Why Qwest built in 2,300% excess capacity

In 1994, broadband communications provider Qwest built its 18,500 mile transcontinental Macro Capacity network with 48 strands of 10 Gbps fiber optic cable to link 150 U.S. cities. The telecommunications provider activated 20 Gbps while leaving the other 460 Gbps as “dark fiber.” Building 2,300% excess capacity would be highly unusual in most other industries. A hospital is not likely to build facilities for 4,800 patients when currently serving only 20. Similarly, an automobile manufacturer will not build a factory with capacity for 480,000 cars a year while making only 20,000.

A key difference between broadband telecommunications and other businesses is that two major costs of constructing a broadband network are fixed. The costs of securing the right of way and digging the trench do not vary with the network capacity. Whether Qwest laid 1 strand or 48, these costs would be the same. The variable costs of additional network capacity were the price of the extra strands, the incremental cost of installing them (beyond the cost of installing the first strand), and the network equipment connecting the strands.

Qwest deliberately installed 46 extra strands of “dark fiber” for possibly two reasons. One was that the economies of scale in the construction of a broadband network were so large that it was worthwhile to build the additional capacity in anticipation of future demand. The other reason was that the cost of building the excess capacity was sunk, once incurred. As we explain in chapter 10, large sunk investments may be effective in deterring potential competitors.

Source: “The Bandwidth Barons”, Data Communications, July 1998, pp. 44-56.