Special Report: Optical Future
At the Speed of Light
Forget those pokey copper wires--the optical network is the medium of the future
The Chief Andrew Isaac Health Center in Fairbanks, Alaska, has 30 clinics scattered across a frozen tundra the size of Texas. Some clinics are in villages, such as Fort Yukon, that are more than 100 miles away. Worse yet, most aren't accessible by road. All too often, patients who use the clinics are left biting their nails for days, waiting for X-rays and other medical tests to be mailed to experts in Fairbanks. If the weather is dicey, they may not get critical diagnoses for a week.
All that is about to change. Thanks to a high-speed, optical-communications network that will be completed over the next six months, the clinics will be linked directly to Fairbanks. Then X-rays, medical tests, and case files can be zipped instantly to doctors--and the analysis is done in minutes. "Five years from now, we're going to wonder how we got along without it," says Jim Kohler, director of Chief Andrew Isaac.
As will we all. Getting instant medical advice in the remote corners of Alaska offers but a small glimpse of the promise of optical communications. This breakthrough technology transmits data, video, and voice in the form of light over glass, instead of using electrons over copper--the method of choice since the telephone was invented more than 100 years ago. Because light on glass is startlingly more efficient, it's increasing the capacity of the communications systems by staggering amounts. Consider this: With the latest optical technology, a single strand of fiber thinner than a human hair can now carry every phone call, e-mail, and Web page used by every person in the world.
Combine that kind of speed with the ubiquity of the Internet, and the implications are profound. Today's nettlesome hookups for videoconferencing on PCs would become as easy and as reliable as making a phone call. And those herky-jerky images? They would become as quaint as silent movies. Even full-length movies would get zip. Today, downloading a digital movie--say, The Matrix--takes more than seven hours over the fastest cable modem. With an optical connection, it could be done in four seconds flat. Communications capacity in the optical era will be so generous, says James Q. Crowe, CEO of telecom company Level 3 Communications Inc. (LVLT), that he predicts we soon will send hologram communications over mobile phones. "For 300 years, society has been organized around old communications networks like the railroad and the waterways," says Vinod Khosla, a partner at venture-capital firm Kleiner Perkins Caufield & Byers. "This is going to change all that."HAPPY LAWYERS. Simply put: It's business carried out at the speed of light. Until recently, optical technology was so expensive that only deep-pocketed, long-distance phone companies and giant corporations could afford it. Now the price is plunging so precipitously that almost anyone can get a piece of the action. Al Castiglia, the owner of a small video production house in Manhattan called Crews N Production Services, is getting a speedy, $650-a-month optical connection that will allow him to send broadcast-quality video over the Web to clients such as MTV and CNN. Fenwick & West LLP, a Palo Alto (Calif.) law firm, is paying about $6,000 a month for an optical link to the Net so that its lawyers can get the entire contents of Web sites transmitted to their PCs for important cases. The attorneys are so happy with the new setup that they have stopped into the office of Matthew Kesner, chief information officer, to give him a slap on the back. "That was a first," says Kesner. "They usually don't get too excited about networking."
Why are prices coming down so steeply? Credit improvements in optical technology, which allow telecom companies to deliver much more capacity at reasonable rates. Ten years ago, phone companies could send only one stream of data over a fiber-optic cable. But the latest in optical technology, called wavelength division multiplexing, allows them to split that fiber into 160 channels--with each channel capable of carrying as much traffic as the old single fiber. That has torpedoed the cost of capacity for a phone company by more than 99%. David R. Huber, the founder and CEO of optical upstart Corvis Corp. (CORV), estimates that optical equipment has helped drive down the price of moving a bit of information over long distances to 0.006% of what it was in 1996. "If BMW could do that, you could buy a new BMW for $2.50," says Huber.
Optics, say experts, will put Moore's Law to shame. Analysts predict that optical equipment will continue to double the capacity it delivers at a given price every nine months--or twice as fast as the speed of improvements in semiconductor performance set out by Intel Corp (INTC). Chairman Emeritus Gordon E. Moore--hence Moore's Law. "The cost of delivering data is coming down like a stone," says John W. Loose, president and COO of optical components maker Corning Inc. Already, companies such as Telseon Inc., in Englewood, Colo., and San Francisco's Yipes Communications Inc. are beginning to charge corporations $6,000 a month for optical connections of 10 megabits per second. That's a third the price of a traditional corporate connection from the local phone company for several times more bandwidth. And prices are headed south again soon. New York's Cogent Communications plans to offer 10-megabit connections for $1,000 a month in November.HEAVY TRAFFIC. The investment world is clearly smitten. JDS Uniphase Corp. (JDSU), which makes many of the components that go into optical gear, has seen its stock soar an astonishing 11,200% over the past five years, vs. 160% for the Standard & Poor's 500-stock index. Optical gearmaker Corvis has a market cap of $25 billion--and has yet to record its first dollar of revenue. Even in the tumultuous market for initial public offerings this year, optical firms seem to be the only sector that regularly receives lavish treatment from investors. Take ONI Systems Corp. (ONIS), which makes optical gear for metro markets. It went public in June and has seen its shares more than triple, to $94.
There are those, however, who worry that optical companies could follow the path of dot-coms: ever upward for years until the devastating fall. Fueling these worries is growing concern that telecom companies may have to cut back on capital spending because of stiff competition and sluggish revenue growth. "Too many people are investing in optical startups whose products will never see the light of day," says Todd Dagres, a partner and longtime optical investor at venture-capital firm Battery Ventures.
But tuck that thought away. The optical sector isn't going to go the way of boo.com and other here-today-gone-tomorrow dot-commers. Telecom players desperately need the most efficient gear. Internet traffic is doubling every three months, and optical technology is the only practical way to carry it all. Spending on optical gear is expected to soar to $44 billion this year, vs. $31 billion last year, according to market researcher RHK Inc. And that's pegged to hit $89 billion in 2003.
It's the latest disruptive technology. Just as the rise of the personal computer gave Microsoft Corp. (MSFT) the opportunity to overthrow IBM for leadership of the computing world, optical technology is turning the $377 billion communications equipment market upside down. Two years ago, Lucent Technologies Inc. (LU) was the runaway leader in telecommunications equipment in the U.S. But in late 1996, Canada's Nortel Networks Corp. (NT) introduced a new optical system that routes data at 10 gigabits a second. Lucent, convinced that demand for the complex technology would develop slowly, stuck with gear that operates at one-quarter the speed. Nortel has been proven right. Nortel's market cap has soared 40% this year, to $200 billion, while Lucent's shares have tumbled 50%, leaving it with a market cap of $108 billion.MAGIC WORD. Both companies, however, are nervously looking over their shoulders for the next rival. Networking giant Cisco Systems Inc. (CSCO), which sells optical gear, is beginning to sell more to telephone companies. A host of startups, including Sycamore Networks Inc. (SCMR) and ONI Systems, are betting that their expertise in the new technology will give them the chance to grab a fat slice of the communications-equipment market. And venture capitalists are pouring moolah into even more new players: Venture financing in optical technologies more than tripled in the first half of this year, to $1.6 billion. "If you're an entrepreneur and you mention the word `optical,' people stand in line to write you a check," says Rob Chaplinsky, a partner at venture-capital firm Mohr, Davidow Ventures in Menlo Park, Calif.
Traditional telecom carriers are getting the shake-rattle-and-roll too. Net-savvy newcomers, such as Qwest Communications International (Q) and Level 3 Communications (LVLT), are using fiber optics to deliver services that are difficult for older phone companies to match. Verizon Communications (VZ) and SBC Communications (SBC), for example, take about three months to boost the speed of Net connections for corporate customers. Qwest can do the same thing in a matter of days. "That's why we're going to eat their lunch" in the corporate market, says Afshin Mohebbi, president and COO of Qwest's worldwide operations. Braggadocio aside, Qwest's savvy use of optical and the Net helped push its market cap to the point where the four-year-old upstart was able to acquire Baby Bell US West Inc. , a company more than three times its size, for $56 billion earlier this year.OLD CONCEPT. Surprisingly, the notion of sending information over a beam of light is almost as old as the telephone itself. Alexander Graham Bell experimented with the idea of photonics back in the late 19th century. In 1880, four years after receiving a patent for a telephone that used copper wire, the inventor created what he called a "photophone" that carried voice signals on a beam of light. He used it to talk to his assistant, Sumner Tainter, over a distance of 1,300 feet. Ultimately, though, Bell found that using copper wires was more workable.
Photonics has come a long way since then. When the first transcontinental fiber network was installed two decades ago, a single stream of bits flowed along a fiber strand so it could carry 45 megabits of information per second. In the '90s, scientists began to use prisms to send multiple colors of light down a single fiber--a process called dense wave division multiplexing, or DWDM. Now, a fiber strand can be split into 80 or even 160 different colors, each capable of carrying its own stream of data. And the speed at which bits flow along fiber-optic cables has increased. Last year, the speed limit was raised to 10 gigabits a second, up from 2.5 gigabits per second just a few years earlier. All told, technological improvements have boosted the capacity of a strand of fiber 18,000-fold, to 800 gigabits or more, over the past 20 years.
More big innovations are on the way. The photons that carry information on the optical network still have to be converted into electrical format to be regenerated and sent over even greater distances. That slows down traffic, and it's expensive. Buying and maintaining the equipment for that conversion makes up more than half of the costs of running a long-distance network. Now Nortel and Corvis Corp. are racing to build optical gear that will eliminate the need for most optical-to-electrical conversions.
In the local networks, more than 20 startups are building gear to handle the explosion of data coming from new broadband connections to homes and businesses. Zaffire Inc., for example, is promising telecom companies that its optical equipment will cut their costs by 75%. The company plans to offer one optical box that would substitute for numerous pieces of electrical data networking gear. And TeraBeam, a Seattle company run by former AT&T Wireless CEO Dan Hesse, plans to carry optical traffic over a wireless network, eliminating the need for more conventional fiber routes. "Right now, people are talking the talk," says Tamm Dell'Oro, the founder of market researcher Dell'Oro Group. "If they can walk the walk, it's a huge opportunity."
The real importance of optical technology transcends the technology itself. Just as the PC revolution unleashed a wave of products and services that have changed the way companies operate and people live, the new optical technology will have wide-ranging implications. Consider Vector Partners, a Norwalk (Conn.) brokerage firm. Its system for taking customer orders was time-consuming and inefficient. A client would fax in an order to buy or sell a stock, the order would be retyped into Vector's computers, and then an e-mail or fax would be sent to the company's execution desk to make the trade. With a new optical link, the customer's order is relayed instantaneously to the execution desk, saving precious minutes. And software that Vector can only use because of the optical link lets the company aggregate orders so that customers can get volume discounts on trades. "Connectivity and the exchange of data are our life's blood," says Vector General Manager Simon Langdon. Since installing the system in the fall of 1998, the firm has doubled its business, Langdon says."THIS IS REVOLUTIONARY." For many companies, optical technology lets them offer services that just weren't possible in the past. Curtis Sellers, the president and founder of a film and video production house in Cincinnati named Curtis Inc., was always frustrated that it took so long for him to get finished video projects to customers. He typically had to send them by mail--and often had to fly clients cross-country to screen ongoing projects. He tried for two years to get a speedy Net connection from Time Warner (TWX), which provided his cable-modem link, but what it offered was never affordable. "For what they wanted to charge, paying for airline tickets looked cheap," says Sellers. Then Broadwing Communications Inc. (BRW), an Ohio telephone company, offered him a blazing-fast optical connection to the Net for a reasonable price. Sellers will soon be able to send completed videos to clients in an instant--and make revisions in minutes instead of days.
A company can now get its hands on that kind of speed faster than in the past. Palo Alto biotech company Incyte Genomics Inc. (INCY) used to buy its high-speed data lines from Pacific Bell, which required two or three months to fill an order for a faster line. Tired of the delays, Incyte switched to Telseon. Now Incyte can order a speedy line on Telseon's Web site, and it will be available for use in minutes. Moreover, Incyte gets a 50 megabit connection for less than half of what Pacific Bell charged. "We wouldn't give this network up without a fight," says Phil Kwan, Incyte's associate director for network infrastructure. "This is revolutionary."
Some big companies even take the ultimate step toward empowerment and become their own telecom carrier. That's what Chase Manhattan (CMB) did. It leased 100 miles of optical fiber from Metromedia Fiber Networks (MFNX) in order to connect its sites in New York, New Jersey, and Delaware. The network has 100 times more capacity than its old system from local phone company Verizon. But the real value is that Chase is now in control of its communications. In the old days, because the network was so slow the bank only had time to back up its data several times a day. Now it can complete backups constantly, ensuring better security should there be a system failure or natural disaster. "It wasn't about costs. We simply couldn't have gotten to this capability with someone like Verizon," says Michael Sztegnberg, senior vice-president of Chase's information-technology unit.
As optical technology pushes deeper into the mainstream of modern life, it is bound to have a profound impact on the way people live their daily lives. Just as the railroad opened the West for settlement, and the highways gave rise to the suburbs, next-generation communication networks will alter the landscape. Telecommuting, now a luxury for workers, will become more commonplace, says Paul Saffo, director of the Institute for the Future, a think tank in Silicon Valley. That will free people from having to live near their jobs so they can move to more scenic locales such as Santa Fe, N.M., or Telluride, Colo. Or even Fort Yukon, Alaska.By John G. Shinal in San Mateo, Calif., with Timothy J. Mullaney in New YorkReturn to top