trends
In the U.S. communications gold rush following the Telecommunications Act of 1996, buying dark fiber on other carriers' networks helped many providers build-out their footprints. By early 2001, the telecom gold was gone, and the practice of selling intercity dark fiber strands using indefeasible rights of use (IRUs) all but dried up. But even in the current communications downturn, dark fiber still has a role to play—if wavelength leasing doesn't steal the spotlight.
"There is still plenty of isolated activity out there within certain segments," says Gordon Boyes, director of metro fiber services at Level 3 Communications. (Broomfield, CO). Level 3 operates a 16,000-mi intercity U.S. network that interconnects via a transatlantic cable to a 3,600-mi pan-European network. The carrier offers intercity dark fiber as well as fiber pairs in 26 U.S. and nine European metro markets. Recently announced contracts in the United States include metro fiber sales to the city of Washington, DC; the Corporation for Education Network Initiatives in California (CENIC), which will use the fiber to link 40 research institutions across the state; and Cox Cable.
Demand for dark fiber is currently higher in the United States, but the "lifecycles" are similar in Europe, according to Boyes. Today, instead of expanding geographically to operate networks in new markets, many wholesale customers are buying dark fiber assets to remove costs from their networks.
"It used to be that people were investing just to claim they had more miles or to have more PP&E [property, plant, and equipment] on their books," observes Boyes. "A lot of CLECs [competitive local-exchange carriers] for a while thought they traded on a multiple of PP&E, so there was a huge investment to just expand footprint. I think in a lot of ways that's gone. But the true operators that are out there, that have netex [network expenditures], for example, floating around a market, and are looking to put it on an owned network and remove that cost from their business, are still out there buying fiber."
Contract sizes are smaller than two to three years ago, which is reflected in dark fiber pricing—larger contracts (12 or 24 fibers in 10 markets versus two fibers in one market) meant better deals.
On intercity routes, carriers may want to expand between city pairs or add a new city pair, but "we're no longer seeing the material demand for the entire network," states Boyes.
Emerging technologies may also change the market's dynamics. Wavelength services emerged in late 1999 and early 2000 just as the capital environment in telecommunications tightened and the economy headed south. Williams announced an Optical Wave Service in June 1999, leasing point-to-point OC-48c (2.488-Gbit/sec) unprotected wavelengths on a 1-, 5-, 15-, or 20-year basis. Today, many carriers, including the incumbents, offer wavelength services in some form. "Despite all the hype about wavelength services, in many cases where you would have had a fiber exchange a few years ago, there is more flexibility in leasing wavelengths," says David Gross, senior analyst, optical networking, at Communications Industry Researchers (Charlottesville, VA).
"From an intercity perspective, wavelengths haven't really taken a bite out of dark fiber yet," says Stacy Jackson, marketing manager for the transport line of business at Level 3. "You see the demand for wavelengths more on a individual circuit basis where customers are trying to close rings or fill holes in their network." Level 3 sells wavelengths on an intercity basis, but does not offer the services as a standard offering in the metro area.
"There has been a huge bite taken out of dark fiber naturally in a distressed economy," agrees Jackson, "but I don't think it is because of wavelength services. The fact the wavelength services became a viable commercial offering around the same time that the economy crashed helped operators take another look at their buying versus building philosophy, and customers who had a natural tendency to build for whatever reason suddenly took it upon themselves to question that view."
In addition to a tough economic climate, and more capacity options from emerging services such as wavelengths, dark fiber transactions are receiving increased scrutiny, as a few carriers' accounting and disclosure practices—namely, Qwest and Global Crossing—raise questions among angry shareholders, Congress, and the U.S. Securities and Exchange Commission (SEC). In particular, the financial accounting for massive swaps of assets between carriers—almost always involving dark fiber—is now being dissected under the microscope.
"Where it starts to get technical is if it is a like kind exchange," says CIR's Gross, who has a degree in accounting. "Then it gets trickier because in some cases it really isn't a sale. But the problem is that the accounting rules aren't that well defined around this activity."
In early August, the SEC issued new accounting policies for telecommunications capacity swap transactions, making some carriers' interpretations of the former accounting rules invalid. While this action should help, the fallout of all these accounting issues is that swap transactions are now viewed as some sort of shady mechanism.
That's unfortunate, because many "swaps" provide a clear business value—for example, when a European carrier wants to enter the U.S. market such as the dark fiber swap announced by Williams Communications Group and Telia International Carrier in March 2000. On the other hand, there are those in the industry who have always been skeptical of non-monetary transactions, because swapping network assets in effect meant that carriers were giving competitors access to their networks.
"It very much speeded up the rate at which competition evolved," opines Stephan Beckart, research director at TeleGeography (Washington, DC). "If you look at some of the network maps, it is very clear that many carriers bought capacity on the same routes. So they had no basis on which to compete other than price, which drove down bandwidth pricing."
"The word 'swap' has become a dirty word in our industry," agrees Level 3's Jackson. "But I still think there are carriers out there who are willing to do non-monetary reciprocal business, although they may couch it under the term 'partnerships' instead of swaps in the future, and they certainly won't do swaps that don't add any value to their business."
The dark fiber industry thrived during aggressive network investment, has suffered especially on intercity routes in the current tight capital environment, and may end up somewhere in between when industry consolidation takes hold. "[T]here will be more and more need for dark fiber either to interconnect multiple networks that people are bringing together as the result of acquisitions or to use to put traffic over, because they are consolidating multiple networks...shutting down one to make their business more cost-effective," predicts Level 3's Boyes. "As people exit the market, there is going to be a certain amount of demand that's there and fewer competitors, so for those that survive, I think you will see an uptick."
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Major North American 'swap' contract announcements in 2000-01