STARTAP annual meeting

Stockholm, June 5th 2001

The optical network evolution Affected by current economic slowdown?Yves PoppeDir, Liaison R&E NetworksGlobal Market

AgendaThe difficulty of predictions

Transoceanic (over)capacity

Slowdown and rebound

The optical future is no illusion

The difficulty of predictions and forecastsIn october 1994 Teleglobe inaugurated Cantat-3 with two fiber pairs, capacity of 5gigabit (2x2.5Gb) linking Canada to the UK, Germany, Denmark, Iceland and the Faroe Islands.Doubled the capacity under the atlantic155mb was earmarked for dataEngineering estimated 17years to fill the cable

What happened sinceThe internet tsunami took everybody by surprise.Cantat-3 was full in less than 3 years.Five years later cables of 1000 times the capacity of Cantat-3 are being installed.Deregulation and ease of acces to capital created a multitude of new carriers and a cornucopia of transmission capacity. This in turn now makes it relatively easier and less costly to deploy worldwide networks such as Teleglobes GlobeSystem.

GlobeSystem 160 major global marketsAdvanced services for carriers, ISPs, content providers and corporations Over 400,000 route miles Next generation technology US$5B investment over 4 years

The battle of the AtlanticCapacity coming onlineGbps* RFSLevel 3/Global Crossing (Project Yellow)1,2803Q00TAT-14 (Club) 640 4Q00FLAG Atlantic-1 (FLAG/GTS)2,560**2Q01Hibernia (360networks, Inc.)1,9202Q01Atlantic Crossing -2 (Global Crossing)2,560***1Q01TyCom Global Network2,5604Q01OxygenNo Go!-------Total8,960* = Design capacity** = Teleglobe buying 2 fibers*** = Cancelled, AC-2 joining Level 3Does not include C&W Apollo cable (RFS 2003)

Transpacific cables up to June 2001TPC-5China-USJapan-USPC1

Transpacific Terabit capacity ?

FLAG PACIFIC-1 projectDual cable system linking major Internet hub cities Los Angeles, San Francisco, Seattle, Vancouver and Tokyo Southern branch through Hawaii, Northern via AleutiansDesigned to provide 5.12 Tbps fully protected capacity.Alcatel awarded supply contract for submarine systemPlanned RFS date: mid 2002Expected to commence service at 160GbpsCost: US$1.2 billionOverall lenghth of 22,000km

Could there be oversupply?Atlantic supply exceeds conventional demand forecasts: strong downward price pressure !GbpsThis does not include C&W Apollo cable project: additional 8 terabit for planned for 2003

Chart11

37.286.289.6191.5

73.2216.11369.62111.5

127.1586.22329.68511.5

206.31221.52969.68511.5

304.12233.13609.68511.5

572.43022.84889.68511.5

Demand (Gbps) - Probe

Demand (Gbps) - Pioneer

Transatlantic Supply

Transatlantic Design Capacity

Sheet1

199920002001200220032004

Demand (Gbps) - Probe37.273.2127.1206.3304.1572.4

Demand (Gbps) - Pioneer86.2216.1586.21221.52233.13,022.80

Transatlantic Supply89.61,369.602,329.602,969.603,609.604,889.60

Transatlantic Design Capacity191.52,1128,5128511.58511.58511.5

199920002001200220032004

Demand (Gbps) - Probe25.246.678123.3179.1337.2

Demand (Gbps) - Pioneer27.576.9175.9381.1739.81,281.40

Transpacific Supply19.9259.90419.901,219.901,859.902,499.90

Transpacific Design Capacity19.91,0601,0603,6203,6203,620

Sep'99Oct'99Nov'99Dec'99Jan'00

Los Angeles - Tokyo77.373.366.76464

Los Angeles - Hong Kong81818179.379.3

New York - London4540353430

New York - Frankfurt41.127.826.726.726.7

London - Sydney85.585.585.582.982.9

Sheet1

0000

0000

0000

0000

0000

0000

Demand (Gbps) - Probe

Demand (Gbps) - Pioneer

Transpacific Supply

Transpacific Design Capacity

Sheet2

0000

0000

0000

0000

0000

0000

Demand (Gbps) - Probe

Demand (Gbps) - Pioneer

Transatlantic Supply

Transatlantic Design Capacity

Sheet3

00000

00000

00000

00000

00000

Los Angeles - Tokyo

Los Angeles - Hong Kong

New York - London

New York - Frankfurt

London - Sydney

Oversupply in the US ?Carriers spent much of the several years tearing up streets and laying down fiber routes as if demand knew no bounds. But now the utilization rate of that vast network is a staggeringly low 2.5% according to Merrill Lynch& Co. Telecom equipment analyst Tom Astle. Business Week, April 9th 2001

Telecom meltdown?Telecom debt USA plus Europe :US$700 billion100 billion could default or restructureUS comm spending 2000: US$124 billion; 25% year over tear increase from 1996 to 2000; expectation for 2001: -15%, 2002: flatTeligent, Northpoint, Winstar, ICG, PSInet etc. file for bankrupcy protection; Covad, 360Networks have difficulties.

How did we get into this predicament?Deregulation combined with the internet and wireless boom led to wild spending and irrational exuberance by established telecom carriers and start-ups.The 1996 US Telecom act and European deregulation promised access to a US$300 billion market growing at 10% p.a.Get rich quick model by 1996 purchase of MFS by Worldcom for US$14billion or 6 times the value of assets put in the ground was emulated by lots of start-ups and facilitated by the abundance of equity capital.

End of the never ending high-revenue growth The perfect storm of sky high investments combined with the proliferation of competitors and spectacular advances in fiber transmission and processor capacity led to too much of a good thing.Economics similar to railroads: once the money is sunk into the ground, incremental cost to provide the service is almost nil.While capital spending grew by 25%, revenue growth remained stuck around 10%. Long-distance per minute revenue collapsed; the price of a NY-London STM1 went from US$ 12million to less than US$2 million between 1999 and 2001.

For when the upturn? The BW 2 year theoryPostulate: after 18% growth in 99 and 23% in 00, growth in 01 and 02 will be 3 to 5%Reasoning:Slowdown would bring the industry 5 y growth back to its long-term average of 12%3 to 5% growth-rate not unprecedented: for the 86-87 and 90-91 tech slowdowns the 2 y growth rate was 4% and 2.5% respectively Return of 30 to 50% growth rate unlikely in foreseeable future; more likely 20% range.

Who will be the beneficiaries?With more consolidation and less capital for start-ups competition on the local access risks disappearing. Even the promise of local access competition from cable TV companies seems to be recedingLocal phone companies such as Verizon, SBC, Bellsouth, Bell Canada continue to produce steady financial results with relatively little competition in core local access and capitalize on BB internet and wireless.New generation carriers: Qwest, Level3, GC, Tycom, Williams, Broadwing et all: Darwinian process in progress.

Dare to extrapolate for the next 5 years?Will Moores law and related laws for growth of fiber transmission capacity and internet growth continue to apply? ProbablyThe laws of gravity still apply, even in the New Economy. Progress alternates between periods of exponential growth and plateaus were the progress is absorbed.Progress continues unabated:Alcatel tested 10Tb over single fiber with 256 channels at 40Gb and demonstrated 3TB over 7300km using wide band EDFAIntel announced chipsets for OC192 and 10GbECiena announces 160 channels at 25GHz spacingAlthough traditionally spacing in GHz=2.5x channel capacity in Gb Ciena claims to have 10Gbps using 12.5GHz spacing in lab

The optical future is no illusionMost major carriers are committed to an optical backbone as a cost effective way to meet the increasing bandwidth demands.R&E, community and condominium fiber projects help accelerate the extension of capilarity all the way to schools, businesses and homesOptochips will do for telecom what microprocessors have done done for computers. They will usher in vast increases in power along with huge savings in cost. (Otis Port in BW May 14th)Commitment of heavyweights such as Intel and progress in optical switches, tunable lasers, use of indium-phosfide chips.Most important: US$6.4 billion in VC for photonics (71 deals since 96) June 4th FT quoting Merrill Lynch: Spending on optical will grow by more than 30% p.a. over the next 5 years despite the bust in other parts of the equipment market.

The need for next gen applications .Once the carriers will saturate their DSL and cable access markets for high speed internet access what then?What happened to HDTV? Where is HD Video-conf? Desktop video-conf? Interactive cubicle?Are the next gen killer apps in interactive entertainment? Sony deal with AOL and Realplayer is a first step.Hot products these days are local HD (DVD players, home theaters, high res digital cameras). Cable TV down load of movies was supposed to make the local video store obsolete years ago.Hot telecom products are not high-speed but relate more to mobility and universal (wireless) accessibility

Satellite will continue to play a crucial role to connect many countries, even in an increasingly optical world.

GlobeSystem Internet - We Connect the World !

1) Probe forecast is high scenario. Pioneer forecast model suspected of over estimating demand 2) Capacity figure for 1999 from Pioneer is 191.5Gbps and includes the following systems:1988TAT-80.561989PTAT-11.261992TAT-91.121992TAT-101.121993TAT-111.681994CANTAT-34.981994Columbus-21.681995TAT-124.981996TAT-134.981998AC-139.811998TAT12/13(U)9.951998Gemini29.861999Columbus-39.951999 AC-1 (U)39.811999Gemini (U)29.861999TAT-12/13 (U)9.953) Re design capacity, assumes AC-1 could be boosted to 160Gbps4) Re supply: assumes:- TAT-14 and Level 3 start at 640 Gbps in 2000- Flag Atlantic 1, Hibernia and TyCom start at 320 Gbps in 2001- Level 3, FLAG Atlantic 1, Hibernia and TyCom add 160 Gbps each year to existing systems in 2002 and 2003 and 320 Gbps each in 2004

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