A full recovery may not come until late-2002 or even 2003, but industry optimists hope that Corning's move signals a reawakening of demand for telecom gear and the beginning of the end for a stubborn fiber glut.
To get a better feel for the future of fiber optics--and an informed opinion about broadband's ability to transform the Internet--Tom French, a director in McKinsey's Boston office, and Somu Subramaniam, a director in the New York office, recently spent some time with Wendell P. Weeks, president of Corning Optical Communications, discussing forecasts, business models and the value of high-quality connections.
Q: Why are you restarting fiber manufacturing?
A: For one simple reason: Optical-fiber inventories have been reduced to a level appropriate to our ongoing order rate. Restarting production will match our operations to demand.
Should this be viewed as a positive sign? Or can it at least be assumed that business conditions haven't worsened?
It is not appropriate to view our restarting these fiber facilities as a signal of a market turnaround, but it is reasonable to say that business conditions are not worsening.
The fundamental human factor that makes me bullish on broadband is that we value connection so terribly highly.
Much of the recent press on broadband's ability to transform the Internet is bearish. How do you respond to these skeptics?
The current skepticism is a classic counterrevolution. Everybody got on the bandwagon that the Internet was going to change our lives, and out of a lack of understanding, people began to shift everything over to the Internet without paying attention to fundamental economics, such as having to actually pay for it. Then classic economics stepped in, and the capital markets stopped giving money to every idea. First, everything was good; now it's all bad. It'll even itself out.
Will broadband transform the Internet?
Yes. It's got to because the customer experience is what creates value, and that is defined by what touches him or her, which is defined by access: I use the Internet more because the experience is better and it's not just in speed. Broadband defines the Internet--there's no way around it. We're visual people, and we need the visual richness that can only come through broadband.
Will this transformation go beyond residential customers?
In residential, any time you get an offer to do something faster and get a more enriched experience, it's going to sell. The real killer app for businesses--and it's going to make your demand forecasts and my bandwidth forecasts look conservative--is the power of next-generation peer-to-peer applications and connections. It is the ability to collaborate in some way other than through the hierarchy of today's networks. You know there's value there.
Do people really value high-quality connections?
Absolutely. We always want the highest-quality connection we can have. Why don't we use more videoconferencing? Because the quality of the connection is so poor. We value connection to the point where you'll get on a plane and use a day for a two-hour meeting that you could have done in a videoconference but didn't because videoconferencing isn't good enough.
The fundamental human factor that makes me bullish on broadband is that we value connection so terribly highly. Name one aspect of your life in which you get great joy that does not involve connection. That desire for connection will move disposable income around all the time. If I were bearish, it would be because it's hard to get connections that are of high enough quality. The great news is that if you're in the business of bandwidth, it's not about speed; it's about connections. The bandwidth is going to square with each connection. That's what bandwidth demand is about and that's why I'm such a bandwidth bull in the long term.
Broadband defines the Internet--there's no way around it. We're visual people, and we need the visual richness that can only come through broadband.
Our own modeling says by about 60 percent to 80 percent per year, but it's really not the right question. What's really relevant is whether there are business models to make that bandwidth demand profitable. So much of the growth is in data, and people don't make any money moving data around. The economics will become ever more efficient, but no one has found the business models to make money on data.
Which models are the most promising in your view?
One hint might come from subscription-based software, which is the most natural thing in the world. That's a high-value application that people pay a lot for today. The question is whether the value is in the content or in the carrying. Do those two things have to be combined on one profit-and-loss statement? Many people are vying for the ability to control the consumer access point, be it through games, through your computer, or through your television. The problem is that all the cost is in providing the connection. How do we get money to the guy who actually makes the connection? The Japanese have figured this out in wireless better than anyone else in the world, with micro-billing. Users pay every time they access a wireless base, or want to download, or play a game. But the micro-bill is so small that users don't care, although it adds up for the company doing the billing. That's how NTT DoCoMo became a success story. They will continue to be a success story because they weren't laboring under the concept that the Internet had to be free. I never thought free was a smart concept.
How will this affect fiber's prospects?
I think there will be competition for the new data services, but the markets won't be willing to fund a third player or even two players going after each other's base businesses. The first problem is that the technology challenge increases by orders of magnitude because of complexity. Unlike long haul, where you go from A to B, in metropolitan areas you go from A to B or C and D. Sometimes you carry Internet traffic, sometimes circuit traffic--different levels of circuit traffic or plain old-fashioned voice circuit. It's a very complicated technological problem, but it can be done.
How do you think it will be done?
We're starting to see innovations that will unleash the power of optical technology and the power of Internet Protocol (IP) to attack these issues. Those two together will win in every single piece of the service. If IP can solve quality-of-service issues, and optical can give the same robustness of protection in restoration that circuit does today, they are going to win.
And the second problem?
The second problem is that we may have moved too early. A lot of money flowed into competitive local exchange carriers (CLECs) in the belief that people would buy just because they got a slight improvement in service. There was never a technological innovation leading to a completely new cost structure. Now that there are innovations that can help CLECs make that leap, the capital markets have soured. The fact is you can't fund half a network and expect it to make money. So the technology is there, but the money isn't, and this will take a while to even out. Maybe it will end up jibing very well with a move toward one standard. The Internet has the opportunity to be the very first global standard, and don't underestimate the power of that. That's how you get many people trying to solve the big problems.
What trends might emerge to make profitable business models possible?
Physics tells you to do that with optics, and that's Corning's slice of the electromagnetic spectrum. It comes down to fundamental human needs, and physics takes care of the rest.
What does all this mean for Corning?
If you accept that the demand will be strong, then we have to move a lot of information. If you also accept that connections matter, then the highest-value connections will be those which are hardest to do--farthest away. You've got to move a lot of information a long way. Physics tells you to do that with optics, and that's Corning's slice of the electromagnetic spectrum. It comes down to fundamental human needs, and physics takes care of the rest. So optics is, without doubt, a transcendent technology. But how you win with optics is a question of getting your organization connected enough to innovate, and on that front we are definitely in the hunt. That's the best you can hope for in a revolution--to be in the hunt.
Who is in that hunt with you?
It's a collection of the old, the new, and the yet-to-be-born. Twenty-five years ago, the traditional telecommunications-equipment providers had a natural monopoly, around which the whole industry was structured. Corning introduced a new technology called optical, which the traditional guys moved to because of its obvious benefits. We still compete with them today.
Then you have new players that have come in with new technologies, beyond fiber amplifiers, around Wavelength Division (Multiplexing)--companies like JDS Uniphase. They've been a great example of how to build a company through acquisition very rapidly, backed by the financial markets. Then there are the yet-to-be-born. As long as solving these problems is valuable, and as long as the companies that have mass don't innovate quickly, you leave room for upstarts. This kind of innovation is backed by the most powerful financial trend of the past ten years and probably the next ten years--venture capital, which provides powerful amounts of money for a more efficient way of defining where the walls are. Inside a corporation, you're plagued by the inefficiencies of your portfolio-management process; it's human nature to hang on too long to some things and not long enough to others. The venture capitalist forces discipline over a vast number of plays. That's a very powerful model.
Fifty percent of the world is still waiting to make that first phone call, so the traditional response is to build out those areas.
In what parts of the world will Corning's opportunity play out?
Fifty percent of the world is still waiting to make that first phone call, so the traditional response is to build out those areas. China builds out; India ultimately builds out; some day in the distant future Africa builds out; South America builds out. But there is a more powerful option. The biggest growth will come from those who decide they want to solve the broadband problem. Countries that make broadband deployment a national priority have certain advantages. They may well leap to technologies that are newer and better and not be burdened by the weight of thinking about things in a traditional way. The Champs-Elysées wasn't built by committee, right?
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