling the extra bandwidth themselves at a discount later on.

But analysts say it's a different story for the equipment companies, which are even now struggling to keep up with network operator demands, as evidenced by Lucent's recent missteps and Nortel's plans to add optical manufacturing capacity.

Vinod Khosla, a partner at Silicon Valley venture firm Kleiner, Perkins, Caulfield & Byers and a member of Qwest's board, said the biggest obstacle to the communications company's growth is finding enough cutting-edge equipment to put in its network.

"I don't see any excess bandwidth for the next three to five years," Khosla said.

Most of the big network operators are upgrading their infrastructure to take advantage of the latest in fiber-optic technology. They're even looking a few upgrade cycles ahead, analysts say, building in extra capacity so they won't find their brand-new networks completely filled in a year or two.

If all the network companies in the world worked on the same schedule, this could lead to a kind of boom-and-bust pattern for the equipment providers. But the newcomers like Level 3 are building from scratch now, while established companies like AT&T or the Bell phone companies work more slowly, trying to get as much use out of their old switches and infrastructure as possible before selling it.

Overseas companies also lag behind the leaders in the United States, promising demand for high-tech fiber equipment for years to come.

And while this cycle is running its course, content providers and application builders will be finding new ways to fill the networks, driving demand for bandwidth and network equipment even higher, analysts say.

"It's a great long-term play," said Ross Mayfield, president of RateXchange, an online site where network companies trade and sell their excess bandwidth. "The cycle will always come back around in (the equipment makers) favor."

Frost and Sullivan says the total worldwide market for fiber-optic telecommunications equipment was about $10.4 billion in 1999. That would jump to nearly $17.7 billion by 2003, and to $28.6 billion in 2006, Henkel said.

"If you've got thousands of people to move, it favors a big plane," said Corvis's chief David Huber, an industry veteran who also founded Ciena. "Optics is a big plane."