This article written by the managing partner in May 2006 examines the recent experience of the fiber optic industry where disruptive innovations have been common but the results in terms of individual company market share and profitability have varied considerably.

The fiber optic industry has gone from a period of extraordinary growth and profitability in the nineties to the present stage of excess capacity and worldwide glut in a matter of five years. An industry that was once characterized by exceptional new technology development and product innovation both at the large company level as well as smaller independent unit level is now considered as the largest failure in the U.S. economy since the Second World War.

The article is narrowly focused on the disruptive innovations as opposed to sustaining innovations in the industry and relies on the experience of large transnational corporations such as Corning, Lucent, and Alcatel as well as the experience of smaller “niche” players in New England. With the drop in venture funding for smaller players, the Hill & Jones Model and, the Christensen Model do not adequately explain the performance of many companies specializing in disruptive innovations. The paper explores alternative approaches to business growth and market share expansion in the present environment where lack of liquidity has curtailed risk-taking by both small entrepreneurs and large industrial manufacturers.

The author has conducted extensive interviews with the members of the New England Fiber Optic Council regarding their experiences with the new technology development, commercialization, and recent product innovations. While utilizing the insights gained from these interviews, the paper compares their experiences with the conventional examples cited by Christensen, Johnson, Gilbert, Chesbrough, and others from automotive, electronics, and computer industries. This comparative analysis validates traditional assumptions of the Disruptive Innovation Theory but it also illustrates the dangers in any simplistic generalization regarding a volatile industry such as fiber optics. Using the company database maintained by NEFC, the paper summarizes the key innovations introduced in the industry over the last twenty years by selected firms. It isolates the “disruptive” innovations and makes projections regarding their impact today and their potential for the future.

Historical Background

My first exposure to fiber optic technology dates back to 1978 when I assumed optical product management responsibilities at American Optical Corporation, then one of the largest optical companies of the world. Working with Dr. Walt Siegmund, who had supervised early work of Dr. Will Hicks, a true pioneer of fiber optic technology. I found American Optical to be more focused on medical and healthcare applications as opposed to telecom uses that have become so dominant in recent years. We were purchasing high purity glass from Corning Glass Works where Dr. Peter Schultz had perfected low loss fibers for telecommunications applications. But the center of innovation for fiberoptics was at Bell Labs, then part of AT&T. With the merger of Ted Valpey’s firm Valtech with CommScope, the disruptive innovation of fiber cabling as an alternative to copper cabling had already begun. Later, during my association with SpecTran Corporation in the early eighties, Peter Schultz developed several fiber-preform manufacturing innovations, and he along with Drs. Aslami & Jaegar, created several brands of multimode fibers for the telecom industry. That process saw the emergence of multiple sustaining innovations when Lucent purchased Spectran and introduced additional high performance fibers for the telecom industry employing newer approaches to preform manufacturing at its Sturbridge plant.

By the time I left American Optical in 1982, when it was sold by Warner Lambert and broken up into many parts, medical uses of fiber had become an insignificant part of the total fiber market that was now dominated by telecom applications. The emphasis was shifting clearly in favor of single-mode fibers where Corning had become the dominant producer in the world. By 1983, AT&T was laying submarine cables across the Atlantic containing two pairs of single mode fibers each carrying 280 million bits per second.

With the onset of a key disruptive innovation of this period, fiber amplifiers, the long distance communications, whether underwater or on-land, were about to change forever. These were first thought out again at American Optical by Dr. Eli Snitzer when he had actually moved away from optical fiber research to concentrate on lasers. Erbium-doped fibers turned out to be perfect amplifiers and submarine cables just like the above ground cables started using these amplifiers instead of repeaters for global communications. Using Raman amplification techniques and carrying soliton light pulses, the Bell Labs engineers were able to transmit one trillion bits per second through a single optical fiber. This set the stage for the current phase of all optical networks where optical fiber has become the basis of multiple innovations in the business and personal communications industry.

Market Share and Profit Determinants

The disruptive innovations have come about more from the telecom company demands and less from the traditional producer base of fiber manufacturers. Historically, the industry has been affected by the regulatory environment and the market expectations regarding the bandwidth demand. Goldenberg & Levav et.al.(2003) have outlined five innovative patterns that by manipulating existing components of a product line and its immediate environment can lead to a market share enhancement for the company. One of the technologies they have highlighted for the optical industry is the innovation of photochromics – a technology developed originally by Corning for glass lenses and later extended to plastic lenses in a disruptive fashion by American Optical during my association with the company. Levav et al. suggest photochromics as an example of a dependent relationship between a product and its environment. Corning Glass Works was the market leader in the seventies and it was focused on ophthalmic sunglasses that changed from clear to dark lenses in the sunlight because of their photochromic properties. We at American Optical felt that the consumer preferences were shifting to lightweight plastic lenses for their comfort and convenience. Our R&D scientists Rotenberg and Carmelite were the first to develop a photochromic coating for the plastic(CR39) lenses. We gained market share by launching the product in Europe first and licensing the “Photolite” technology in 1980 to Nikon of Japan for Asian markets. In a comparable situation today for the fiber optic industry, the photosensitive fibers based on co-doping of germanium and boron offer a similar opportunity for new fiber bragg gratings needed by the sensor industry (Shu, Zhang, and Bennion 2002). Wallace (2002) has analyzed the growing use of fiber optic sensors in petroleum exploration and processing fields. Using a two-Bragg grating sensing system, BP has successfully deployed a fiber based monitoring system in the Gulf of Mexico, and the North Slope of Alaska. Similarly, Norsk Hydro is utilizing multi-fiber P/T gauges and distributed temperature sensing systems in the North Sea. These developments suggest the potential for non-telecom applications for fiber optics. U.S. Military and Homeland Security Departments are now using fiber sensors in a variety of non-telecom applications that are radically different from the original product characteristics for intended markets. NEFC members have confirmed in their interviews the diversification strategies that are bound to enhance their market shares even in an uncertain environment for new capital infusion for the industry. A number of new products have the potential of disrupting the traditional market position of Alcatel, Fujikura, Furukawa, Sumitomo, Corning, and other large producers in the industry. Alternative product lines based on EDWAs (erbium-doped waveguide arrays) for cross-connects and reconfigurable multiplexers are gaining popularity in the marketplace.

Regulatory Environment for the Telecom Market

There have been significant discontinuities within the U.S. local telecoms markets over the last twenty years. Many companies have lost business and market shares in this market in a pattern different from the European and other global markets. They assumed that entry would be relatively cheap, that the market would be capable of sustaining multiple local access networks immediately, that existing companies would not seek to deter entry of new companies in hopes of entering long-distance business agreements, and that regulators would reduce (not raise) entry costs to new firms. Entry into local markets are extremely expensive and requires companies to sink huge costs and achieve economies of scale quickly if they are going to survive future competition. Bell operating companies are perceived as monopolists and because they have the power to raise prices and restrict output and additional entry into the market; Congress decided that government regulation and remediation was required and necessary. Regional Bell operating companies still have the incentive and ability to engage in strategic, anticompetitive vertical conduct, particularly in the markets for terminal equipment and long-distance callings. Recent FCC decisions have created more uncertainty for the relative market position of ILECs and long distance companies that made huge investments in long-haul fiber backbones during the nineties.

Advent of Advanced Photonics

Optical networking is critically dependent on advanced photonic components including robust functional components and WDM networking. Such components include fibers, amplifiers, WDM sources, WDM routers, tunable lasers, λ - monitors, ultra-wideband amplifiers, dynamic gain equalizers, integrated add/drop, WDM XC-Fabrics, and λ - Converters. WDM Networking includes point-to-point systems, WDM Add/Drops, WDM Rings, WDM cross-connects, and WDM Mesh Networks. WDM applications evolve from long distance (400G, Xtreme, Lambda Router) to high-speed switch / router (Rubicon), metro/business access (Metro/EON), and optical/wireless architectures.. From metro/business access to LAN (Interconnect,Routing) and Cable TV and from LAN to residential access (WDM PON), the applications have been challenging for competitive market strategists. The rapid evolution and deployment of optical networking systems has been driven by innovation in fiber, optical components, and transmission systems techniques. Scalable optical networks employing optical switching and routing require highly functional and dense optical components and circuits that must be cost-effective. The development and marketing of such components requires continuous infusion of new equity capital which has slowed in recent years.

Recent Industry Setbacks

Following years of double-digit growth, the market for optical networking equipment retrenched in 2001 and has continued to erode during 2002 and 2003. However, new DWDM producers such as Atoga, Altamar, Movaz, PacketLight, PhotonEx, Lumentis, Seneca, Innovance, All Optical Networks, Ceyba, Xtera, Zaffire, Astral Point, ONI, and Sycamore, are showing resilience in the market. Established customers dependent on bandwidth have experienced that on average 20% of deployments need to be upgraded each year, potentially representing $2.5 billion in revenues for the vendors. In the DWDM & OCX market, the sources for demand come from two areas: established customers by adding transmit-receive cards to already installed systems and deploying new systems as capacity fills and first time deployment for DWDM in smaller market rises.

Examples of functional blocks include transponders, gain blocks, optical switch fabrics, mux-demux blocks, and monitors. Migration to transponders can increase supplier revenues even if unit sales are stagnant.Customer empowered optical networks are built on the paradigm that the customer owns and controls the wavelengths (Virtual Dark Fiber). The customer controls the setup, tear down, and routing of the wavelength between itself and other customers. Wavelength resource management is done on a peer to peer basis rather than by a central administrative organization. Customers treat networks today as assets, rather than services. In the future, customers will purchase networks just like computers, machinery, or other big equipment and will be able to trade, swap, and sell wavelengths and optical cross connects in the commodity transaction markets.

Fiber to the Home (FTTH) Prospects

Currently deployment of DSL and cable modems is hampered by high cost of deploying fiber into the neighborhoods. Cable companies need fiber to every 250 homes for next generation cable modem service, but currently only have fiber on average to every 5000 homes. Telephone companies needs to get fiber to every 250 homes to support VDSL or FSAN technologies. Wireless companies need to get fiber to every 250 homes for new high bandwidth wireless services and for the cost effective provision of mobile internet. The cost of “last mile fiber” has to come down considerably if these applications are going to be embraced by the consumer. An innovative fiber deployment system will provide opportunities for small service providers to offer service to public institutions as well as homes. For e-commerce and web hosting companies it will generate new business in out sourcing and web hosting. Bargas & Power(2003) have shown that newer DWDM systems have reduced the cost of turning up new wavelength services by eliminating the need for typical upgrades inherent with legacy networks. Additional innovation in the DWDM infrastructure will be the key to lower operating costs associated with commissioning of future wavelengths while optimizing transmission performance of ever changing transport networks. Advanced fiber devices have enabled the transmission of high speed internet-centric services creating a broadband digital infrastructure that has changed the profile of both public sector and private sector enterprises. These new service requirements have the potential of reversing the telecom fiber glut that exists in the U.S. Market. The Matrix of Companies in Exhibit A shows how a number of fiber opticmanufacturers have diversified into related products and services. They have joined major nonfiber opticproducers such as Intel, Sony, Cisco, Sun, and U.S. Surgical Corp that have made a name in the field of disruptive innovations.

Role of Asset Based Telecom Services

A new business model that may return the fiber opticindustry to its old level of profitability is the asset based telecom provisions. In asset based telecom approach, the customer owns the infrastructure (dark fiber, switches, and wavelengths) while the carrier provides the service and network management. It relieves the carrier of huge capital cost of infrastructure and gives customer greater flexibility in the choice of service provider and control of the network. Asset based telecom puts customer in control and ownership of the network is in its hands.

Metro asset based telecom include condominium fiber networks. Several next generation carriers and fiber brokers are now arranging condominium fiber builds, including IMS, QuebecTel, Videotron, Ceogeco, Dixon Cable, and GT Telecom. Organizations such as schools, hospitals, businesses, municipalities, and universities become anchor tenants in the fiber build. Each institution gets its own set of fibers on a point to point architecture, at cost, on a 20 year IRU (Indefeasible Right of Use). Fiber is installed and maintained by 3^rd party professional fiber contractors, usually the same contractors used by the carriers for their fiber build in the system.

In the condominium fiber market for business there has been significant reductions in price for local loop costs. Also,there has been no increase in local loop costs as bandwidth demands have increased. The ability to outsource LAN and web servers to distant locations increases as LAN speeds and performance can be maintained over dark fiber.

The growing trend for Fortune 500 and large institutional customers is to acquire and manage their own fiber in the metro area. In the long haul, the purchase of point to point wavelengths as IRUs rather than as service is increasing. Carriers will increasingly provide services and management rather than own and operate infrastructure.

Technology Overview

The whole industry shift from copper to fiber has led to several disruptions for users as well as the service providers. Today’s telecom network owes its existence to a transition that has created many failures in the process.

Network drivers have experienced several trends, including: migration from repeaters to amplifiers, increased speed on existing fiber (from 2.5 Gb/s to 10 Gb/s; and from 10 Gb/s to 40 Gb/s), more channels on a single fiber, and quicker provisioning of spans.

Enabling technologies have allowed new cabling architectures optimized for fiber, short wavelength fiber LAN electronics, and small-form-factor (SFF) fiber connectors.

Centralized fiber architecture offers real savings today, with single point administration, reduced ports costs and life-cycle savings, and is accepted in standards worldwide. Fiber LAN electronic costs are decreasing, with 850 nm short wavelength generally less expensive, and 100BASE-SX offering lower costs, and smooth migration. In conclusion, fiber to the desktop can be cost effective today.

Because of the explosive growth of the internet, there is increasing need for more bandwidth in metro and access, and new high speed data and broadband services. The current wave of price reductions of optical components and equipment will create new applications. Cheap fiber deployment in conjunction with mandatory water and sewer rehabilitation projects by municipalities along with increasing importance of dark-fiber networks may stimulate fiber deployment in metro and access networks. There is increasing need for capacity and high speed services by network and service providers (internet, data, & multimedia), public and private institutions, and businesses. Metro optical network requirements include: having multi-protocol and multi-service platforms, being scalable with DWDM (“Pay-as-you-grow”), having point and click provisioning (in seconds , not months), having different QoS and SLAs, with different billing options, switching and routing of wavelengths, including “Wavelength Services”, and having a longer-term, so that all-optical transport with opto-electronic conversion is only at the edge of the networks. Optoelectronic components for metro networks include tunable lasers and filters, transceivers and transponders, OADMs (Fixed and Re-configurable), opaque and transparent OXCs, compact optical amplifiers, DWDM components, uncooled lasers for CWDM, components for optical monitoring and control, and protocol transparent devices.

Thus, it makes no sense to lay “just enough” fiber because the biggest issue at present is the lack of last-mile capacity. There is no way for carriers to be able to make money laying a data network on top of one that is optimized for voice. A new network, built using fiber optics at the core and at the edge will have to be in place for effective utilization of fiber optic systems. No network has unlimited capacity to reach every customer, carrier, or ASP. Thus, carriers will be unable to compete effectively unless they start working with their neighbors, and fellow competitors, in the long haul, metro, and access markets. The carriers that will be the most successful will be those that work together at the lowest cost and in the lowest unit of time in order to be the most efficient.

By incorporating an intelligent optical network environment, carriers will be able to manage down capital expenditures and improve network-operating efficiencies. Several components of next-generation subsystems that enable intelligent optical networking include tunable lasers, optical amplifiers, and transponders, OCMS, and dispersion compensators. By entering into an intelligent optical network environment, carriers will increase revenue and improve service velocity, reduce the cost to deploy, provision, and maintain communication networks, and enable the migration of their voice-centric infrastructure to serve an ever-increasing IP-oriented demand.

Metro Deployments

A new flexible approach for fiber deployment can be considered as an innovation that has disrupted the traditional outlook on fiber. Cities and towns are beginning to develop their own approaches towards fiber deployment for metro applications.

Municipalities are beginning to deploy their own fiber optic infrastructure to gain complete control over their own private and secure network and to eliminate leasing expenditures to telecom companies. This way they have the option to make a city-owned asset pay for itself and produce revenue. Several characteristics of this flexible approach are that it deploys fiber in both man-accessible and non-man accessible existing sewer and drainage systems, it incorporates state-of-the-art materials and equipment developed to streamline the entire installation and upgrade process, and it is cost effective and delivers true fiber-to-the-desk connectivity. The individual fiber tube (IFT) is the low-cost fiber optic deployment alternative in that there is no stranding of unused fiber, there is true fiber-to-the-desk connection through Individual Fiber Management (IFM), and that for the first time, there is access to simple connectivity and easy upgrades. Such a Metro system is becoming a growing trend due to several important aspects such as: revenue sharing opportunities (individual fiber tubes allow a city or telecom for the first time to share, lease, or rent to make revenues); construction (no large crew and/or equipment is needed, permits, restoration, and moratoriums become non-issues); speed to market (customer connection to network is accomplished in days rather than months); instant network (backbone is lit by leasing individual fiber tubes and then blowing and splicing fiber); and secure network (it eliminates “hot cuts” or unintentional access to lit fiber).

New Network Service Tools

The service providers remain focused on aggressively reducing costs and pursuing key innovations in optical switching even though there has been rapid change in the business environment. Optical switching cannot be discounted because use of optical switching can dramatically reduce OpEx and CapEx, and with optical switches, new services can be introduced non-disruptively over existing SONET/SDH infrastructure.

Many component manufacturers are using tunable laser technologies to address the challenges faced by network service providers today. The emerging trends in the system architectures have been higher channel counts, higher data rates, longer reach, tunable components, and better network design and management softwares. Tunable lasers are the differentiating tool for new systems architects because of the advantages they offer to the systems vendors and network operators. Tunable lasers allow system vendors to design flexible networking equipment; improve system maintenance and trouble-shooting; and reduce systems maintenance costs for carriers. They also allow network operators to deliver flexible bandwidth services, reduce network operating costs (inventory, provisioning) and increase new revenue generation. One factor that might stimulate fiber deployment in metro and access networks is the cheap fiber deployment in conjunction with mandatory water and sewer rehabilitation projects by municipalities and the increasing importance of dark-fiber networks. Metro fiber networks will become important as there is increasing need for capacity and high-speed services by networks and service providers, public and private institutions and businesses. There are several requirements for metro optical networks including: multi-protocol and multi-service platforms; that are scalable with DWDM; point-and-click provisioning with different billing options; and switching and routing of wavelengths services.

Summary and Conclusions

Disruptive, discontinuous, or radical innovation as a competitive strategy is not new to the fiber optic industry. It has followed the typical pattern of most high technology industries especially the electronic and computer industries. Tushman & Anderson (1986), Wheelwright & Clark(1992), Christensen(1997), Todd(1997), Johnson & Scholes(1997), Hill & Jones(1998), Trott(1998), Veryzer(1998), Hamel(2000), Ahuja & Lampert(2001), and Rice et.al.(2001) all have provided relevant examples from several industries where disruptive innovations carried out by niche players have led to the erosion of market presence by industry leaders. Smaller players who paid more attention to newer applications that met new customer needs as opposed to satisfying old customer needs better have been rewarded for their ingenuity. McDermott & O’Connor(2002) have shown in a multidisciplinary study that project teams engaged in radical innovation projects encounter a more challenging environment than those engaged in incremental or sustaining innovations. A comparison of Fortune 500 Companies from 1972 to those still on the list in 2002 demonstrates how companies that did not anticipate or capitalize on disruptive innovations hurt themselves compared to the responsive firms. The degree of responsiveness to changes in the market and business trends will determine the success of any competitive strategy and fiber optic industry is no exception in this regard. The innovative process that accompanies technological change has been more important for telecom companies and other service organizations in this industry. The enabling nature of fiber optics is such that by enhancing capacity and bandwidth availability, it has ushered new services that in turn have been disruptive for other industries. A good example is the emergence of web services industry. Web technologies such as “http” and “html” represented the first wave that resulted in significant advances in electronic commerce. While some industries such as newspapers, other print media, travel agencies, and point of purchase stores suffered because of it, a whole new market of internet advertising took shape because of it. New UDDI directories using “web service description language” are now in the forefront of the web-based marketing initiatives. They remind us of companies such as Charles Schwab and Bloomberg Financial that entered their industries as disruptive technologies but helped expand the total market within a short period of time. Several NEFC members such as CyOptics, DRAKA, Gould, JDS Uniphase, Newport, Nufern, Panduit, Schott, Verrillon, and Xanoptics are credited with significant innovations in recent years. Because of the macroeconomic downturn and the ensuing liquidity problems, the disruptive aspect of these innovations has not yet materialized and several branded or proprietary products have become part of the mainstream market without much fanfare. The market leaders such as Alcatel, Lucent, and Nortel have lost market share to newer players such as Sycamore and Ciena that figure prominently in Exhibit A Database. Timing of product acceptance by the telecom companies has been more of a deciding factor than the disruptive nature of the innovation.

According to KMI estimates, over fifty million miles of fiber optic cable has already been buried underground which is enough to circle the whole planet approximately sixteen hundred times. There were competitive and regulatory pressures that were responsible for this massive “over-build” of capacity at a cost of over one hundred billion dollars. The net result is that capital infusion into this industry has dropped disproportionate to other industries. That has affected the process of innovation and risk taking in the industry. Only a small fraction of the buried dark fiber capacity has been put to use. The industry needs both sustaining and radical type of innovations in the applied and service sectors if the past investments have to yield desirable returns. Recent FCC Rulings have opened up the wireless arena to telecom companies. Tech Man International, an early manufacturer of wireless modems, was one of the first to receive an FCC license in 1984 for telecom networking devices. But the regulatory policy that was too restrictive and cumbersome slowed the growth of this industry. With the recent technological advances and the popularity of the cellular networks, we have the opportunity to integrate high bandwidth fiber backbones with fixed wireless and mobile solutions. Exhibit A Database companies such as Corvis, Ericsson, and Nortel that are beginning to link fiber optic networks to wireless systems are going to define the new marketplace. The fiber manufacturers such as Corning should not look at wireless option as a competitive threat. Just as WDM proved itself to be a complementary technology and led to the expansion of fiber optic market size, the wireless innovations should also help create additional opportunities for fiber producers.

The Internet Freedom and Broadband Deployment Act of 2001 has opened up new avenues for expansion of fiber optic services especially to the emerging “fiber to the home” sector. The popular Gigabit Ethernet has reduced the cost of high bit rate transmission to the desk and has enabled network upgrades without redesign and replacement of existing components. Simultaneously, VCSELS have extended the capacity and life cycle of existing multimode cable products. The emerging multi-wave optical layer that is based on innovative DWDM systems has removed many bottlenecks from ever expanding telecom networks. The demand for high bandwidth internet services is leading to new product innovations. Applications such as WebTV, palm-pilot video, streaming video on demand, television quality (full motion) cellular pictures, and high-end consumer preferences are setting a new standard for the integration of bandwidth-rich fiber optic solutions with the ease of wireless systems.