Broadband carriers facing uncertain demand

Weekly Corporate Growth Report, Feb 5, 2001 by Rock, Justin

Sample of Fiber-Optic Companies and Networks

Level 3 Communications

Headquarters: Broomfield, CO

Currently building: 16,000-mile network connecting 150 U.S. Cities and 4,700mile European intercity network

Global Crossing

Headquarters: Hamilton, Bermuda

Currently building: 20,000-mile North American network, 15,500-mile European network, 11,600-mile East Asian network and a 10,000-mile South American network

360networks

Headquarters: Vancouver, British Columbia

Currently building: an 88,000-mile network connecting the major cities in North America, South America, Europe and Asia

PSINet

Headquarters: Ashburn, VA

Currently building: a network spanning North America, South America, Europe, East Asia and Australia

Source: Wall Street Journal

Over the last few years investors have eagerly tossed tens of billions of dollars at young companies that were laying fiber-optic cable across the Americas, Europe and Asia. But these companies have not been spared in the recent technology massacre.

Most of these companies building large fiber-optic networks are suffering substantial losses even as their revenue sees significant growth. These companies, such as Global Crossing Ltd., Level 3 Communications Group Inc., and 360networks Inc., are looking at large corporations, Internet service providers, other big data and phone carriers and even regional phone companies as new customers. They are offering data-carrying capacity and even related network services like computer-server management.

Some feel that the frenzy of fiber-optic networks being thrown around the globe is similar to the dawn of the railroad age. Many investors willing to help start-up companies, but eventually experienced a shakedown after too many competitors were crossing tracks and moving into places with no economic justification.

Adding to these concerns are the signs that Internet traffic may not be growing as boldly as many believe. A recent survey by PricewaterhouseCoopers states that the average U.S. Internet user went from 5.3 hours per week of usage, to only 4.2 hours. One suggested explanation is "the medium's maturity."

The prices for broadband are falling dramatically. Prices for transmitting data between New York and London have dropped 45 percent over the past six months. The new carriers have lower cost structures which allows them to break even on these lower costs, but that may not last. The industry is nearing a consolidation shakedown.

"Current market conditions are quite challenging, as the slowdown in Internet spending becomes more apparent every day," said William L. Schrader, the CEO of PSINet in a release.

What these carriers are betting on is a steady increase in the number of highspeed Internet users. The key users are the ones tapping into high-bandwidth applications such as Napster.

Napster alone accounts for 3 to 4 percent of Internet traffic and users often sign up for high-speed Internet access just for the use of this application.

Ford Cavallari, executive vice president of Boston telecom research firm Adventis Corp. says, "All you need is a couple dozen [applications like Napster], and all of a sudden you have no bandwidth."

These Napster-like applications are what broadband carriers are counting on to push the demand of bandwidth to the industry's projected supply.