This paper examines the recent experience of the fiberoptic industry where disruptive innovations have been common but the results in terms of individual company market share and profitability have varied considerably.
The fiberoptic industry has gone from a period of extraordinary growth and profitability in the 1990's 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.
This paper 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 Fiberoptic 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 Fiberoptics. 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.
My first exposure to fiberoptic 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 fiberoptic 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 Coming 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 firmValtech 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 Coming 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 Profitability Determinants
Exhibit A, prepared with the help of IGI, provides in a matrix format, the product line breakdown for major players in the fiberoptic industry covering such innovations as the DWDM systems, optical switches, terabit routers, and access systems for enterprise and residential markets. 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. Coming 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 fiberoptic 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, & Bennion 2002). Wallace (2002) has analyzed the growing use of fiberoptic 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 fiberoptics. 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.
The 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...