A surplus or "glut" of optical fiber and optical-fiber cable that was manufactured in 2001 is being traded around by users who either don't need it or who are seeking a bargain. According to KMI Research (www.kmicorp.com), this phenomenon will lessen the amount of new fiber that users will require this year.
KMI, a Providence, RI-based firm that studies optical-fiber cable and production trends, describes the glut as a market correction, coming after two years of unprecedented volume demand for cabled fiber.
"People went through a big boom of network construction in the past few years," says KMI analyst Patrick Fay. "They had access to a lot of money, and got the funding to build up their networks and compete with the incumbents. But the market couldn't support all those operators, and there has been a contraction."
A combination of factors led to the glut, starting with the demand for bandwidth and Internet data requirements and the resulting huge surge in network construction during the past few years. This surge was partly fueled by the passing of the 1996 Telecom Act that was designed to inspire competition in service areas and foster a global market.
KMI reports that the surplus began as end users were purchasing optical fiber to fulfill their growing bandwidth requirements. But much of the cable was made and delivered to network operators in the challenging economy of 2001, and they were suddenly left without the funds necessary to install or equip it. This led to a buildup of excess inventory.
"Several million kilometers of fiber cable had been produced, and then there was a drop-off in demand," says Fay. "It didn't get installed, and it's been floating around in the market."
According to Frank Murawski, president of FTM Consulting ([email protected]), "The real reason is many of the telecoms reduced capital expenditures, not only for telecommunications near the switch, but also for cable. That is the principal reason the market is so deteriorated."
By "floating around," Fay means some end users are probably reselling their surplus optical fiber to other end users or network operators. They were forced to do so, he says, after calling a halt to their own expansion plans. "There just wasn't the market to pay the bills as they came due, or to service the debt to build their networks," says Fay.
Some end-users who need optical fiber are also trying to find deals in bankruptcy proceedings, which is helping them find fiber at bargain basement prices. "They are trying to find fiber that can be bought at a cheaper price so they can expand their networks without the cost," notes Fay.
As a result, Fay says the demand for newly manufactured optical fiber is now down between 5% and 10% from 2001. Demand for fiber in 2001 was already down 10% from 2000.
KMI predicts that the turnaround will be slow. Fay says companies are expected to take a more cautious approach to expansion for the next few years, thus slowing the need for new fiber.
"There was a lot of money flowing into that sector which did support the buildout of all these network operators," says Fay. "The money since then has been largely withdrawn, and people are much more skeptical or leery of just jumping in with both feet and asking questions later."
Fay says he does not see a noticeable turnaround until around 2004. "It's just that the big driver in demand was in the last couple of years when we really saw a huge spike in long distance here and in Europe. And those have both gone away. There's no reason to suspect that anything like that will come along in other regions."
This isn't to say that there won't be "opportunities" in the market, Fay says. The need for metropolitan networks and fiber-to-the-home still represent drivers for optical-fiber manufacturers. He believes the fiber-to-the-home market, for example, will begin to truly take off in earnest around 2005.
But the volume of demand will be tempered compared to what it was, he says. He says companies will be more focused on managing their revenues and seeking profitability than taking on more debt in order to build new networks.
-Brian Milligan
