What does it take to dominate one of the world’s fastest-growing markets?

Follow the supply chain back from your local Best Buy—where falling prices have shoppers scrambling for flat-screen televisions—and you may well find a factory nestled amid the horse farms and tobacco fields of rural Harrodsburg, Kentucky.

This is where 154-year-old Corning first made the glass used in today’s notebook computers, cell phones, and flat-screen TVs. While prices for flat-panel sets plummet, the former light bulb and kitchenware company is squeezing fat profits out of the business. That’s because it owns the market for the huge sheets of glass required for the high-definition, wall-hugging LCD sets that will be at the center of next year’s Super Bowl parties.

This is no ordinary glass. Twin roughly 9-foot-tall yellow robots—Fred and Ginger—use suction cups to grab huge sheets of fresh glass as they pour down untouched from a long trough of molten glass just a few feet above. The machines take turns pirouetting the glass onto a conveyor behind them. The less than 1-millimeter-thick sheets are so perfect they would be invisible if not for the fine line where the light bounces off their edges. A factory worker inspects the fresh glass with xenon lights. Moments later, it’s packed by another pair of robots wielding suction cups and jetted out to Asia. There, machines will etch millions of circuits into the pristine glass, forming the foundation for the ever-bigger flat-screen TVs that consumers crave.

It’s a series of transactions now among the most scrutinized in technology. Investors are furiously debating how long Corning can balance surging demand and plunging prices with the $1.7-billion investment in new glass factories from 2003 through 2007 that it needed to stay ahead of Japanese competitors Asahi Glass, Nippon Electric Glass, and NH Techno Glass. After rumbling up nearly 1,900 percent from their post-bust low of $1.10 on October 14, 2002, the glass giant’s shares have been moving raggedly up and down for weeks now as investors place their bets on the future of the fast-growing LCD industry. They closed at $18.55 on Oct. 24. Corning has lost bets like this before. The telecom bust cost the company roughly half of its work force of 40,400 when its molten-hot fiber-optic business collapsed. “There are fundamental differences,” says Corning Chief Operating Officer Peter Volanakis.

That doesn’t mean Corning isn’t stepping gingerly. “We are very diligent and vigilant,” says James Clappin, who leads Corning’s Display Technologies business. “When you spend that kind of money, you’ve got to be certain you need it.”

Certain indeed. If Corning miscalculates, it will jeopardize the $363 million in net income—which includes results from a joint venture with Samsung—that it cranked out of its display business in the quarter. Those profits made up the bulk of Corning’s third-quarter net income of $405 million, excluding special charges, and are hauling the company through losses in its once-mighty telecommunications segment. Sales for Corning’s display segment grew to $489 million, up 66 percent from $295 million in the year-ago quarter. The segment accounted for more than 30 percent of Corning’s sales of $1.188 billion last quarter. Displays are the key to salving the deep wounds left by the telecom bust. Corning climbed back to an investment-grade credit rating from all three major rating agencies this year and plans to slash its debt to less than $2 billion by year-end from $2.7 billion a year ago. Every day Corning can keep its grip on the market for LCD glass it grows stronger.

But this is more than just the story of a single risky bet. It’s the tale of a manufacturer that once again has found a way to turn a dead end into a new start—a reinvention that came not through some trickery of financial engineering or crude intellectual property shakedown, but through a hard slog past the frontiers of manufacturing technology. It’s a case study in the risks and rewards of innovation that will literally play out in front of our eyes over the next decade. One missed step, and it’s lights out for Corning’s stock. The future of a Fortune 500 stalwart with a $27.45-billion market cap—equal to storied computer company Sun Microsystems and networking giant Lucent Technologies combined—and its roughly 25,000 employees is on the line.

Blinded by the Light

No one knows this better than Corning. In 1970, three Corning researchers invented the fiber-optic cable now at the heart of modern communications networks. It was just the latest innovation to emerge from Corning’s vast Sullivan Park research labs in Erwin, New York—a 257-mile drive from New York City. But in order to turn that invention into a business, Corning had to win bruising battles with Asian rivals. To dominate the business it created, Corning has spent decades perfecting fiber able to carry 150 million conversations in a single hair-thin strand. By 2000, Corning’s optical fiber and cable business brought in $2.9 billion, up 70 percent from the year before. To keep up, Corning announced it would spend $1.65 billion on new capacity.

That’s when the fiber-optic bubble popped. While Corning’s fiber revolutionized telecommunications by the late 1990s, WorldCom, GlobalCrossing, and others were sinking billions into fiber-optic lines that had become connections to nowhere. The resulting bust led to the departure of CEO John W. Loose in 2002 and the return of Corning scion and onetime CEO James R. Houghton. He moved quickly, slashed 20,000 jobs to save $2 billion annually, and sank $640 million into expanding Corning’s display business before stepping down once more (Chief Operating Officer Wendell Weeks was promoted to CEO in April). The result has been a seemingly instant shift from bubble-era has-been to stock market superstar.

Patient Money

Corning’s salvation came from a business that looked like a dead end. When Mr. Volanakis was put in charge of Corning’s LCD glass business in 1997, the company had pursued the business for over 13 years and was still losing money. Just a few years earlier, Mr. Volanakis was involved with another promising Corning project that had failed—crafting a kind of glass that could be shaped into all kinds of parts like plastic. It was beginning to look like this could be another. “There were discussions inside the company about if this was worth it,” says Mr. Volanakis.

It would be the last of the LCD business’ many near-death experiences. Corning had made today’s LCD displays possible in Harrodsburg, where its 53-year-old plant was the first in the world to create glass pure enough for modern LCD screens in a region better known for fine bourbon than technology breakthroughs. The secret was the “fusion” process Corning had invented, and later abandoned, to create glass for car windshields and sunglasses free of the imperfections caused by polishing. The glass is poured down the sides of a long trough, meeting to form a single sheet underneath. Corning was within days of giving up in the early 1980s when the first panels good enough for the job were produced. By 1997, Harrodsburg was cranking out glass for laptop monitors and cell phone displays. The revenues were real, but there were no profits. Then the Asian financial crisis hit, crippling consumer electronics manufacturers and forcing Corning to shut down the factory for nine months.

The turning point came on a tour of Asia to check in with Corning’s customers. There, consumer electronics manufacturers made it clear the cathode-ray tube would soon be in for some serious competition. In Japan, consumer electronics company Sharp showed Mr. Volanakis prototypes of wall-sized LCD displays, a concept for a flat computer where the display is the computer, and more. All of this helped Mr. Volanakis make a case for the display business to Corning’s management committee. In June 1998, Mr. Volanakis compared his five-year plan—which showed a loss the first year, and the business ramping up every year after that—with all of his predecessor’s plans, which started with losses and ended there. “This is my plan,” Mr. Volanakis told them. “And here are all of your plans.” It made for an uproarious punch line. But this was no joke. Corning’s patient money had paid off. LCD’s time had come.

The Triangle of Pain

To dominate the business it had created, Corning would have to make its glass bigger and better faster than its competitors. That meant mastering what Peter Bocko, director of commercial strategy for Corning’s display group, calls the “triangle of pain.” Corning would have to make its displays flatter, cleaner, and more stable—all while increasing the size of the glass sheets to allow manufacturers to carve out ever-larger displays.

The result: since 2000, glass size has doubled about every 1.5 years. Factories in Taiwan, South Korea, and Japan duplicating processes pioneered at Harrodsburg are one solution to the problem of moving giant glass sheets onto planes, under bridges, and through tunnels. The glass is so free of the kind of flaws that make conventional glass brittle that it’s surprisingly strong. Mr. Bocko has taken pendulums to Corning’s glass to demonstrate its strength. Meanwhile, the glass is so flat that the distortions on its surface are the equivalent of a four-inch wave on the surface of 12,000 feet of water. “This is really, really hard to do,” says Mr. Clappin. “As you get bigger it gets more difficult.”

But size is what keeps Corning ahead of its competitors. Corning now has 56 percent of the market, compared to just 20 percent for Asahi Glass and 18 percent for Nippon Electric Glass, and 6 percent for NH Techno Glass, according to El Segundo, California-based market researcher iSuppli. Bigger panels will also help keep Corning’s prices relatively high as analysts predict the average selling price for glass declines. Corning believes LCD televisions will grow from roughly 10 percent of the market now to 21 percent in 2007. The upshot: Corning should be able to prosper even as prices for flat-screen TVs plummet.

Another cushion, besides size? Corning’s customers are paying to help it bulk up. Companies are crowding into the LCD panel business in an effort to grab as much of the booming market for LCD screens as they can. As a result, they began telling Mr. Clappin, who led Corning’s display business in Asia, that Corning had to boost its production. “‘You want a lot of capacity, I’m not sure it will be utilized,’” Mr. Clappin says Corning replied at the time. The response? “‘Well, I need the glass, let’s talk.’”

Panel makers began signing agreements to buy new capacity in advance. Taiwan’s Chi Mei Optoelectronics agreed to pay $510 million in advance for glass over two years. Since then, others have struck similar deals, receiving over $1 billion in contract commitments for LCD glass. Such terms are unheard of in consumer electronics. “It’s a race to see who can be faster, who can increase their maximum capacity, and who can increase their market share,” says Sweta Dash, director of LCD and projection research at market researcher iSuppli. “In these conditions, companies such as Corning have a definite advantage.”

Corning now expects 40 percent compound annual growth for LCD glass between 2004 and 2007. Compound annual growth for glass used in LCD TVs will be almost 100 percent between 2004 and 2007. Compound annual growth for glass used in LCD TVs will be almost 100 percent between 2004 and 2007. And Corning’s own projections have proven conservative. In October, the company announced that its board approved another boost in spending on displays, earmarking $425 million to expand a factory in Taichung, Taiwan, as demand for its LCD glass grew 22 percent over the prior quarter, exceeding Corning’s own forecast of 15 to 20 percent revenue growth.

Nowhere to Hide

While too much fiber in the ground created ruinously cheap prices for phone calls and destroyed the phone companies that were Corning’s best customers, the television market is different.

Although fiber optics failed to create more demand for communications as quickly as some had thought, consumer demand is more elastic, since bigger panels are making entirely new products possible. Sharp’s $20,000 titanium-finished, high-definition 65-inch flat-screen TV is just one example. The big panels mean LCDs will move from replacing computer monitors to taking on cathode ray tubes and rear-projection television sets in living rooms.

The market is also far easier to track than the fiber-optic business, says Bob O’Brien, global market forecast manager for Corning’s display technologies business. Everyone from retailers to consumer electronics companies regularly discloses enough about their sales that Mr. O’Brien’s team of analysts can get a good idea of what’s selling—and industry analysts can easily double-check their work.

Most important, as much of the U.S. fiber-optic capacity now sits unused in the ground, a new wave of applications should keep the market for sleek, high-definition displays interesting over the next few years. Corning predicts sales of LCD televisions will jump to more than 45 million in 2007 from a little under 10 million last year. Higher capacity alternatives to DVDs, such as Blu-ray and HD-DVD, will make their debut next year, boosting demand for new high-definition sets, many of them LCD displays. The next generation of game consoles, which will begin hitting the market this year, will feature support for high-definition games. Digital broadcast signals will likely replace analog signals in 2009 in the United States.

Risky Business

Of course, if none of these wonders arrives on schedule we’ll all know it—and Corning will be punished. This is not a stock for widows and orphans. It’s the kind of fast-trading issue that will make or break Wall Street’s toughest growth investors over the next few years. Janus’ Orion fund made Corning its biggest position during the first half of this year, riding it up for market-beating gains before dumping it during the second quarter. As of the end of August, other investors—including Primecap Management Company, which runs Vanguard’s Primecap Core and Capital Opportunity funds—were holding tight.

It’s been a bumpy ride. Every time there’s a downward blip in consumer demand or a hint of inventory trouble at a panel manufacturer, Corning gets smacked. In early October, when LG.Philips LCD, one of the world’s largest LCD makers, predicted flat-panel prices would fall during the fourth quarter, Corning’s shares dropped more than 9 percent to $17.79. Bulls such as Merrill Lynch analyst Steven Fox argue such dips are buying opportunities, despite tagging Corning’s “volatility risk” as high. Others such as Morningstar analyst John Slack praise Corning’s turnaround, but are steering investors away from what they see as a risky bet. “Back in the fiber days Corning was a proxy for fiber demand, now it’s a proxy for LCD demand,” says Mr. Slack. “When you start to hear of inventory issues in Asia or pricing softness in LCDs it bounces all over the place.”

Look past the volatility, though, and Corning could be a good investment. Strip out special charges such as those involving a 2003 asbestos-related legal settlement, and the company has a price-to-earnings ratio of 22.97, according to Thomson Financial. That’s well above the average of 18.20 for capital goods manufacturing companies. But analysts expect eye-popping earnings growth of 76.58 percent this year compared to 16.79 for a typical manufacturer.

Fiber’s Killer App?Recent consumer behavior is easy to track, but consumer sentiment is difficult to predict. A recession spurred by rising energy prices, falling housing prices, or both could turn today’s free-spending consumers skittish. That could send LCD makers scurrying to cut back production.

Of course, an extraordinary upside is also possible here—one that may even bring some light to the end of the tunnel in which Corning’s once-booming fiber-optic business is now trapped. Corning has scaled back since the days when phone companies scrambled to put hundreds of thousands of miles worth of its premium fiber in the ground and under oceans. But the business of bringing those high-speed connections to homes is just beginning (see “Fiber Wars,” Vol. 2, No. 17, p. 40). That’s especially true in the U.S., where relatively pokey copper connections to homes and businesses dominate.

Phone giants SBC, Bell South, and Verizon are pushing ever-faster connections to homes for next-generation voice, data, and entertainment services. Nothing can push more data into those homes faster than fiber. Verizon has taken this furthest: It is equipping 2 million homes with fiber-optic connections, on top of 1 million homes hooked up last year. Folks are going to want to use those connections for more than just shopping on eBay.

Way back in 1983, Don Keck, one of the Corning researchers who created commercially viable modern fiber optics, saw this coming. “Just remember Pete, at the end of every fiber is a display,” Mr. Bocko recalls Mr. Keck telling him. “We’re riding the same trend.” As phone companies start wiring up thousands of neighborhoods with fiber, the killer app will be waiting: all those high-definition flat-screen TVs, LCD-equipped video cameras, and handheld game and music players ready to be filled up with content.