Optical companies urged to focus their plans

ISPs and equipment makers involved in optical networking should focus on their core competencies and set more realistic prices, abandoning the “build at any cost” mentality that prevailed during the glory years of the early 1990s.

That was the message delivered by Reed Hundt, chairman of the U.S. Federal Communications Commission (FCC) from 1993 to 1998, in an interview Wednesday.

“During the party and before the hangover, [service providers, equipment vendors, and enterprises] pretty much forgot to count costs,” Hundt said. “They set prices without counting costs and they didn’t count all costs. Most importantly, they did not count operating expenditures.”

Hundt, current chairman of Sigma Networks Inc. (a San Jose, Calif.-based metropolitan networking firm) and FCC chief during the passage of the controversial 1996 Telecommunications Act, was scheduled to give a keynote address on Wednesday at the Opticon 2001 conference in San Jose.

Hundt also outlined the three main business strategies that networks should adopt in order to weather the downturn.

“Number one, combine with your business rivals instead of killing each other,” he said. “Number two if you have money, spend it much, much more slowly, over three-, four-, or five-year periods. And number three go back to your business models, count the costs correctly, and price accordingly,” Hundt said.

The prices that optical firms have been charging have not been in line with economic realities, according to Hundt.

“For the last three years, people have been forward-pricing, [saying], ‘Here’s the price I would charge if I dominated the industry and could only recover incremental costs’,” Hundt said. “That’s crazy. If you’re a small company, you prove that you have a value and you price the value. Nobody could pay attention to that because the markets didn’t care.”

However, Hundt was highly optimistic about the future of the optical industry, particularly in metropolitan regions.

“While you’re suffering from the hangover of the optical party, it’s really difficult to focus on the fundamental good news,” Hundt said. “But it’s there. The pace of technological innovation is quite vibrant and the demand is there. It’s not where it was a year ago, but it’s steady. The traffic is not disappearing and companies are not turning off the Internet. This is not the pet rock business, where one day people wake up and they don’t want to buy pet rocks.”

Hundt said that the compound annual growth rate of total Internet traffic over the next five years will be 80 percent, and in traffic to and from data centers it will be 100 percent. Roughly a quarter of all that traffic will begin and end in metro markets, according to Hundt.

“That means there’s a real need for metro connectivity and for optical services in metro markets,” Hundt said. “To be in a business where you can assume demand is an extraordinary privilege. It’s just hard, if you were planning on getting rich in a nanosecond or if you have a good technology and you were cut short in terms of funding, to focus on the good news.”