10 Things You Need to Know: Broadband's Benefits Cut Wide Swath for Net Outfits

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SAN FRANCISCO -- The interstate highway system triggered the development of cities, suburbs and businesses along its lonely stretches of pavement. In the same way, an explosion in high-speed online networks could mean a long-dreamt-of bonanza for Net content, services and applications companies this year.

Wall Street has shown that it's confident the networks are getting in place to make this high-speed Net access, called broadband, a reality for more consumers and businesses. Fiber-optic equipment maker JDS Uniphase (JDSU) rose 850% in 1999, while Covad (COVD), a provider of digital subscriber lines, ended the year up more than 366% from its January IPO.

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Financiers and analysts figure 2000 will bring more gains to the smartest network builders. And the new broadband networks they build will allow services and applications to flourish. For instance, J.P. Morgan figures the U.S. broadband opportunity for infrastructure, services and applications will grow more than 30% annually to $100 billion by 2002 from $30 billion in 1998.

"We believe that bandwidth consumption will become the prime mover of an increasingly technology-driven economy," says Mark Langner, an analyst at J.P. Morgan.

Kong-Size Opportunity Broadband and IP data services market projections

Note: Percentage change is from previous year. Source: J.P. Morgan Securities

The winners could include established companies like Yahoo! (YHOO), RealNetworks (RNWK) and Exodus (EXDS).

Yahoo!, for instance, is leveraging its purchase of Broadcast.com and reportedly developing a daily, two-hour live video program for the Net. And whenever Web surfers demand richer audio and video, streaming media leader RealNetworks stands to benefit.

Small Fry

And there are scores of small fry jostling to beat the bandwidth rush. The top names that analysts cite are Launch Media (LAUN), which creates music content, Quokka Sports (QKKA), which provides sports programming, and EMusic (EMUS), which offers downloadable music.

Hand in hand with content is advertising. CMGI (CMGI), which has assembled a band of online marketing and advertising companies, is well positioned here, analysts say.

"Advertising has been somewhat thwarted by narrowband," says Dan O'Brien, an analyst at Forrester Research. "Rich advertising would greatly increase the effectiveness of advertising."

More bandwidth also will help companies service consumers and businesses over the Net. "You've got this opportunity to deliver a whole range of services over this pipe," explains Peter Wagner, general partner with VC firm Accel Partners. "I think that this story will take root in 2000."

One good example is the application service providers, or ASPs, which allow people to use software without the large upfront costs. For instance, people could dial in to rent constantly upgraded Microsoft Word rather than keeping an aging copy on their PC.

Small Biz Goes Big on Broadband Business broadband penetration projections

Source: J.P. Morgan Securities

Despite high start-up costs, software companies like Siebel (SEBL) and Oracle (ORCL) have high hopes for the ASP model. Sun Microsystems (SUNW), a star stock in 1999, is distributing its Star Office software over the Web. And USinternetworking (USIX) is focusing on the support and distribution of enterprise software applications.

Bottleneck Breakers

Meanwhile, companies tackling the Internet's bottlenecks by routing, caching or storing data may be less obvious bandwidth beneficiaries. Pioneers Inktomi (INKT) and Akamai (AKAM) have the advantage of an early lead. But there are promising newcomers.

iBeam, a private firm, has set up a satellite-based network for distributing audio and video, and Xcelera.com's (XLA) Mirror Image, a content distribution and caching service, look good, says Peter Christy, a principal analyst with the Internet Research Group. (Christy has done consulting for both companies.)

Another promising entrant is InterNAP (INAP), whose network of private Net tollbooths can send data along the shortest path across the Internet. "I think InterNAP will be great for things like chat or email," says James Callinan, portfolio manager of the (RSEGX)RS Emerging Growth fund, which is long InterNAP.

And someone is going to have to manage that content. Web hosting companies like Exodus and Digital Island (ISLD), both of which store and maintain Web content and applications, will be busier as more bits move around the new networks.

Just as the interstates took decades to build, there will be plenty more broadband building down the road. "It's a bit of a misperception that we're going to arrive at broadband at a certain point," says Munder Capital portfolio manager Paul Cook. "The buildout is just starting."

Read them all 10 Things You Need to Know to Profit in 2000 Monday, Jan. 3 For Wide Spreads and Cheap Stocks, Investors Can Join the Latin Club Wireless Internet Stocks -- Understanding the Monster Tuesday, Jan. 4 Intel Hopes the Itanium Will Be a Chip Off the Old Block Exchange-Traded Indices Pose Threat to Mutual Funds Wednesday, Jan. 5 Technology Buildout Goes Global B2B Becomes the BFD Thursday, Jan. 6 PC, R.I.P.: The New Kids Are in Town Broadband's Benefits Cut Wide Swath for Net Outfits Friday, Jan. 7 Declining Profit Margins Will Span Old Wall Street and New Weighing and Measuring the Contenders to Be the Next Microsoft

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