Dark fiber future darkens

Bandwidth prices plummet on both sides of the ocean Bandwidth prices are dropping like a lead-lined safe on both sides of the Atlantic. Analysts estimate that prices of dark fiber have fallen 60% in Europe in the past year - up to 80% on "fat routes" such as London-to-Paris. In the U.S., analysts say prices have fallen up to 40% in the past year.

The same dynamic is working on both sides of the pond, but in the U.S. it's been happening longer - and in a bigger market. In Europe, everything has happened in the past two years.

Consider timing, regulation and technology. We may be coming to the end of the longest bull market in history - an entire decade in which ideas (sometimes good, sometimes not) and money constantly collided. That markets would be deregulated, that technology would improve by leaps and bounds when investors were ready to be separated from their cash, is the greatest timing imaginable.

Domestically, of course, deregulation pre-dates the bull market and technological advances. It began happening in stages in 1982. "In the U.S., which deregulated in 1982, competition has been slower and over a longer period of time," said Donald Noonan, director of bandwidth sales and trading at Band-X, a London-based trading exchange. "So you have a range of different networks, and the fact is that it's a bigger country."

Even so, many networks were built and expanded in the U.S. in the past few years, not least by companies such as Level 3 Communications and Qwest Communications, which weren't even around when de-regulation began. The big bubble of bandwidth came online in the U.S. about 18 months ago, said Sue Uglow, a senior telecom analyst for Ovum, a London-based consultancy.

In Europe, the long-distance business was deregulated all at once in 1998. It was as if a cork had been pulled out of a bottle containing optical fiber and money. More than 24 carriers announced they would build pan-European networks. Backhoes dug up the countryside in the Benelux countries, the U.K., the northwestern corner of Germany and in northern France.

"It's a supply and demand thing," Uglow said. "There's lots of supply coming online."

In addition, there have been considerable technological advances in the past few years - dense wave division multiplexing, more efficient switching and improvements in the fiber itself. As a result, in Europe all that bandwidth is coming online despite the fact that the technology exists to wring the most value out of each fiber. So carriers that started with the intent to provide dark fiber to a hungry market are making less money by providing it. Carriers are buying STM-1s (155 Mb/s) as their standard bandwidth denomination now instead of the E-1s (45 Mb/s) they bought last year, Uglow said.

Voice revenues will account for 13% of European telecom revenue by 2005, said Jonathan Bell, a telecom analyst at Pyramid Research. That amounts to $1 billion, down from $18 billion, or 67%, in 1998. There are so many competitors in Europe now that bandwidth has gone beyond commoditization to what Bell calls "hypercompetition." Carriers are engaging in aggressive price cutting and discounting, in forward pricing and in the use of bandwidth exchanges such as Band-X. The market for dark fiber in Europe will disappear altogether in the next 18 months, Uglow said.

For companies that already built their own networks, the best move is to pile as much value on top of them as possible, analysts said. Providers must offer managed bandwidth, data centers and IP services - anything to keep cash flowing.

IP services are especially important in the U.S., where "everything is moving to IP," Noonan said.

For European operators especially, strategic alliances may be the key to survival. "If you can't build it or buy it, you have to make a partner of somebody who's got it," said a European backbone provider executive who requested anonymity.

Companies such as carrier-based RSL Communications, burdened with debt and still dependent on voice, will have difficulty surviving for the next few years, Bell said. Level 3, COLT and Global Crossing, on the other hand, are "all extracting a value proposition for their customers," Bell said.

Global Crossing's size and its recent deal with data center giant Exodus Communications (Global Crossing sold its data centers to Exodus and got a traffic commitment in return) allows it to expand its data service bundle. COLT, Europe's first real competitive local exchange carrier, boasts 4200 buildings connected with its own fiber. Level 3 is aggressively building its own data centers on top of its fiber network.

For everyone else in Europe, consolidation is looming. As Richard Elliott, Band-X's co-founder and director, put it at a conference earlier this year, "the fat lady may not be singing, but she is most definitely warming up."