Raise the demand for fiber

Oct. 1, 2001


The bankruptcies of 'last mile' companies and the recession in the fiber, router, and chip markets make investment capital flee, and it won't return product until demand is reestablished.

When you're down and out, put on a happy face, wipe out that full-of-doubt look, sell fiber and lasers all over the place." These are not the lyrics of "Put On A Happy Face," a song written to lift downtrodden spirits in the Great Depression, an economic catastrophe that lasted from late 1920s until 1946. The Depression's principal economic feature was a collapse of demand-just like the collapse in the fiber business. When the Depression started, no one knew they were in it, thinking instead that the decline would end in a year or two-just like analysts are saying today. The Depression proved at least one thing: Economic recovery means being proactive. If the fiber industry and its brethren just put on a happy face, doing nothing to improve demand for their output, it will be a long wait to recoup investment and bring new products to market, no matter how good they are.

Common wisdom used to be that innovative and cost-saving products are snapped up by the market. That wisdom was disproved by Jacob Schmookler, an economist who in 1966 authored Invention and Economic Growth, a study of investment in an industry and the industry's patenting of new products. He found that highs and lows of investment preceded the highs and lows of patenting and concluded that demand for the industry's goods attracts capital because profit-probability rises as demand increases. He also proved the converse, the lower the demand for an industry's products, the lower the industry's profit potential and the lower the investment in the industry.

German economist Joseph Schumpeter recognized the disconnect between product-excellence and market success. About 100 years ago, he authored The Theory of Economic Development and asserted, "Economic leadership...must be distinguished from 'invention.' As long as they are not carried into practice, inventions are economically irrelevant. To carry [an invention] into effect is a task entirely different than creating it and requires entirely different kinds of attitudes."

Schumpeter saw the entrepreneur as critical to economic innovation. Deregulation supporters use his work to argue that regulation is the same as regulating an entrepreneur and thus a restraint on innovation. But the poor health of so many optics and advanced telecommunications companies-many started by entrepreneurs-suggests they face something Schumpeter did not foresee: a telecom market whose demand for optics and optoelectronic products is constrained by legacy networks, where the owners' business-behavior approaches but does not cross into the explicit antitrust violation known as "refusal to deal," a legal term for "boycott."

A boycott is an often illegal practice where one industry or group refuses to use another's products. A boycott charge can be avoided if the industry buys just enough "foreign" product but still targets most of its capital spending on a preferred technology. Apparently, the charge can also be avoided when the industry argues that "regulatory uncertainty" prevents purchases of newer, better technology. It may seem easy, but gathering persuasive legal evidence of one industry "boycotting" another is difficult, especially when an "economic downturn" or "technology preferences" produce the same result as a boycott. Even if such evidence were readily available, years could pass before a legal resolution.

Industry's first proactive response is the Fiber-to-the-Home Council, composed of personnel from Alcatel, Corning, Optical Solutions, Worldwide Packets, and 41 other companies. Still in nascent form, the Council is a market development group whose mission is to "provide a consistent and accurate view of FTTH" and to make the economic case for FTTH with vendors and users. The distribution system's architecture is not an issue for the Council, which wants to create a virtuous cycle, where the deployment of true broadband infrastructure "enables" better applications that in turn increase the demand for broadband products, according to Robert Whitman of Corning and Matthew Walsh of World Wide Packets.

The Council has not decided if it will pursue a legislative agenda or play a role in the regulatory sphere. To the extent the Council does not, it avoids the riskier and more controversial roles of challenging the telecom incumbents' agendas, which aim to preserve a low-speed status quo telecom infrastructure. The Council's foray into FTTH is sure to have broad effects, not only on fiber but also on the optoelectronic-component industry, which has to prosper for FTTH to succeed.

One optoelectronic product in particular needs to thrive: vertical-cavity surface-emitting lasers in the long-wavelength range. VCSELs have received plenty of media attention in the past year, because they are comparatively easy to couple to fiber and have the potential to extend fiber cheaply and deeply into telecom distribution networks. The problem with many commercial VCSELs, however, is that they are built to operate at wavelengths of 980 nm or less, inadequate for low-loss fiber operating at the 1300-nm wavelength, where silicon, the cheapest of all semiconductors, does not work. Long-wave VCSEL producers have to make semiconductors from expensive alloys such as indium gallium arsenide, gallium antimony, or silicon germanium and compensate for heat buildup in these materials and other problems that degrade the semiconductor. Each step adds expense, but per-unit costs would decline if the demand for optical communication were large enough.

Unfortunately, the collapse in telecom-optics demand makes scale economies harder to achieve and capital harder to find. But long-wave VCSEL producers won't be stranded if the Council is successful, especially if "early adapters" step forward.

Consider Ashland, OR, which has its own fiber network and an economic development goal of making bandwidth an inexpensive input for the city's entire business community, according to Richard Wanderschied, the current director of the city's electric and telecommunications utility. The city has a high-speed data product used by 40 businesses, which buy 100-Mbit/sec and 10-Mbit/sec Ethernet service and send data at these speeds to any point on the city's network. Sustained business traffic to the Internet is limited to 2 Mbits/sec, but bursts of 45 Mbits/sec are occasionally allowed for 15 sec. Ashland also competes in the cable-modem business against Charter Communications, owned by Paul Allen, who has "strong ties to Ashland," says Wanderschied.

The city would be interested in FTTH, provided certain technical problems were solved, according to Richard Holbo, the principal engineer for the Ashland Fiber Network: "FTTH is still expensive; that's why we didn't do it, but we looked at it closely-how are you going to split the wave to get it to the houses?" The long-wave VCSEL producers have an answer. But Holbo brought up a major problem in FTTH, one that the Council has to solve for the entire industry's benefit: "Until the equipment is cheap enough I can't buy it, but unless a bunch of us buy some, it won't be cheap enough."

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.