May 4, 2012
Telecom contractor Bob Sellenriek recently bought three massive bulldozers and fitted them with cable-burying plows that had been gathering dust in his warehouse for a decade. Mr. Sellenriek needed the plows for something he has done very little of since the telecom bubble burst and wiped out $2 trillion in stock market wealth more than 10 years ago: laying miles of new fiber-optic cable. After years of licking its wounds, and with much of the fiber-optic cable capacity in the ground still unused, the telecom industry is going on another building spree.
Some 19 million miles of optical fiber were installed in the U.S. last year, the most since the boom year of 2000, research firm CRU Group says. Corning Inc., a leading maker of fiber, sold record volumes last year and is telling new customers that it can't guarantee their orders will be filled. RWF Bron, a Canadian maker of the specialized "cable plows" used to bury fiber-optic cable, says the last six months were its busiest in a decade. And railway Norfolk Southern Corp. says it is finally seeing interest in the empty plastic pipes it buried along its tracks in the late 1990s, betting telecom companies would pay to string fiber through them.
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.
Cisco Systems Inc. predicts that mobile data traffic will nearly double every year through 2015. But Andrew M. Odlyzko, a University of Minnesota math professor who warned a decade ago about slower-than-expected Internet growth, says predictions of skyrocketing mobile traffic seem overly optimistic: Mobile bandwidth may be too expensive to increase, he says. Every cellphone data connection generally runs from a phone company's cellphone tower into a landline telecom network. 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.
Telecom builders say it is the location of the fiber-optic networks-rather than their capacity-that is driving new demand. Networks don't exist where they are needed-at cellphone towers, suburban office parks, and remote data centers, for instance. Carriers that prize reliability want alternative routes. And new uses, such as high-frequency trading, are also emerging that call for new routes. In fact, demand for fiber could explode if online video streaming continues to take off, some companies and analysts say. Companies like Netflix Inc., Apple Inc., Hulu and Amazon.com Inc. deliver movies and TV shows to consumers over the Web. But media executives note that widespread adoption of such services would stress the existing Internet infrastructure.
As of last fall, Netflix represented nearly a third of all peak downstream Internet traffic, up more than 10% since last spring, according to network-management company Sandvine Corp. Cisco expects the volume of video content crossing the Internet to increase fivefold by 2015 from 2010 levels. "When there is fiber to several billion homes around the globe a number of years from now, we will look back at today as only the beginning," a Netflix spokesman said. For the most part, new projects aren't started until customers have been lined up. But some speculators are installing unsold "dark fiber" that has yet to be lighted up for customers, raising concerns that builders may again be getting ahead of themselves.
Mr. Sellenriek's client on the Excelsior Springs dig, Bluebird Network LLC, is building about 1,500 miles in new fiber-optic network around Missouri this year with help from $47 million in government stimulus funds. Its customers are wireless companies like Northwest Missouri Cellular, which is upgrading the links to its towers from copper to fiber, and local phone companies like Rock Port Telephone that want to offer faster Internet to landline users. It is also installing dark fiber. "Thank god for Facebook," Mr. Sellenriek, a 40-year veteran of the business, said in a middle-Missouri drawl as his crew dragged a 57,000-pound cable plow and tractor through the dirt outside Excelsior Springs.
Veterans of the 2001 collapse insist they are mindful of the lessons they learned and are being much more careful about where they deploy new cable. "We are a lot smarter than we ever were 10 or 15 years ago," says James Crowe, chief executive of Level 3 Communications Inc. His company helped define the telecom boom by building its own network from coast to coast, beginning in 1998. It lost more than 90% of its stock-market value a year after hitting its high in March 2000, but it was one of the few to survive the bust.
In recent months, for the first time since the 1990s, Mr. Crowe has started extending Level 3's fiber-optic network into areas where he hasn't yet signed up any customers, betting that the demand he needs to make money is there. He is starting small, investing $50 million in such projects, less than 10% of Level 3's capital investments this year. But he says the company built a database of three million office buildings, data centers and cellphone towers, pinpointing areas where Level 3 can risk expanding its network without first selling the new capacity. "The demand has become so obvious," Mr. Crowe said in an interview at his headquarters in Broomfield, Colo. referring to the surge in bandwidth intensive uses, like streaming video and smartphones. "You've got residential neighborhoods that consume more bandwidth than all of New York City did 15 years ago."
Fifteen years ago, the demand seemed so obvious that scores of new telecom carriers sprung up and by 2001 had hung, buried and bored $90 billion worth of fiber-optic cable across the U.S. Optimists predicted Internet traffic would grow 10-fold every year. Mr. Crowe, along with others including Qwest's Joseph Nacchio and Global Crossing's Gary Winnick, became the "fiber barons" whose pipes were supposed to facilitate the dot-com boom. Pipeline companies, utilities and railroads rushed to build networks of their own along their rights of way-or bury empty plastic tubes, known as conduit, that telecom companies would then use as pathways for their fiber-optic cable. Corning couldn't make enough fiber-optic cable, and Bron could barely churn out enough cable plows, to keep up with demand. It turned out that Internet traffic didn't grow as fast as the boosters had claimed. New laser technology allowed existing fiber-optic cables to carry far more information than the builders had believed. And high-bandwidth uses of the Internet, like video, were slow to catch on-in part because the critical "last mile" connections that brought high-speed access to homes and businesses weren't built out nearly as quickly as the long-haul connections that could easily be plowed along railroads or highways.
The result was a glut of unused fiber in the ground and on the ocean floor. TeleGeography estimated that in 2003, the fiber-optic cables running through most of America's biggest cities were using just 3% of their capacity. Some predicted the glut was so great that new construction would never be needed again. Then came years of distress, bankruptcy and consolidation. Fiber-optic networks have changed hands so many times that TeleGeography says that is one reason it doesn't estimate just how much of America's available fiber capacity is being used. Analyst Stephan Beckert says there is no lack of fiber in the country now-and with communications technology continuing to improve, it is hard to see a limit to how much data existing fiber can carry.
So it was puzzling when in 2009 representatives of a company called Northeastern ITS LLC approached the city council of Pepper Pike, Ohio, a town of 6,000 in the Cleveland suburbs, to say they would be digging up one of the town's main drags. Then-council candidate Jill Miller Zimon, who says she worried the work could disrupt her daughter's Bat Mitzvah celebration, decided to look into the company. She determined Northeastern ITS was installing a fiber-optic cable running to New Jersey, though the exact purpose was unclear. In statements to local officials in small towns across the northeast, where the company was digging up streets and even cutting through mountains, Northeastern ITS executives said they were building a cable to increase Internet connectivity for telecom carriers and hospitals, colleges and other organizations.
The low-profile project turned out to have a high-profile backer: Jim Barksdale, former chief executive of Internet browser company Netscape, one of the highfliers of the dot-com boom. In 2010, he unveiled the fruits of his labors, dubbing the company Spread Networks. At an estimated cost of $300 million, Mr. Barksdale had forged a new cable route between Chicago and New Jersey that shortened by three milliseconds the length of time it took for a pulse of light traveling through glass to make a round trip between the two points. For traders using high-powered computers to profit from the interplay between Chicago's commodity markets and New York City's stock exchanges, those three milliseconds were worth hundreds of millions of dollars, Mr. Barksdale argued. Market observers say Mr. Barksdale will need to command high premiums to justify his project's cost. As new technology increases the capacity of existing fiber, the wholesale cost of transmitting data between Chicago and New York has dropped 89% since 2005, TeleGeography says. In an interview, Mr. Barksdale's son David Barksdale, chief executive of Spread Networks, wouldn't discuss his project's cost or financial returns but said he hadn't yet sold all his capacity.
Despite the uncertainty, a second group with ties to another 1990s-era mogul is financing another route between the East Coast and Chicago. Allied Fiber LLC, with backing from members of the Ted Turner family, has started building its own national dark-fiber network. Allied Fiber Chief Executive Hunter Newby says there is an opportunity to offer fiber-optic capacity to Internet companies, wireless carriers, hospitals and others who want an alternative to entrenched carriers like Verizon Communications Inc. and AT&T Inc. "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. "We actually got emptier over the last year and a half, despite pretty successful sales," said Richard Elliott, managing director of Apollo Subsea Cable System Ltd., which runs the last submarine link to be built between London and New York. Fiber representing just 18% of the potential capacity between New York and London is being used, TeleGeography says.
But optimistic builders increasingly argue there is a case for new systems to be built. One group, Hibernia Atlantic, which owns an existing trans-Atlantic cable system, said in January it had signed contracts for a new $300 million cable linking New York and London. Another company, Emerald Networks, is hot on Hibernia's heels. It says it already has an investment of $6 million from British foundation Wellcome Trust, and has hired Wall Street bank Jefferies & Co. to help raise at least $80 million more for its own new link between New York, Ireland and Iceland-where it says cheap power will encourage Internet companies to build massive data centers. The network would connect to London through existing networks. But uncertainty about the fiber-optic industry's future remains. One morning in December, Level 3's Mr. Crowe told investors that he saw opportunities in new fiber-optic construction. UBS AG analyst John Hodulik, who interviewed Mr. Crowe onstage at the event, says Level 3's shares dropped after Mr. Crowe spoke, as investors worried the fiber baron could be going back to his roots as an aggressive builder of networks. "We're a long, long way from that today, but it was such a painful experience that people still shudder to think we could be heading back to something like that," Mr. Hodulik said. Wall Street Journal
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