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TeleChoice Analysis: TeleChoice has published numerous books and white papers that focus on the information needs of service providers, and new categories of technologies and solutions. Additionally, several TeleChoice executives contribute articles in leading business and industry publications.

TeleChoice - TeleSparks

On occasion, we will share with our friends throughout the industry our views on major events and issues in the telecom industry.
We will use TeleSparks as the primary vehicle for sharing these (usually highly opinionated) views and we welcome your feedback.

TeleSparks is authored by Danny Briere, TeleChoice Chief ExecutiveOfficer, with input from others throughout the TeleChoice organization.

To subscribe to TeleChoice TeleSparks and Digest, tell your friends and colleagues to email join-TeleSparks@list.telechoice.com with "JOIN" in the subject of themessage.

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TeleSparks Archive

TeleChoice TeleSparks - Fiber Glut Revisited

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The News
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As Global Crossing, Williams, Qwest, WorldCom, and others 
face financial challenges, the recurring theme in the business 
press is: "The telecom industry put too much fiber in the 
ground creating vast oversupply problems that are destroying 
the industry."

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The TeleChoice Take
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The assumption that carriers’ financial problems are caused by 
an oversupply of bandwidth or fiber is not just dead wrong 
it’s dangerous. Wrong analysis leads to wrong solutions that can 
do more damage than the original problem.

Over the past couple of years, TeleChoice has performed the 
most extensive analysis ever published of long haul fiber supply 
and demand between major U.S. markets. The results provide a 
clear picture of the baseline situation, a flexible modeling tool 
for examining future supply/demand under different scenarios, and 
the ability to marry these scenarios with financial modeling tools 
to understand the economic impact of these different scenarios.

Current Situation

The baseline for this analysis is July 1, 2001. The TeleChoice Model 
for Advanced Capital Planning (MADCAP) models the dark fiber and 
lit capacity of the 29 carriers that control the fiber on the major 
routes connecting the Top 12 telecom markets. MADCAP then 
matches that supply with the demand for transport capacity on those 
22 routes resulting from end-user technology and application 
adoption trends. The July 2001 baseline uses the best data on 
supply and demand drivers available directly from carriers and 
from other resources.

Based on this analysis, as of last summer, it was completely 
inaccurate to assume a vast glut of lit capacity, as many in the 
business press were claiming at that time. In fact, of the 22 
routes modeled, only 4 had enough excess capacity to be 
considered in "glut." Of the remaining 18 routes, 14 were at 
"full" capacity (at or above the threshold where carriers historically 
have created new capacity), and the other 4 were approaching 
that threshold.

Bottom line, the industry was effectively managing the amount of 
lit capacity to meet the current market demands and was far 
from a "glut" scenario. If anything, the past 10 
capital-constrained months of operation have made this situation 
more true. Carriers are creating new capacity solely based on 
new demand from customers.

The fiber situation is less clear. Although only 22% of the fiber on 
these routes had been lit as of last July, this is a reasonable amount 
and should not be viewed as foolish overbuilding by the industry. 
Most of the constructed fiber in this country has been built in the past 
5 to 7 years. Obtaining rights of way, managing construction 
projects, and digging up people’s backyards is an expensive and 
painful process -- one no carrier wants to have to repeat every 
few years. Therefore, fiber construction projects are designed 
to provide enough fiber to optimally meet demand for the next 
20 years. Within this context, at roughly one quarter of the way into 
this 20-year cycle, 22% (or today’s 23% to 25%) is a reasonable 
level of utilization.

Future Scenarios

TeleChoice never intended to predict the future levels of supply 
and demand. However, we have created a tool enabling anyone to 
plug in different assumptions about demand and supply drivers 
(e.g., business and consumer adoption of new broadband 
technologies and implementation of new transport technologies) and 
to understand the resulting impact on demand for lit transport 
capacity, supply of lit capacity, and demand for dark fiber on a 
route-by-route basis. Obviously, these are answers of extremely 
high interest to all players in the industry.

Although we’re sure you have your own scenarios you’d like to 
run (contact us if you’d like to learn how), to satisfy overall 
burning curiosity we have used MADCAP to model a set of 
very interesting future scenarios.

In short, the factor that has the greatest impact on future 
bandwidth demand is the level of adoption of new broadband 
services by business customers. Specifically, metro ethernet 
services represent an order-of-magnitude increase in capacity 
available to typical business users and, therefore, represent 
tremendous increases in the demand placed on long haul 
transport networks.

Consider three contrasting scenarios around the one variable 
of business adoption of metro ethernet services:

1. If Yipes’ bankruptcy filing is a leading indicator of the 
complete collapse of the metro ethernet services market (which, 
of course, we don’t believe) and business broadband 
connectivity continues to be driven by DSL and TDM 
connectivity options, the 18 "healthy" long haul routes will continue to 
be managed to balance supply/demand, the 4 "glut" routes will 
achieve supply/demand balance by 2005, and the amount of fiber lit 
on these 22 routes will increase to nearly 30% by that year.

2. However, if the new entrants, RBOCs, and IXCs have even 
slight success with their current and future metro ethernet 
offers, achieving adoption rates of 2.5% of Internet-connected 
business locations by 2005, then ALL the fiber will need to be lit on 11 
of the 22 routes in our model.

3. Further, if service providers have moderate success with 
metro ethernet services so that 5% of connected business locations 
use these services, only 2 of the routes will have ANY unlit fiber 
left.

Although all 3 of these scenarios are relatively conservative 
compared to the historical pace of adoption of new broadband 
services, we imagine 2 of the 3 are beyond your wildest imaginations 
of the amount of fiber that will be lit over the next few years.

No Harm, No Foul? So what? Even if it’s wrong to say there’s a glut 
of fiber or a glut of capacity, the carrier segment is clearly 
under tremendous financial pressure. Being factual about 
the supply/demand situation doesn’t magically fix the 
economics. Where’s the harm in pointing to the wrong problem?

For starters, focusing on a mythical suspect keeps us from catching 
the right offender. If we spend all our time trying to fix a problem 
that doesn’t exist, we aren’t spending enough time trying to fix the 
very real problems in the industry.

So What Is the Real Problem? If you’re with us so far, you might 
now believe that the problem ISN’T that too much fiber was built or 
lit. The fundamental problem is that too many COMPANIES were 
funded to build and light that fiber. More precisely, on any given 
route, there were too many construction projects required to build 
the right amount of fiber.

We can clearly see the two-fold impact of this mistake:

1. It cost way too much money to build the right amount of capacity.

2. There are way too many players competing to get to a 
sustainable market share level, resulting in fierce and irrational 
price competition.

Dealing with the first issue, consider the Chicago-Denver 
route. Approximately 800 fibers are constructed along that route, 
and by our analysis, this is actually about the "right" amount of 
fiber. However, that fiber was constructed by 8 different companies. 
If the capital markets had rationally funded that 
infrastructure opportunity, that fiber should’ve been built by 2 or 
3 different companies. Since we estimate the cost of the fiber 
and related materials is approximately 20% of the total cost of 
each construction project, then, as an industry (and, considering 
the impact on the capital markets, as an economy), we overpaid 
by 150% in putting that fiber in the ground. Since carriers funded 
their construction projects through a combination of debt and 
equity, this has resulted in the tremendous debt levels seen in 
the industry today.

Once these competing players were in the market, they had 
established a tremendous cost basis that needed to be covered 
through network revenues. This business is very much driven by 
scale economics -- to achieve a competitive per-unit cost position, 
a player must achieve a certain level of scale and utilization. 
Scale comes from lighting the fibers (which is expensive); 
utilization comes through sales.

Historically, in asset-intensive industries, sustainability has 
required approximately 15% to 20% market share, 
which mathematically tends to result in no more than 3 successful 
major players in each market. With anywhere from 8 to 10 
new competitors on each route, obviously not all of them can achieve 
a sustainable level of market share. The result has been frantic 
and irrational competition for each point of share, resulting in 
the precipitous price declines we’ve seen for transport 
capacity.

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What's Next?
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If you believe the problem is oversupply, the only way to fix it is 
to create tremendous levels of new demand. However, this isn’t 
an oversupply problem.

Since the problem is there are too many competitors and as a 
combined entity they spent too much to create the right amount 
of capacity, the solution is a bit more complex and painful. There’s 
no way to recover the $tens of billions that were wasted by 
inefficiently building our fiber networks. That waste will need to
 be written off sometime by someone -- the sooner the better for 
the recovery of the industry. Similarly, the number of 
competitive players will need to be significantly reduced -- to at most 
3 to 5 major players -- before we will see a return to 
rational competitive behavior. This reduction can happen 
through shutting down and liquidating current players or 
through combining multiple smaller players into a single sustainable 
new competitor. Unfortunately, the individual best interests of 
lenders and investors stand in the way of this process happening 
very quickly. (This topic was covered in some depth in the first issue 
of TeleSparks which is available at 
http://www.telechoice.com/inprint_telesparks.)

Beyond these fundamental structural issues, the industry must 
address other critical issues. The current offer/pricing structure for 
IP services is flawed and cannot lead to profitable growth. In fact, 
our financial analysis of the implications of this flaw under 
different MADCAP scenarios indicates that this issue 
becomes devastating under the high-demand growth scenarios 
that would be favored by those trying to "fix" the industry problem 
if they believe the problem is a fiber/bandwidth glut. We will cover 
this topic further in an upcoming TeleSparks issue.

What Can You Do?

We strongly encourage you to stop and consider the implications of 
this situation on your business. Specifically, consider these key issues:

- If you’re a carrier, carefully evaluate what it will take for you 
to achieve a sustainable scale position, and what impact the 
coming structural disruptions will have on your business. Where 
should you focus your efforts? How can you best weather the 
likely extended period of uncertainty and consolidation? Are 
there portions of your business you should exit/outsource? Is a 
strategic combination the best way to achieve sustainability and 
the objectives of your stakeholders?

- If you’re a technology vendor, consider how these issues affect 
your opportunities. How can you best overcome the extended 
inertia within your customer base caused by ongoing uncertainty? 
Can you position your solution as an enabler of consolidation, easing 
the integration of merged companies or acquired assets? Does 
your technology simplify the transition from owned to 
outsourced operations? Can you be part of the solution to 
accelerate your customers’ path to sustainability?

- For both carriers and technology vendors, what role should you play 
in fixing the fundamental challenges with today’s IP services?

Through challenging times such as these, strategic focus is 
critical. Clearly defining and crisply communicating how you are part 
of the solution will be essential in retaining or regaining confidence 
from your customers, investors, and employees. Let us know if we 
can help.

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For Further Reading
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If this topic interests you, we recommend you download several 
white papers for free from the TeleChoice Website 
( http://www.telechoice.com/inprint_whitepapers.htm ):

MADCAP Report Overview and Methodology
( http://www.telechoice.com/action_analysis.asp )

TC Perspectives: Super Broadband Deployment Initiatives
( http://www.telechoice.com/inprint_RegMailer3.htm )

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Need Some Help?
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TeleChoice helps companies everyday better position their firms 
and products for success, whether re-examining fundamental 
business strategy or clearly communicating unique position and value 
in today’s tough marketplace. Contact us at info@telechoice.com. +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+

About TeleSparks: On occasion, we share with our industry friends 
our views on major events and issues in telecom. We use TeleSparks 
as the primary vehicle for sharing these (usually highly 
opinionated) views, and we welcome your feedback. Feel free 
to forward these on to others, but please copy us on the messages 
so we have a sense of the extent of distribution of our views.

TeleSparks is generally authored by Russ McGuire, TeleChoice 
Chief Strategy Officer, with input from others throughout the 
TeleChoice organization. You may contact Russ 
( rmcguire@telechoice.com ) or your favorite TeleChoice contact 
to share your thoughts on these matters.


 

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