Fiber emerges as a pervasive technology in world economy

By STEPHEN N. BROWN

Fiber has a new status in the world economy and is becoming another nuts-and-bolts economic issue like electric power and oil.

Fiber optics has left behind its status as a "niche technology" and has become pervasive enough to permeate ordinary economic activity. The technology is affecting nations` international trade policies, the development of satellite markets, and the pricing of Internet services between nations. When President Clinton made his tour of South America last October, one goal was to advise the Brazilian government to reconsider its policy of placing high tariffs on U.S.-made fiber-optic cable and equipment. The reconsideration was prompted by the chairman of the U.S. Senate Foreign Relations Committee, Sen. Jesse Helms (R-NC). In a letter to President Clinton, Helms wrote, "It is especially regrettable that the Brazilian government has adopted discriminatory taxes...making it next to impossible for American optical-fiber producers" to compete in Brazil.

Direct export is not the only way to reach Brazil`s market. Fiber producers have the option of side-stepping the tariffs by building production facilities inside the country. Pirelli Cavi S.p.A. of Italy has already followed this strategy because Brazil accounts for 53% of Latin America`s telecommunications traffic and is expected to be one of the most lucrative telecommunications markets in the next decade.

Another way around a tariff is to export not from your own country but through another one that has easier access to the target market. Mexico`s Condumex, a major producer of optical supplies, has entered into a long-term contract to channel Corning Inc.`s fiber through Mexico to the broader Latin American market (see Industry Update, page 3).

Although tariffs are meant to protect domestic industry, they sometimes aid producers that stand between the original point of export and the target market. Brazil`s policy may benefit Condumex to a small extent, but the entire picture--the tariffs, Helm`s complaint, and the Corning-Condumex partnership--terminates fiber`s "niche status" and elevates the technology to the "pervasive" status, as governments worldwide view fiber not only as a technology but as a required resource for economic growth.

Perhaps the strongest sign of fiber`s new status as a pervasive technology lies in its effect on satellite markets. Last summer, the chief executive of comsat--which was founded in 1962 and combined the satellite programs of nasa, the U.S. Department of Defense, and at&t--invoked the competitive pressure of fiber optics to release comsat from the regulatory oversight of the Federal Communications Commission (fcc). The executive, Betty Alewine, told the Senate Commerce Subcommittee on Communications that "competition among satellites--and between satellites and fiber optics--is robust and growing. Undersea fiber-optic cables and competing satellite systems offer consumers an abundance of choices." Alewine asked that the fcc treat comsat like a non-dominant carrier and that Congress remove the ownership, borrowing, and equity restrictions imposed on comsat by its 1962 enabling legislation. According to Alewine, such changes would allow comsat easier access to capital and provide an orderly way to privatize not only comsat, but also its international counterpart, intelsat.

Privatization risky

An orderly transition from public to private ownership is not likely in the near term. The continuing improvements in fiber technology and submarine cabling make privatization a riskier project, a fact emphasized by the mediocre bond ratings of Motorola`s 72-satellite Iridium project. In the past two years, the project placed more than $2 billion of bond issues with private holders. In each instance the bonds received a mid-level "B" rating from Moody`s. The rating agency commented on Iridium`s most recent bond issue: "We still view the risk to be substantial [because of] the rate and degree of consumer acceptance and usage, price elasticity for satellite telephony, the timing and receipt of a myriad of regulatory approvals, completion and successful operation of the network, and potential competition from other satellite systems and terrestrial replacements."

Moody`s caution is appropriate. Over the next 10 years, various governments and companies are expected to launch another 600 to 700 low-earth-orbit satellites worldwide. Some of these will be from Motorola`s Iridium project and many more will stem from Teledesic, the joint project between Microsoft and Boeing. The expanded capacity will place downward pressure on prices for international and domestic telecommunications. The pressure will intensify because wavelength-division multiplexing (wdm) and dense wdm are expanding the capacity of in-place fiber in the short- and long-haul markets. Also, in the long-haul markets, fiber`s repeaterless span-distance is improving and lowering costs. These characteristics make fiber a long-term competitive threat to satellites and are sure to increase the financial risks in the international telecommunications markets. The privatization of intelsat may take a long time unless the private sector is allowed to buy in at rock-bottom prices. This scenario is likely because there are indications that the satellite business is becoming too competitive for the participants, and rather than face knockdown competition, the large participants buy the little ones.

As an example, Loral Space & Communications Ltd., whose market value is near $4 billion, recently gobbled up Orion Network Systems, which had a market value near $500 million. Shareholder and fcc approval is expected in March. The chief executive of Loral explained the purchase in oblique terms: "Importantly, in line with our established long-term strategy, Orion expands our satellite services business into new markets and beyond our domestic borders. Orion complements and extends our current resources in...Globalstar...contributing a key networking capability positioned to serve the fast-growing, multibillion dollar corporate data and Internet markets."

Within a month of the announced buyout, Loral was in China negotiating for joint ventures to enhance China`s ability to build and launch advanced satellites. China`s Ministry of Posts and Telecommunications is especially interested in using Loral`s Globalstar as a platform for mobile communications. This would fit with China`s telecommunications infrastructure policy, which relies heavily on the nationwide development of wireless loops. But Globalstar is not the only system that could be used as a platform. Orion Networks had already scheduled the January 1999 launch of Orion 3, aimed at serving the Asia-Pacific region. Loral`s purchase of Orion may mean that China has one less independently priced platform to choose from as the country increases its teledensity.

Consolidation, mergers, and buyouts are an industry`s typical responses to downward pressure on prices, whether the source is competition or surplus capacity. The satellite business is no different. As it expands, a likely danger is the further development of monopoly-like and cartel-like pricing for communications services. The danger can be minimized by expansion of fiber-optic production facilities and the deployment of domestic and international fiber networks. A case in point is the recent joint venture among Telstra of Australia, Kokusai Denshin Denwa of Japan, Hong Kong Telecom, and dacom of South Korea. The companies intend to interconnect with each other by laying more fiber-optic submarine cable. The existing circuits between these countries frequently depend on U.S. networks. The companies want to reduce their vulnerability to the pricing strategies of U.S. carriers, especially with regard to the way these carriers set prices for Internet service, whether it is carried by satellite or cable.

Telstra is quite vocal in its complaint that the international pricing of Internet services provides a $300 million annual subsidy to American carriers. The problem, according to Telstra, is that the pricing does not reflect the actual capacity devoted to the two-way flow between the United States and Asian countries. When the Internet was a fledgling in Australia, Internet traffic was primarily to the United States, but there was little return traffic because few Americans were accessing Australian sites. Therefore, American carriers insisted that Australian carriers pay 100% of the capacity costs for Internet connections between the two countries. Now the traffic pattern has shifted--30% is from the United States to Australia and 70% flows in the opposite direction. Despite the change, U.S. carriers have not changed pricing policy. Telstra`s managing director of international carrier business, John Hibbard, has decried the policy, saying, "[T]he global subsidization of the United States...will disadvantage users in all other countries and potentially undermine the viability of the Internet." But it is also true that the policy motivated the creation of the Asia-Pacific Internet Community and the development of more communications capacity, which will eventually produce more downward pressure on prices. q