The Wall Street Journal

September 26, 2002

Technology Races Far Ahead Of Demand and the Workplace

By DENNIS K. BERMAN
Staff Reporter of THE WALL STREET JOURNAL

Who should be blamed for the giant telecom wipeout? It's easy to throw
darts at the telegenic dealmakers who headed the fallen industry. But
these days, even behind-the-scenes scientists such as William Brinkman
are feeling pangs of responsibility. "Maybe we should have been less
smart," rues Dr. Brinkman, a distinguished researcher who spent 35 years
at Bell Laboratories.

Dr. Brinkman and hundreds of other telecom researchers are now beginning
to understand the economic force they unleashed on the industry during
the mid and late 1990s. Perhaps never before has the efficiency of an
industry's technology gotten so far ahead of demand, creating a glut of
capacity that will take years to work off -- and crippling dozens of
companies in the process.

Scientists perfected once-exotic methods for cheaply sending vast amounts
of voice and data, such as Internet traffic, over fiber-optic lines.
These advances far exceeded the pace of telephone-industry innovation in
the 100 years before it. Prior to 1995, telecom carriers could send the
equivalent of 25,000 one-page e-mails per second over one fiber-optic
line. Today, they can send 25 million such e-mails over the same fiber
strand, a 1,000-fold increase. Yet the cost of making that upgrade rose
by just a few times over the 1995 price, and in some instances actually
declined.

The gap between the capacity of long-distance phone networks and demand
is now so great that even if all the Internet traffic among the top 20
U.S. cities were routed through Chicago, only one-quarter of that city's
available capacity would be used, estimates research house Telegeography,
Inc.

More than 60 telecom carriers have filed for bankruptcy in the last two
years, in part due to price wars created by this overcapacity. And makers
of telecom gear have undergone massive downsizings as sales cratered and
earnings evaporated.

Of course, the telecom mess wasn't caused entirely by technical advances
-- wildly optimistic business plans, biased analysts and questionable
accounting also played a big role. Yet consider the main 1990s
improvement in phone equipment: Before 1995, it was possible to transmit
only one color of data-carrying light through the glass lines that are
the foundation of almost all medium- and long-distance phone networks.

But new technology called dense-wave division multiplexing, or DWDM,
essentially split that pulsing light beam into a spectrum of colors,
thereby multiplying the available wavelengths, and capacity, by up to 320
times (though most systems today only use eight to 32 wavelengths).

Just one outcome of the advances: In the nine months it took Flag Telecom
Holdings Ltd. to design a fiber-optic cable system across the Atlantic
Ocean, the now-bankrupt carrier was able to double the amount of capacity
over its original plan -- at little additional cost.

This isn't the first time technology got ahead of a marketplace's ability
to absorb the advances. Computer microprocessors in recent years have
possessed more processing power than was generally needed, causing
marketing problems for their makers. Advances in agriculture have helped
farmers improve yields so much that they have almost no pricing power.

Yet the technology overhang in telecom is unique in several ways. "It's
rare that a technology is so far ahead of demand," says Dr. David Payne
of England's Southampton University, who is often regarded as the
grandfather of the capacity-multiplying technology. Second is the sheer
amount of money that had been staked on its benefits. Investors have
poured some $757 billion into telecom stocks and bonds since 1996, says
Thomson Financial, much of it on the bet that technology would create
profitable, low-cost competitors to established phone carriers.

When new phone carriers piled into the market in the late 1990s, they
clamored for the hottest technology to differentiate themselves. In
August 1999, for instance, Global Crossing Ltd. touted a technology
upgrade that was completed 18 months ahead of schedule. Global Crossing
and others proceeded to offer customers low-cost deals for vast amounts
of capacity. When demand failed to pick up as expected in 2000 and 2001,
the financial structures of these companies crumbled.

"There was a fever," recalls Michael Birck, chairman of equipment-maker
Tellabs Inc. "People were advertising how much they could pack into a
single fiber, and it went up to unbelievable numbers."

The financial fallout has put telecom researchers in a difficult corner.
They are deeply proud of their progress, and bristle at the idea that
they should hold back innovation until the business catches up. But they
also recognize that their work -- in the hands of eager businesspeople --
has helped bring the industry to its standstill.

Andy Evans, chief technology officer at FLAG Telecom, shifts much of the
blame to the equipment makers. They provided billions of dollars of
so-called vendor financing to the carriers. That supported the purchase
of the most advanced systems, which helped fatten revenues during the
bubble, Mr. Evans says. Now, equipment makers such as JDS Uniphase Corp.,
Nortel Networks Ltd. and Lucent Technologies Inc. have had to make
massive cutbacks to stay alive.

Southampton's Dr. Payne keeps the faith that the industry will recover,
albeit after deep consolidation. He reasons that eventually all the
capacity he helped create will be filled by new, bandwidth-hogging uses.
For now, though, he can't forget how one leading industrialist, whom he
declines to name, admonished him at an industry conference a few years
ago. "He said, 'You guys have to stop inventing things,' and he was
deadly serious."

Write to Dennis K. Berman at [log in to unmask]

Updated September 26, 2002


VICUG-L is the Visually Impaired Computer User Group List.
To join or leave the list, send a message to
[log in to unmask]  In the body of the message, simply type
"subscribe vicug-l" or "unsubscribe vicug-l" without the quotations.
 VICUG-L is archived on the World Wide Web at
http://maelstrom.stjohns.edu/archives/vicug-l.html