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Telecom's Fiber Pipe Dream

Upstart firms saw riches in circling the globe with high-capacity optic cable. Instead, they were laying the foundation for their own downfall.


The world's phone calls, faxes and e-mails zip through strands of glass no thicker than a human hair, riding across countries and continents on pulses of multicolored light.

The strands are bundled in cables that run beneath city streets, through mountain passes and under the seas.

The cables were laid by a band of upstart companies that spent $50 billion or more in the last few years to wire the planet. These massive networks will serve the public for years to come, delivering the electronic goods of the Digital Age.

But the companies that built them are not celebrating. Many are in financial ruin. The recent collapses of Global Crossing Ltd. and other communications firms have roiled financial markets and cost investors and employees tens of billions of dollars.

How did such a triumph of engineering leave so much corporate wreckage?

News reports of Global Crossing's meltdown have dwelt on accounting sleight of hand and extravagant executive pay. But what actually drove the company and others like it into the ground was an epic miscalculation.

These upstarts bet that if they built communications networks with far more capacity, or bandwidth, than had ever been available before, customers would rush to use them.

The network builders employed new technology that crammed much more data onto each strand of glass. This enabled them to slash prices for long-distance data transmission well below the rates charged by established networks, such as those of AT&T Corp. and British Telecom, that used older equipment.

The newcomers believed that the combination of low prices and abundant bandwidth would unleash a frenzy of activity on the Internet. Consumers and businesses would pay for all kinds of services that previously had been too expensive. People would watch Web movie channels on their TV sets. Doctors would diagnose illnesses via the Internet. Corporations would hold video conferences with employees around the world.

The problem was that too many companies had the same dream, and they built too many digital toll roads to the same destinations. The prices commanded by long-distance networks did drop--but much more steeply than the newcomers expected. And the demand for their services did rise--but not nearly as much as they had banked on.

As a result, many of the upstarts couldn't bring in enough cash to pay interest on the money they borrowed to lay all that cable.

Their plight is a textbook example of the boom-and-bust cycle of high-tech capitalism. It illustrates how technological innovation, plowing relentlessly forward, can make companies and then break them.

The financial outlook is not universally bleak--many network operators remain healthy, and some regions are not overloaded with fiber. But on many of the routes that drew the heaviest investment, such as those between the United States and Europe, the bandwidth glut is likely to remain for five years or more.

"People have laid huge amounts of fiber in the ground," said Internet analyst Tony Marson of Probe Research Inc., "and there is a distinct possibility that quite a lot of that will never actually see any traffic."

Explosion of Internet Traffic Fueled Demand

If any one person inspired the burst of network building, it would be an English computer scientist named Tim Berners-Lee.

The expert in storing and retrieving data invented the World Wide Web in 1989 while working at a European nuclear research laboratory.

Before then, Internet users had to type arcane computer commands to search for and view files on the network. Berners-Lee devised a way to present documents, pictures and graphics on electronic pages that could be retrieved with the click of a mouse.

The new technique transformed the Internet from a hard-to-use research tool into a communications medium for the masses.

Two developments in the early 1990s aided that transformation. First, in 1992 Congress lifted the ban on commercial uses of the Net. Then, in 1993 and late 1994, the first easy-to-use browser programs were released, simplifying the task of viewing or building a Web site.

Up to that point, Internet use had doubled every year or so. Afterward, traffic exploded, increasing tenfold in 1995 and again in 1996, according to researchers at AT&T Labs.

"People thought it could double every quarter forever," said analyst Paras Bhargava of BMO Nesbitt Burns, a Canadian investment bank.

As people and businesses began buying, selling and chatting online by the millions, it seemed that no amount of Internet bandwidth would be enough.

"All these [dot-com] companies were cropping up, it seemed weekly, and there was no end to that in sight," said Glenn Jasper of Ciena Corp., a telecom equipment manufacturer in Maryland. "So the conventional wisdom was we've got to grow the capacity of our networks not for the traffic that's out there now or even next week but for a year from now."

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