Carriers have spent billions of dollars building networks they are only partially using because there isn't enough traffic to send through the cables they installed. As a result, companies have reduced their spending on equipment, cut prices and seen profits plunge, touching off a chain reaction in the telecom sector.
In recent months, equipment giants Cisco Systems, Lucent Technologies and Nortel Networks, among many others, have issued profit warnings and announced reorganisation plans as a result of poor sales to these carriers that are reluctant to buy. Despite the evidence of a communications sector slowdown and signs of a fibre-optic glut, some carriers have forged ahead with their plans to complete or even expand their networks.
On Thursday, Global Crossing and Qwest Communications International both announced the completion of new fibre-optic networks, for example.
Some analysts and industry executives refer to the oversupply of fibre-optic capacity as simply planning ahead, or as a glut that may eventually be corrected. Others regard it as a sort of long-term boondoggle.
"The telecom industry has invested itself right out of a business," said Mike McCue, chief executive of Tellme Networks, a voice-activated Internet service that works with many communications carriers. "They've laid so much fiber in the ground that they've basically commoditised themselves. They are going to get into massive price wars with everyone and it's going to be a disaster."
Optimists, however, believe the issue of optical overcapacity is overblown. Qwest Chief Executive Joe Nacchio has disputed claims of a fibre glut made by the media and Wall Street. He does not see installed-but-idle fiber as a sin, instead calling it a cost-saving measure.
"For every dollar you spend to dig up the ground, put a conduit in, pull fibre and splice it, you spend one to two dollars of capital in order to make that network operable and serviceable," he said. "You don't spend more money to prove that your first investment was incorrect."
Nacchio also pointed out that Qwest operates its networks near 85 percent of their capacity.
Many industry observers believe that less than 5 percent of the fibre put in the ground is in use. Future applications and new Internet users may one day fill these networks, but for now most experts say they will handle only a fraction of their capacity.
Making matters worse for carriers, the lack of network traffic has forced them to cut prices for use of their networks.
According to RateXchange, an electronic broker that helps carriers trade bandwidth capacity, a connection running at 155 megabits per second from Los Angeles to New York cost about US$45,000 a month last October. That price fell to $35,000 in March and is expected to slip to $2,450 in January 2002.
Russ Matulich, senior vice president of sales at RateXchange, estimates that a 155mbps connection could handle about 42 million minutes of calls a month under ideal circumstances, and that current optical technology could increase this capacity eight to 10 times more.
"You could do all the world's long-distance with two or three strands of fibre, and there's thousands of strands in the ground" now, Matulich said.
