fiber optic Keynesianism

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New Appetite For Fiber
Government Work Nourishes Hungry Industry

By Griff Witte
Washington Post Staff Writer
Tuesday, December 9, 2003; Page E01


Perched at the edge of an open manhole at Euclid and 16th streets in
Northwest Washington one chilly morning last week, Andy Farrel peered down
into the tangle of grimy cables and saw his past -- and, possibly, his
future.

Farrel, a trim 40-year-old with a gruff voice, spent the 1990s ranging
across the country, tearing up streets and burying fiber-optic cable at a
furious pace. Prodded by venture capitalists and investors who believed
that the demand for fiber and its promise of lightning-quick connections
knew no bounds, Farrel's employers sank all their money into laying
millions of miles of the tiny glass strands.

"When it's going like that," said Farrel, a project superintendent,
"nobody thinks it's going to end."

But then it did. Demand crashed, and Farrel was laid off.

Unlike many colleagues who gave up on the business, however, Farrel stuck
with it. Two months ago, he got a job that will keep him busy laying fiber
across the Washington area for at least the next few years.

The difference is that Wall Street isn't funding the work anymore.
Taxpayers are.

Farrel's new boss, Omaha-based Adesta LLC, has a contract with the
District to help build a $93 million fiber-optic network intended to
improve emergency communications and provide top-notch Internet
connections to schools, libraries and hospitals.

The project is just one of many taxpayer-funded ventures across the
country that, together, have provided a life raft for fiber companies
trying to stay afloat until private-sector demand returns.

The government's appetite for fiber has been surging of late. The
combination of security concerns since the Sept. 11, 2001, terrorist
attacks, the allure of digital technology and the falling cost of building
networks has created a market awash in government work.

This is happening despite the fact that fiber -- glass strands only
slightly thicker than the human hair that can carry voice, video and
Internet transmissions at high speeds -- already saturates the ground in
many areas. Nonetheless, it doesn't always go where it is needed, and
governments have often decided they want to own their networks,
independent of private-sector constraints.

The Defense Department, for instance, awarded $390 million in contracts in
September to infuse its global information grid with fiber. On a much
smaller scale, municipalities and public utilities across rural America
have been leading the way in bringing fiber to the home, paying to build
advanced digital networks that run through farmers' fields.

In many of those cases, residents didn't have anything faster than dial-up
Internet connections and had given up on waiting for private companies to
come to them with speedier options. So local governments and utilities
have shelled out the upfront cost for building a fiber-optic network in
the hope it will generate enough economic activity in the long term to
make the venture worthwhile.

"The private company is going to go where the profits are. We don't have
to have a profit next year," said Christine Stallard, spokeswoman for the
Grant County Public Utility District in Washington state. The county, with
13 residents per square mile, offers Internet connection speeds of up to
10 megabits per second -- many times faster than the digital subscriber
lines and cable modem services available in most urban and suburban areas.
To get those speeds, the utility district spent $91 million to lay 800
miles of fiber across the central Washington desert.

Private companies have opposed efforts by local governments to build their
own networks, questioning whether municipalities and utilities should be
getting into the telecom business. "The issue is whether this is the best
use of taxpayer dollars when there are private companies ready, willing
and able to deploy this technology," said Verizon Communications Inc.
spokesman Eric Rabe.

But many wonder how long that will take. Today, only 64,700 homes in the
United States have fiber connections, up from 5,500 in 2001, according to
the fiber research firm Render, Vanderslice & Associates.

Verizon, the nation's largest phone company, has said that next year it
will begin rolling out fiber past 1 million homes as the first step in a
long-term project to replace the traditional copper network that has
carried voice communications for more than a century. It's a venture that,
over time, would inject billions of dollars into the fiber market.

But the other regional telecom giants -- BellSouth Corp., SBC
Communications Inc. and Qwest Communications International Inc. -- have
been far more circumspect about their plans. Even Verizon concedes that a
series of pending regulatory decisions could have a major impact on how
aggressively it deploys its fiber.

"The telecom companies have told us [they'll deploy fiber] before," said
Paul Polishuk, a fiber-optic industry analyst and president of
Boston-based IGI Group. "So whether they really put their dough out there
or not could be a different story."

That uncertainty in the private sector explains why many of the companies
that live or die on fiber demand have poured their energies into pursuing
government work.

"In the grand scheme of things, the government contracts are not that
significant," Polishuk said, noting that even the Defense Department's
$390 million contract is dwarfed by the $17 billion that the regional
telecom giants spend annually on capital investments. "But for the smaller
company that can get into one of these deals, it means survival."

That's certainly true at Adesta. The company was a highflier in the late
1990s, building approximately 2 million miles of fiber in 70 metropolitan
areas and taking in $200 million annually in revenue. But it depended
almost entirely on private sector demand, with WorldCom Inc. and Enron
Corp. as two of its biggest customers. When the technology bubble burst,
Adesta filed for bankruptcy as revenue dropped to $20 million and the
payroll sank from 750 to 200.

Since then, the company has remade itself, with a focus on meeting the
government's fiber needs. "There are all kinds of reasons to do business
with the government. For one, they always pay their bills," said Robert
Sommerfeld, Adesta's president, who noted that about 60 percent of the
company's business now comes from the public sector.

Adesta is not alone. Atlanta-based Xspedius Fiber Group, also a bankruptcy
survivor, has seen a bump in business in the past few months as it's
picked up subcontracting work on government jobs. The idea is to use the
government work to "get over the hump," said Wade Robertson, Xspedius's
senior vice president of sales and marketing. "As the government begins to
close out all its contracts, then the private sector will pick back up,"
Robertson said.

Some analysts are not so optimistic, noting that private sector demand may
not come back as soon as some companies would like and that the government
work will eventually dry up.

"They're not going to get to the promised land this way," said telecom
analyst Scott C. Cleland, chief executive of the Precursor Group. "It's a
bad sign when you're having to turn to the government for most of your
business."

For now, the companies will take what they can get. In September, Adesta
and two other companies outbid seven competitors and won the contract to
deploy fiber for the District's DC Net project. The project involves
connecting about 400 government buildings through underground pipes to a
new network that the District will own, said Peter R. Roy, the city's
deputy chief technology officer.

Roy said the District needs a fiber-optic network because the existing
copper network does not adequately meet the city's emergency response
needs, as was shown Sept. 11, 2001, when the system was overloaded. He
said that building fiber also will be a boon to the school system, which
can use the network to provide students with real-time interactive video
instruction.

Cost is a factor as well. Roy said the District hopes to save $10 million
annually by having its own network rather than leasing from Verizon, as it
does now. The upfront costs of installation also are not as high as they
once were.

"The technology has matured to the point where it's not too terribly
expensive," he said.

Part of the reason for that is that a lot of fiber is already there.
Across the country, thousands of miles of fiber lie dormant because the
builders went belly up. PSINet, for instance, had a 13,000-mile network
that has sat idle since the company's assets were acquired last year by
D.C.-based Cogent Communications Inc., which has its own nationwide
network.

To build its network, the District took advantage of a significant amount
of fiber that is already in the ground. But because most of the fiber
deployed during the tech boom was meant to meet the needs of large
companies, not government, the District has to fill in a lot of gaps.
That's why it pays Adesta to build connections off of the main backbone
into individual buildings.

Unlike in the late 1990s, when the city's streets were continuously under
construction as company after company buried its own cables, Adesta's work
should not cause the same havoc for motorists. In most cases, the
fiber-optic cable will be threaded through conduits that now carry the
wiring for the District's outdated firebox system, Roy said.

For Farrel and his crew, that means installation of new fiber in most
cases will involve nothing more disruptive than popping a manhole cover.

Last week, Farrel's team was going block to block, periodically
disappearing into the world beneath the streets to scout around and decide
exactly how to run the fiber. In his career, Farrel estimates, he has been
involved in laying 2,000 miles of fiber. Now he has the chance to bury
even more.

"I don't believe it will ever be like it was," Farrel said, "but it is
definitely picking up."