Is another ‘bubble’ coming?

Oct. 1, 2007
The telecom business seems to have recovered.
1304qa Chang New

The telecom business seems to have recovered. Could there be another “bubble” coming?

I can still remember the bumper sticker “Oh Lord, let there be another bubble.” There will be bubbles from time to time, but probably not in the optical telecom space for a while. It is fun to recount what happened and compare all the factors, then and now. In fact, we are now operating at almost the opposite extreme of the circumstances that brought us the bubble then.

To begin with, the bubble was triggered by optimistic projections by industry opinion leaders and market analysts of the growth in bandwidth requirement. Everybody was scrambling to build network capacity, which in turn caused equipment manufacturers to panic, overstocking and ordering extra components to cover contingencies. That stampede of orders artificially created an impression of a shortage, which kept prices high and led components manufacturers to add capacity for increased production. All of this was perfectly timed with an exuberant stock market, and venture funds were flourishing because startups could become billion-dollar IPOs in just a couple of years. Not only that, companies started to make acquisitions with high-priced stock as currency and were willing to pay exorbitant valuations. Companies that were barely started were bought for multibillions of dollars (with a “B”!) and the purchasers were getting not much more than a brilliant idea and a promise.

It was a wonderful time for everyone until suddenly somebody noticed that actual network traffic was not growing nearly as rapidly as projected-by a couple of orders of magnitude. The band stopped playing. By then people realized there was actually a bandwidth glut. Literally overnight everything came to a screeching halt: orders were canceled because there was excess inventory in the warehouse, production lines had to be shut down, prices plummeted to compete for dwindling sales, companies cut back, and most of the billion-dollar acquisitions were shut down. What a great story to tell our grandchildren!

Today, seven years later, we have barely worked through the excesses, with many of the high fliers either out of business or acquired by others. Now level-headed market analysts are making rational projections. The business environment is healthy, thanks largely to the rapid growth in video traffic, but there is no big shortage of capacity, equipment, or components. On the IPO front, it is much more difficult for companies to go public; with a few anomalies, the criteria for an IPO has rightly returned to revenue, revenue growth, and profitability. Companies with a small revenue base simply cannot afford the high administrative cost of being a public company that has to comply with the Sarbanes-Oxley act, which didn’t exist during the bubble. And with the consolidation of companies, there are far fewer companies in a position to make acquisitions. Prices paid for acquisitions are now justified by real revenue numbers. Venture capitalists are still loaded with cash, but have moved on to other hot areas, like Web II and green alternative energy. Because they have not quite gotten over the bubble experience, VCs tune out as soon as you utter the words “optical” and “telecom” in the same breadth. Nope, there is not going to be another optics bubble any time soon.

Of the three universities that offer optics degree, which one would you recommend for my Ph.D.?

Gosh! Are you not trying to put me on the spot? All three are great schools. The consideration may boil down to the thesis adviser you have in mind, whether he or she is noted in the field you are interested in, good at getting grants, well connected with industry to help you land jobs, and has the right chemistry for your personality. You also want to make sure the university is strong in related fields; for example, optics applied to biology. It may very well be worth your trouble to spend a few days on each campus and even work with the professor to check out the environment.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at

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