Busted By Broadband

Tucked into a corner of Lucent Technologies' Bell Labs in Murray Hill, N.J., stands a small box that houses what could be the future of the telecommunications industry. Called a LambdaRouter, the device contains 512 microscopic mirrors, each of which can switch light waves packed with more than 10 billion bits of information--roughly the contents of 10,000 novels--from one hair-thin strand of optical fiber to another.

You could conceivably jam thousands of these micromirrors into a soccer ball and have enough capacity to connect everyone on the planet simultaneously to everyone else without the time and expense of converting the light to electronic impulses and back again--as today's networks require. Kick that around. Declares Bell Labs scientist David Bishop, who led the development team: "You will either have a technology that does this, or you will have a going-out-of-business sale."

Nobody knows the vicissitudes of technology better than Lucent, which had to negotiate a $6.5 billion loan package last month to avoid a cash crunch. Lucent was first a beneficiary and then a victim of the race to wire the U.S. with the speed-of-light data pipes known as broadband. And now it has company in its misery, as broadband carnage has spread from phone companies like AT&T and WorldCom to fiber makers like Corning to optical-systems builders like Nortel Networks to components makers like JDS Uniphase and networking companies like Cisco Systems.

Broadband growth figured to be limitless. Given that every business and every household is moving online, data transmission has been expanding at phenomenal rates. But as phone companies and Internet service providers sprang up everywhere, capacity raced light-years ahead of demand. So the price for using the pipes tumbled, hobbling the telcos' ability to expand and to buy more gear. "Never in the history of industry has the sheer number of competitors been so underestimated and misunderstood," says former AT&T Broadband president Leo Hindery. "And never have the implications of technology advancement been so misunderstood as well."

The results have been plunging profits, mass layoffs and imploding stock values for companies that had been NASDAQ supernovas and among the chief reasons for the stock market's rise. At BlueStone Capital Securities, an index of 13 fiber-optic heavyweights that includes Lucent, Cisco, Nortel and JDS Uniphase has fallen 78% since last July, a plunge that has cost investors more than $1.1 trillion in market value. The percentage decline exceeds the drop for NASDAQ as a whole, which fell 51% over the same stretch.

Investors who see those falling stock prices and think "bargain" should think again. Few industry leaders expect business conditions to improve much this year. Phone companies "are really conserving their capital because of the severe downturn in the economy," says Clarence Chandran, Nortel's chief operating officer. Nortel is a one-company bear market. The world's No. 1 producer of fiber-optic systems, Nortel accelerated the industry's slide and NASDAQ's sell-off last month by abruptly slashing its 2001 forecasts and declaring that it would idle 10,000 employees, or nearly 10% of its work force.

You would think we had all stopped calling home or logging on. Not at all. Internet traffic continues to grow at the astonishing rate of 200% annually. Every 45 minutes, AT&T transmits a quantity of data--meaning everything from e-mail to streaming video--equal to 34 times the contents of the Library of Congress. But the broadband buildout has been so furious that it could take three years for the traffic to catch up.

Behind this overbuilding is the telecommunications deregulation act of 1996, which brought a flood of new local and long-distance broadband carriers--including satellite and wireless systems operators--into the telecom market. Their very presence forced incumbents like AT&T to upgrade their systems to keep up. And since deregulation coincided with the Internet bubble, Wall Street was happy to throw money at the telecom upstarts, many of which now resemble dotcoms.

The broadband revolution promised to bring every household fast Internet access along with video-on-demand, interactive TV and the ability to flash Libraries of Congress around the world at whim. Amazingly, the sellers of this dream overlooked the fact that many homes and offices connect to the 21st century fiber network with twisted-pair copper wires--late 19th century tech. These could hardly keep up with the bandwidth demands of the Napster age.

So, for example, a dial-up modem that connects to the Net over copper has a typical download speed of 56 kilobits--or 56,000 bits--per second, at which rate it would take nearly 10 minutes to download a three-minute song. By contrast, a modem connected to a TV cable that feeds into a fiber-optic loop could claim that tune in under a minute. Yet even today only about 6% of U.S. households have cable modems or digital subscriber lines, which carry compressed data over copper wires at broadband speed. But that hasn't stopped carriers from blanketing the country with high-bandwidth networks.