E-business Watch
Tracking the online media to bring you the key e-business trends

March 12, 2001

Bandwidth Bloat

Growth in Internet use and data traffic is spectacular, with Internet traffic currently doubling every 100 days. But while demand is growing rapidly, backbone bandwidth--the capacity for carrying digital information--is increasing exponentially. So much so that the supply of currently active, or "lit", fibers has already outstripped demand, an imbalance that is expected to persist well into 2005. Adventis, a Boston-based consultancy, predicts that in 2004, 40 percent of the fiber capacity in the U.S. and 65 percent in Europe will go unused.

The bandwidth glut is the result of a classic supply-demand mismatch. On the supply side, three factors are driving capacity: the dramatic increase in the number of fibers laid is increasing the overall size of the backbone; significant breakthroughs in optical networking technology are dramatically increasing the capacity of each individual fiber; and caching technology is making the transmission and retrieval of information much more efficient.

Endless Supply

The Internet economy's frenzied pace and projected growth has driven traditional telcos and new carriers such as Global Crossing and Level 3 Communications to lay down millions of miles of fiber optic cables. Many of these networks run between 96 and 144 fiber pairs per conduit, with each pair able to deliver a phenomenal amount of data. The bandwidth from a single carrier's network, like that of Global Crossing or Qwest, can carry all U.S. and European data traffic 20 times over, according to research consultants at Renaissance Strategy.

Perversely, since most of these companies' businesses depend on the rollout of transnational or global networks, they have no choice but to continue until their networks are completed. The result, according to estimates by Renaissance Worldwide, is that the amount of fiber available by 2002 will be 500 times greater than the 23 million miles of fiber laid in 1998.

However, the number of fibers being laid is just one part of the supply story. Continuous advances in transmission amplification and switching, in the form of dense wave division multiplexing (DWDM), mean that a single fiber strand can carry more data over greater distances.

Dense Wave Division Multiplexing (DWDM)

Fiber optics uses wavelengths of light to transport information along optical fibers. Initially, each fiber carried 2.5 gigabit per second (gbps) of information for 200 miles. However, DWDM, which was first deployed as Wave Division Multiplexing in 1995, splits a single beam of white light into colored strands, producing additional wavelengths that each carries 2.5 gbps of information for 1,500 to 2,000 miles. Through DWDM, a single fiber is currently split into an average of about 32 wavelengths. This is expected to move to 80 wavelengths in 2001. Indeed, WorldCom boasts that it will soon achieve 160 wavelengths per fiber.

Disappointing Demand

Demand, for its part, has failed to keep apace with the supply. Streaming media has disappointed as a bit burner because of technological constraints, slow rates of consumer broadband adoption and access bottlenecks. In the meantime, the search for broadband "killer applications" continues to languish. Video conferencing and virtual reality, for example, have been "about to take off" for over a decade, but neither has been able to deliver sufficient quality at a price to drive widespread adoption.

Demand is further constrained by "the last mile problem" --the difficulty of getting a high bandwidth link connecting the backbone to the local loop of homes and small businesses. Despite the tumbling price of optics, the cost of extending fiber optics into residential communication networks capable of reaching millions of homes will remain out of reach for several years to come. Although DSL and cable modem providers are picking up the slack, their pace of deployment is slower than originally anticipated. Emarketer predicts that by 2003, 40% of connected households will access the Internet through broadband.

Winners And Losers

With the oversupply of bandwidth inevitably come losers and winners. Losers include the telcos and carriers themselves, as the combination of falling prices and massive debt loads cripple all but the strongest companies. Lehman Brothers estimates that newly founded communications companies such as Level 3 Communications and 360Networks collectively have $74 billion of debt and an interest obligation of around $7 billion per year. In order to meet their debt obligations, many carriers have no choice but to enter no-holds-barred price wars in hope of generating enough cash to stay alive.

The entire food chain is suffering. Powerhouses such as Nortel and Cisco are feeling the effects of the carriers' weaker demand for their communication hardware. Indeed, reflecting the dire straits of the industry, the stock markets have shaved more than 50 per cent off the valuations of PSINet, AT&T, Level 3 Communications, Nortel and Lucent over the past 12 months. Meanwhile, ambitious startups such as Iaxis (network service provider) and GST Telecom (integrated phone company), have failed, while others like Intermedia (owner of Digex Web hosting company) have been forced to auction themselves off to the telco giants.

Of course, there will also be winners. Network service companies that utilize the backbone to deliver their offerings--such as network management, application hosting, and data center operators--stand to benefit greatly from the cheap bandwidth. Metropolitan area network providers Yipes and Looking Glass, for example, are able to preserve gross margins while simultaneously cutting prices.

Some niche companies also benefit from the push of telcos and carriers to create bandwidth-intensive applications. For example, sales of video gateways, which enable digital video to be received through a variety of communications networks and displayed on televisions, are soaring following video-on-demand pilots being conducted by Enron (with Blockbuster) and major telcos in North America, Europe and Asia. Cahner In-Stat Group, an IT research firm, estimates that the video gateway industry will grow from 250,000 units shipped in 2000 to eight million units by 2003.

Long Term Outlook

Certainly, supply will continue to grow at a feverish pace well into the future. DWDM technology has demonstrated the capability to carry 6.4 terabits per second over a single fiber, a 3,000-fold increase from just a year ago. Moreover, the upgrade to pure optical switches, which could be deployed at critical junctures in the network as early as 2002, will provide the intelligence to manage ever- increasing capacity. Indeed, the carrying capacity of a single fiber may reach the vaunted petabit per second mark if researchers are able to commercialize fundamental breakthroughs that seem possible in lab settings. (A petabit is a thousand terabits, or a quadrillion bits--a one with 15 trailing zeros.)

Still, demand will ultimately rise to approach supply levels. The development and maturity of bandwidth intensive applications, and improvements in the last mile access will eventually create enough demand to fill the supply. The bandwidth price drop will further encourage widespread adoption and creation of broadband services and content. Telecom companies are beginning to offer new services that will stimulate the demand for bandwidth, such as movie-on-demand and interactive TV services. Entire movie reels are beginning to be transmitted online to editing studios and cinemas rather than shipped via FedEx and UPS.

Several other candidates will vie to consume the supply of broadband. The leading candidates are Interactive video applications such as chat, video conferencing and distance learning, which will all consume an inordinate amount of capacity. 3G mobile phones could also represent a new "killer app" for broadband, providing mobile users with new video, audio and other bandwidth-rich applications. Given sufficient bandwidth, even holographic image projection becomes a distinct possibility.

Improvements in speed at the last mile, particularly the reduction of the mismatch between the high-speed backbone and the local loop, will be a major accelerator of demand. At the consumer level, DSL and Cable modems will achieve full saturation shortly after 2005, as the high user price and poor infrastructure that have dogged the industry become resolved. For businesses, the arrival of Ethernet-based technology will enable corporations to connect to the backbone at speeds roughly similar to those at which data travels within the corporation (between 10 mbps and 1 gbps, and at 10 gbps with the soon-to-be- introduced Gigabit Ethernet technology). This will spur demand for broadband capacity as companies will exchange information with offsite storage facilities or their application service providers at Gigabit Ethernet speeds or higher.