Video is brightening picture for fiber-optics industry

March 11, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

The bootleg Oscar-award videos being downloaded on YouTube may be bad for the Academy of Motion Picture Arts and Sciences, which owns the copyright.

But for Ciena Corp. of Linthicum and everybody else making telecommunications equipment, they could mean a welcome light at the end of the optical fiber.

As Cisco Systems executive Dennis Powell noted at a conference last month, YouTube uses as much bandwidth as the entire Internet did in 2000. Such content is illuminating some of the excess, "dark" cables that companies buried a few years ago in what turned out to be one of history's most spectacular busts. In many cases, volume hogs such as YouTube are also prompting construction of large, new networks.

FOR THE RECORD - Jay Hancock's column in the Business section Sunday gave an incorrect figure for Ciena Corp.'s anticipated revenue growth. The Linthicum-based maker of telecom hardware expects revenue to increase between 27 percent and 30 percent in the current fiscal year. THE SUN REGRETS THE ERROR

What a change. We'll never return to the fiber-optic rapture of seven years ago, and don't expect Ciena's stock to reattain its split-adjusted, 2000 price of $1,000 anytime this century. But the rising tide of fiber-optic investments is very good news for the economy.

Several factors are driving the resurgence, but "the big thing that's happened is video," says Lawrence Gasman, president of Communications Industry Research in Virginia.

And how. A half-hour TV show such The Office uses twice as much bandwidth as a whole year of e-mail for one average user - including spam! (This also comes from comments by Cisco's Powell at the Bank of America Technology Conference in New York two weeks ago.)

And of course video doesn't just come in Web downloads such as those furnished by networks and YouTube. Verizon, once a traditional phone company, is spending billions to build cable TV systems. The required switch to digital TV in early 2009 and growth in high-definition TV will also push more video traffic onto the grids.

Good for companies

Either way, it's good for companies such as Ciena and bigger competitors such as Alcatel and Nortel.

The growth and upgrading of cable TV networks requires regional switches and lines to carry signals from local servers.

And unless somebody comes up with a magic way to compress the signal, the boom in Web video means that photons will start appearing even on some cross-country trunks that people thought would lie dormant until the second coming.

But the biggest action is regional.

The fast and efficient Ethernet standard has escaped the office and landed on networks that carry signals from one part of town to another. Ciena has bet big on developing products for these "metro-area networks," as cable companies and now telephone carriers upgrade to Ethernet systems to increase regional capacity.

Telecom providers also want to integrate previously separate systems, as cable TV, phone service, cell-phone service and Internet connections are sold from under one roof. More and more, that means putting everything on an Ethernet platform.

Instead of just connecting houses to existing regional networks, telecom concerns "are really having to add capacity at every level now," says Vince Vittore, an analyst at the Yankee Group, a consulting firm. "It's obviously going to benefit Ciena."

Concerns about terrorism and natural disasters have helped, too. Many insurance companies, government agencies and big retailers have decided that it's too risky to rely on public networks for their data, so they're building their own.

No windfall

None of this means a windfall or even profitability, necessarily, for makers of telecom equipment. Ciena turned its first profit in five years for the quarter ended last October and earned $11 million in the next quarter, but earnings are thin and may continue so.

The company expects only single-digit percentage increases in sales this year. Price competition for fiber-optic equipment is intense, and a profit outlook that was below analysts' expectations this month sent Ciena's shares plunging from $32 toward $26. (They were down to $13 two years ago, after adjusting for the "reverse split" that reduced shares outstanding and boosted the per-share price.)

But for Ciena and the rest of the telecom-hardware makers, the craziest part of the ride seems to be over. Factory capacity utilization for Ciena and other makers of communications hardware reached 74 percent in January - the highest level since 2001, according to the Federal Reserve.

"We've kind of come back to where we should have been in the first place," says Gasman. "In a way, the market should have been growing at 15 percent a year or 12 percent a year for the past five years, and we wouldn't have had all the ups and downs."

Maybe the grandiose predictions of broadband volume weren't so grandiose after all. Maybe they're just taking a while to come true.

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