Hatteras' move represents humbling of telecom industry

September 01, 2002|By JAY HANCOCK

THIS IS THE sound of the telecommunications business two years ago:

"The demand for bandwidth for the Internet is really insatiable," says Kenneth Westrick, boss of New Focus Inc., a Silicon Valley fiber-optics firm.

"A gigabit throughput to every home within the decade," says Bernard Daines, founder of World Wide Packets, a Spokane vendor of fiber-optics networking devices.

One gigabit is supposed to equal all 32 volumes of Encyclopaedia Britannica, and Daines was talking about a gigabit per second, which would max out some desktop hard drives in less time than an AOL dial-up connection starts working.

Now, this is the sound of the telecommunications business last week:

"The capital constraints that we're faced with today dictated that we use the copper," says Thomas McPherson, chief executive of Hatteras Networks.

Hatteras is a Durham, N.C., start-up. "Capital constraints" is a polite reference to the telecom crash. And copper, for the uninitiated, is the dirt path of the information highway, a 19th-century artifact that the Pennsylvania Public Utility Commission declared last March to be "obsolete" as an Internet duct.

Last week, Hatteras got $45 million from Baltimore venture capital firm Grotech Capital Group and other investors to pipe the Internet over copper.

Hatteras is not contemplating gigabit speeds on copper or even a tenth of a gigabit. It's looking at 10 megabits, which is a hundredth of a gigabit, a few times faster than a T1 line, the workhorse of business Internet access.

So, here we are. The titans of telecom are not talking anymore about world peace online or virtually scaling Mount Everest from your bedroom or watching 3D movies streamed to your home computer from remote servers. They're talking about getting the Power Point files from the home office to download a little faster. On copper.

What a change. At one point, telecom entrepreneurs acted as if Internet capacity would grow at the pace set for microprocessors by Moore's Law, named after Intel co-founder Gordon Moore, which declared that computer-chip power doubles every 18 months.

Instead of Moore's law, however, they got what we might call Ebbers' Law, after disgraced former WorldCom Chief Executive Bernard J. Ebbers.

Ebbers' Law is: Stuff happens.

Because the flow of bits into home and office didn't meet WorldCom's grandiose projections, it and many peers are bankrupt or struggling; so are their suppliers. They overextended; they built a church for Easter, but the congregation thought it was only Maundy Thursday.

It's not that demand for Internet bandwidth isn't large and growing. It's that the demand isn't "insatiable," at least not at available prices.

The price problem, of course, involves "the last mile" of conduit, the capillaries that carry signals from trunk lines to computer. Most of these were laid decades ago; most are copper or cable, not fast glass fiber; and most move data at the speed of peanut butter flowing uphill.

It was easy and relatively cheap for WorldCom and its competitors to build cross-country broadband arteries. But it was difficult to extend high-capacity lines to most homes and many offices, so they didn't.

Telecom optimists thought the last-mile problem might be solved relatively quickly and economically by wireless Internet, open-air laser signals or something, but they were wrong. The New Economy's potentially massive flow of data got bottled up on the edge of town and blew up.

Hatteras Networks doesn't want to bring broadband to the masses. It doesn't want to shatter industry paradigms. It doesn't want gigabit throughput to every home.

It does want to give Verizon and other Baby Bell local-phone companies a cheap way to modestly upgrade the online access they sell to business customers, and it seems well on the way to being able to.

More than ever, the telecom hardware game is jamming more data through existing wires. Hatteras, which is entering tests and hopes to ship next year, says its box will let phone companies sell lines with three or four times the 1.5 megabit capacity of a copper T1 line for less than twice the cost - less than $2,000 a month.

Grotech partner Joseph Zell says the Hatteras hardware could be inexpensive enough to give phone companies a return on investment within a year - a juicy proposition for firms still paying mortgages on assets bought years ago. And the great thing about Hatteras is that its product enhances glass-fiber bandwidth, too, offering speeds of up to a gigabit, just in case the bandwidth messiahs turn out to be right.

But meanwhile, the economics of telecom circa 2002 is about incremental upgrades with modest capital investment and quick paybacks. Telecom development is an internecine conflict among entrenched rivals, not an Armaggedon that changes everything.

Nobody's talking about saving the world, and the industry's sights are on the next block of office buildings, not the stars.

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