CHANGE
The silicon economy obeys the law that supply creates demand. Too bad ités not true for fiber.
Ités hard to remember, as the tech world drowns in a sea of glass — the megamiles of excess fiber-optic cable dragging down the telecom sector — that glut was supposed to be a good thing.-Supply creates demandé was the rallying cry of the semiconductor economy: Carpet the world with cheap technology, and clever hands will put it to work in a thousand ways never before imagined, giving rise to new markets and new demand. Want to carry your entire music collection in your pocket? Sure! Now how about all the music ever recorded? You bet. Mooreés law boiled down to one word: more. The more you have, the more you use.
While traditional economics are driven by scarcity, the world created by the microchip is one of abundance.-Waste transistors!é urged Carver Mead, the apostle of silicon. And from such exuberant extravagance came multimedia, the graphical user interface, and the kudzu-like expansion of the computer into every aspect of entertainment.
The optics age started the same way. Network capacity grew even faster than semiconductors, thanks to the freaky frictionless physics of light. As one generation woke up to find that a long distance telephone call was no longer a luxury, another was outsourcing burglar-alarm monitoring to Bangalore.-Waste bandwidth!é was the new cry. If the Web could take off with dialup modems on twisted copper, just imagine what tomorrowés tide of light would bring.
Surprise.
Today the bandwidth industry is in ruins, crippled by debt and overcapacity. The problem is not just the price of speculative excess; something failed on a more fundamental level. As predicted, network capacity on major routes grew three-, six-, even tenfold a year. Yet the flood of insatiable new uses never materialized. In some markets, bandwidth prices plummeted as much as 90 percent a year — three times the rate of semiconductorsé descent — and still most fiber stayed dark. The assumption that network economics are semiconductor economics on steroids has been tested and found wanting. Why?
The theory that supply starts a virtuous cycle predates the microchip by more than a century. In 1803, French economist Jean-Baptiste Say (who coined the word entrepreneur) observed that you had to create and sell one product to be able to buy another, and thus a produced good represents demand for other goods. This rather pedestrian insight has since been extended far beyond its original meaning to a broad notion of-Sayés lawé — simplified to supply creates demand — which is the foundation of supply-side economics. It is also the foundation of Silicon Valley.
éAs the driving force of economic growth,é wrote George Gilder, in Microcosm, his 1989 hymn to the power of semiconductor economics,-Sayés law exalts the creativity of suppliers over the wants and needs of demanders or consumers. As entrepreneurs invent new things and learn how to make them more efficiently, unit costs and prices drop and goods become more attractive. As goods become more affordable to a wider public, more people work to acquire them by creating goods to exchange. These new suppliers both provide and acquire new wealth at ever lower expense.é
The development of the CPU proved a compelling example of Sayés law in action. Each jaw-dropping increase in chip speed was quickly followed by ever larger software programs that consumed all that power and more, simply because it was there. One manés waste is another manés innovation. It may be computationally extravagant to animate an onscreen menu, but such eye candy can make a computer friendly enough to attract a whole new class of user. Videogames are both trivial and voracious consumers of silicon, but they are also, thanks to reckless disregard for the value of a transistor, now an industry that rivals Hollywood.
THE LAST MILE IS STILL RULED BY BUTT-CRACK ECONOMICS
Optical networks were expected to work that magic on a massive scale. Assume bandwidth is free, went the mantra — where do you want to go today? Sun Microsystems proclaimed that-the network is the computer,é and investors — intoxicated by the laws of Moore, Gilder, and Metcalfe — took it from there. The geometric growth engines of silicon, fiber, and network effects were all combining into the biggest, fastest CPU the world had ever seen.
One problem: The network is not a computer, at least not in the way we usually think. A PC is a closed system, where hardware (supply) and software (demand) co-reside and play off each other in search of equilibrium. Yet unlike the self-contained micromarket of the circuit board, networks are typically chains of unrelated parties, held back by their weakest links. Megabit circuits might be going for a song between New York and Chicago, but if the demand for streaming video is stalled by a dialup in Des Moines, much of that submarine and subterranean glass will stay dark. Supply cannot reach demand, and Sayés virtuous cycle breaks down.
The fabled last mile is not the only problem. Broadband wireless phones have been delayed by the massive debt raised to pay for the necessary spectrum. Hollywood and the music industry have chilled file sharing, a potentially huge bandwidth driver. And the failed Telecom Act of 1996 has left some markets effectively closed (think: local phone service), while others have turned into cannibalistic feeding frenzies (DSL).
Most of todayés excess optical capacity will eventually get used, but not until the telecom industry emerges from the most brutal of correction cycles. And then it will stumble into the next one. For all the dreamy economics of pure-optical switching, it takes the butt-crack economics of ditch digging to reach a customer. While demand sits on the sidelines, waiting to be served, supply creates bankruptcy. Glut hurts.
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