End of world postponed. Stay tuned.

Nov. 1, 1998

End of world postponed. Stay tuned.

Stephen M. Hardy

Editor in Chief

[email protected]

Last month, the captains of the fiber-optic industry assembled in Newport, RI, for the 21st Annual Newport Conference on Fiberoptics Markets. Hosted as usual by the market research and analysis firm KMI Corp., the conference offered attendees a glimpse into their financial future. The last few conferences had seen the analysts at KMI deliver little that wasn`t good news; the fiber-optics industry has been remarkably robust, and there appeared scant reason in recent years to think the situation would change dramatically anytime soon.

But that was before the global economy started to resemble the La Brea tar pits, threatening to suck entire industries into a quagmire of market depression. Would 1999 mark the start of a slide similar to those experienced by other high-tech industries?

The first night of the conference offered a pair of overview presentations that promised to set the tone for the entire affair. There was good news...and there was bad news.

Richard Mack, KMI`s vice president, went straight to the question on the minds of many during the wrap-up of his opening presentation. His final slide, entitled "Frequently Asked Questions," bore this corker: "Is the fiber-optics market in a slump?" Breathe easy--the answer, in general, is no. Mack said that while certain markets or individual product lines might be a bit softer than some manufacturers had hoped, the fiber-optics industry overall remains quite healthy. He noted that this kind of question might originate most frequently from potential investors, as the fiber-optics industry has been the subject of intense interest within the financial and venture-capital communities now being buffeted by the volatile stock market.

Another question on Mack`s list that strikes a similar chord of worry centered on potential gluts in fiber capacity. This question arises regularly, he said, and he offered the example of undersea networks as a frequent context for such queries. While the advent of wavelength-division multiplexing makes a determination of overall fiber capacity difficult to achieve, Mack said he did not foresee a major glut in capacity in the near future that would stifle the demand for new fiber. He predicted that increasing demand for fiber in access networks early in the next century would help to keep fiber factories in business. However, he also predicted that fiber demand in several markets would peak next year, with only the local residential-access sector and an "other" segment that includes fiber-to-the-desk showing continued growth in the early years of the next century.

The next presenter, analyst Patrick Fay, painted a bleaker picture for niche players in the fiber production arena. Fay, who authored this year`s KMI report on worldwide fiber and cable markets, revealed that 10 fiber manufacturing facilities accounted for 70% of the world`s fiber in 1997. The second tier of manufacturers, comprising 11 facilities, produced 18% of all the fiber manufactured last year. That left the remaining 12% percent of the market to be split by 36 companies. These niche players face hard times because of rapidly falling prices for fiber. Fay said his research indicates that the break-even point for singlemode fiber production is around $25 per kilometer. He also reported that Asian manufacturers predicted singlemode fiber prices would fall to as low as $27 per kilometer in the near future. This would leave margins uncomfortably small for lower-tier manufacturers that could not count on high volumes to ensure a reasonable profit. Fay suggested that several of these smaller companies would be hard-pressed to stay in business.

Yet even Fay`s news wasn`t all bleak. While prices will decline, volumes worldwide should continue to increase, from a predicted 1998 total of 44.1 million fiber-km to 67.2 million by 2002. The U.S., Japan, and China will lead the way in fiber deployment, although the growth rate in the U.S. will not be nearly as great as in the other two countries.

The two evening presentations left the audience with plenty to think about as they trundled off to bed. For most of the worriers, it appeared that it wasn`t quite time to pull on the parachutes and head for the nearest exit. But I wouldn`t be surprised if they decided to keep those `chutes handy, just in case.

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