Optical Networking Is Placed on Hold
Brent D. Johnson
When attendees at the Conference on Lasers and Electro-Optics (CLEO) gathered in May to hear the latest forecast for the optical communications sector, it's a pretty safe bet that few were surprised to hear bad news. But the bleak picture, reinforced by the unanimity of panelists at the Future Trends in Optical Communications program, was probably darker and more ominous than most attendees might have expected.
The panel included Ian McPherson, senior analyst for Communications Industry Researchers; Bill Magill, managing director of Telesoft Partners; and Jim Jungjohann of CIBC World Markets Corp.
Perhaps the most disturbing assessment was McPherson's "nuclear winter scenario." He explained that Global Crossing and other companies have wiped away their debts by declaring bankruptcy, giving them an unfair advantage over their competitors. Thus, he speculated at CLEO, WorldCom and AT&T could be forced to file for bankruptcy just to stay competitive.
In a postconference interview that followed WorldCom's restatement of its earnings, McPherson said that he does not believe the additional troubles will drive all of the other carriers into bankruptcy. But it could threaten their ability to obtain long-term cash, he said.
However, the company's restatement of earnings could not have come at a worse time, he added. "If, in May, the doomsday clock was at a quarter to 12, now it's seven minutes to 12," he said.
At CLEO, Jungjohann explained that one source of the carriers' financial troubles is that networks are very inefficient: Nobody is making money on data because the business model is inherently flawed. Part of the problem is that network buildouts banked on the premise that bandwidth would double every three months. Consequently, the industry so overextended itself that many viable technologies may not last another 12 months.
McPherson was more specific, putting the number of optical component companies that will fail at 75 percent.
The hype surrounding Ethernet does not meet the reality of metro and core markets, he added, and SONET SDH will continue to dominate optical transport. Continued maintenance of T1 and T3 will be the core business, and Ethernet will fall away. He doesn't think there is a compelling need for additional services, but he does feel that demands for them have been overstated, citing growth curves far below projections.
Magill supported that assessment, noting that 80 percent of bandwidth is purchased in only 1 percent of US ZIP codes.
That lack of demand translates to networking gear. At one point, 40 percent of revenue was on capital spending. Now it's down to 10 to 16 percent. In noting this, Jungjohann was eerily prescient of the WorldCom debacle, warning, "Don't trust what the techies are saying. It's the CFO who is writing the checks, and they aren't buying anything right now."
McPherson offered one glimmer of hope during the program: Dense wavelength division multiplexing shows strong growth, with 2.5 Gb/s as the basic building block. He advised those who typically invest $10,000 to consider investing only $1000 in September and October.
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