Busted By Broadband

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The advent of the Internet also transformed how phone companies move messages in a way that made Cisco the networking king. Traditional voice phone systems are circuit switched, meaning that a call opens a dedicated line between the parties that outsiders can't share. But data traffic is packet switched: messages are broken into discrete units, or packets, that share their lines with the packets of other users, greatly increasing the speed and volume of the data sent. It's mass transit for data. Moreover, packets can take different paths to their destinations, which is where Cisco's routers come in. They read the address on each packet and speed it along the most efficient route.

As the buildout accelerated, phone companies were creating a painful paradox in which their new technology generated a lower return on investment. The payoff for Internet traffic was particularly dismal, since data can travel across the street or around the world for the same basic charge. And this forced equipment suppliers to slash their prices, putting a further squeeze on their profits. "For the first time in history," says Tracey Vanik, a technical director of the RHK consulting firm, "there's no penalty for distance"--compliments of the Internet.

These same suppliers are now racing to deliver the Next Big Thing when the market turns up. You don't want to be late in an industry where missing a beat can put a big hole in your order book for years. That fate befell Lucent in the late 1990s when archrival Nortel rolled out the first 10-gigabit laser system, which flashes the 0s and 1s of computer binary code at the rate of 10 billion times a second through fiber. Lucent's share of the market for optical transport gear dropped from 28% at the start of 1999 to 14% at the end of 2000, according to the Dell'Oro Group consulting firm. Meanwhile, Nortel's share of the $22 billion market rose from 28% to 43%.

Today both companies are preparing to launch 40-gb/s systems. And by using lasers of different colors, engineers can pack 160 gb/s into a single strand of fiber--enough to transmit the text of 4,800 encyclopedia volumes.

At Nortel's optoelectric labs in suburban Ottawa, Canada, researchers in baby blue antistatic "bunny suits" work around the clock to put as many as 160 wavelengths on a fiber. "It's speed and the number of channels that make the difference," says Carla Miner, a senior lab manager. As recently as 1996, she says, "What we're doing now we thought was impossible."

In Silicon Valley, Cisco--which two weeks ago announced layoffs of up to 5,000 full-time employees, or 11% of its work force--is aiming at the largely untapped big-city market. Even though crews are digging up streets everywhere, only 7% of U.S. office buildings have fiber-optic lines running into their basements. "It's as if you're building a big interstate highway system without any feeder roads," says Carl Russo, Cisco's vice president for optical networking, "and you're wondering where all the traffic is." Nortel's Chandran has noticed that too. He vows to battle from "city to city and building to building" to "unclog the metro."

In fact, the fiber giants have little choice but to focus on the long-neglected "last mile," since that's where the people are. There are signs that broadband could soon reach far more consumers than the relative handful who get it now. According to the Gartner consulting firm, nearly 30% of U.S. households will have high-speed access to the Internet in 2004.

By then, the overbuilt long-haul networks could also be filling up. "They will stimulate commerce that otherwise would not happen," says Susan Kalla, an Internet and telecommunications analyst for BlueStone Capital.

And by then the endlessly hyped convergence of computers, phones and televisions may start to take shape, bringing interactive high-definition TV and Internet phone calling--remember, there's no long-distance charge--within affordable reach. "The ultimate endgame is fiber everywhere," says John Coons, who tracks e-business for Gartner. "Everything will be digitized and sent over one infrastructure." But the beleaguered companies that have developed some of the most dazzling products on the planet will have to get there first.