Yesterday we looked at the popular and scary question of whether we're about to see a profit-destroying bandwidth glut, a surfeit of available capacity that will severely hurt the dominant bandwidth vendors. Four themes emerged:
- Will demand for bandwidth really continue to grow as fast as it is growing today?
- Will the small avalanche of investment dollars pouring into the leading bandwidth resellers today all but guarantee an overbuilt market?
- Will wireless crush the demand for bandwidth over buried fiber lines?
- And will techniques for cramming more data down existing lines do in bandwidth vendors, which have continued to increase capacity?
We examined the biggest of all those questions, the one underlying this growing fear among investors that the bandwidth business won't be so hot much longer:
What about demand?
As I said yesterday, I think the growth of demand for bandwidth is not only going to continue at today's torrid pace, but that growth rate will actually increase, as new technologies and markets, absolutely dependent on ample bandwidth at reasonable prices, emerge.
The issue, I'm convinced, isn't going to be a bandwidth glut, but just the opposite: whether we can build-out total U.S. bandwidth resources fast enough to avoid hurting these new, emerging industries which will rely so profoundly on cheap and abundant bandwidth to deliver their products and services.
On to the other big three questions:
Yes, investment in bandwidth-for-sale is soaring. Four companies now dominate this area, and all are attracting new capital:
, which I am long,
Level 3 Communications
QWST has gotten distracted by its unfortunate bid for
U S West
; CEO Joe Nacchio has decided he wants Qwest to play more in the value-added-services area than as a pure play in buried fiber for rent. That's understandable, but wrong-headed: focus, Joe, focus. But the other three companies, particularly LVLT, are forging ahead as single-minded providers of bandwidth for the major telcos and private company networks.
LVLT looks so interesting right now because with QWST's apparent refocusing -- the company would say "added focus" -- on the value-added-services market, Level 3 emerges as the primary pure-play investment in IP bandwidth. And as a technology leader, buying the best-of-breed solutions it needs to push its network to the front of the quality-of-service ratings.
In that, Level 3 is following the path laid out earlier by Qwest, with even more speed and intensity. Building partnerships, for example: I counted at least six joint agreements for LVLT during June alone, including the Big One, a deal with
to adopt Lucent's Softswitch technology and products to bring to LVLT's IP network the reliability we're accustomed to getting with older, circuit-switched networks. Combine the speed and economies of IP with the quality and reliability of circuit-switched systems, and you've got telecom Nirvana. That's where LVLT is headed.
(Softswitch, which transparently translates calls back and forth between the older circuit-switched networks and more modern packet-switched networks, is a key to building IP datacomm networks that can be used as easily as today's telephones. Customers, both business and residential, simply won't put up with today's Keystone Kops implementations of voice-over-IP, or "VOIP" service, dialing long prefix strings and putting up with voice quality that sounds like something from a World War II-era movie about submarines at war.)
Because demand is going to continue to grow at such a steep pace, the additional capital flowing into the bandwidth business is not a problem for investors, for whom the real risk is not participating in this immense market.
As I've said often here, yes, I do think everything will eventually go wireless. Well, not everything, actually: There are too many security problems in an all-wireless system, and the available over-the-air bandwidth -- the parts of the spectrum available for the various wireless services -- is limited. Noise, reach and other problems will also restrict use of wireless communications. But yes, absolutely, the trend is toward wireless communications.
But hardly ever
wireless. Because it's just too cheap and easy -- and so much faster -- to complete most of those wireless data exchanges, data or voice, over fast buried-fiber landlines.
Think of datacom as consisting of layered, inter-connected services. Wireless is emerging as the highest-perceived-value, topmost layer in this stratified model, the sexy service everyone wants. But believe me, the back room supporting that wireless layer is going to remain full of connections to terrestrial fiber networks -- the kind of networks Qwest, Williams, IXC and especially, Level 3, are now building across America.
Multiplexing is a way of wringing more capacity out of a network, wired or wireless. It allows each fiber strand or each frequency in wireless to carry more data, making the system more economically efficient. Multiplexing over fiber networks is red hot today; wireless multiplexing will be similarly hot in a year or two, as various forms of data compression and multiplexing help stretch that limited spectrum's capacity to carry our voice messages and data transmissions.
The hottest of the hot in fiber multiplexing technologies is called DWDM, for Dense Wave Division Multiplexing. Think of DWDM as a way of sending many different colors of light down each strand of fiber simultaneously, each color carrying separate data streams. With DWDM, you can increase the carrying capacity of a given buried-fiber plant, far more cheaply than by laying additional fiber strands.
Again, sure DWDM is going to be an issue in pricing bandwidth. But I'm convinced the demand for telecom capacity will more than absorb the capacity increases made possible by multiplexing.
Indeed, I see the intelligent use of multiplexing technologies as one of the two safety valves the bandwidth industry has to meet exploding demand with the finite (but substantial) development capital available to it.
The other, to go back to the beginning of this argument, is the amount of "dark fiber" presently owned by each of the bandwidth vendors. Dark fiber refers to those glass strands not yet turned on -- lit, put to use -- in a bundle of buried fiber cable. Each of the major bandwidth companies has a substantial amount of dark fiber at present. Level 3 is probably the leader here, for it has been more aggressive than the others in laying extra capacity as it buries cable.
In the end, your assessment of the likelihood of a bandwidth glut comes back to your estimate of the growth in demand likely over the next twenty years. If you're a pessimist -- like
execs in the early '50s, who thought that the world market for computers might, just might, be as great as 12 units -- then yep, it's easy to understand that you're going to see ahead a bandwidth market soon saturated.
I fall in the other camp. We have always approached bandwidth as an expensive, capacity-constrained commodity, something to be preserved, to be used efficiently, even parsimoniously. I think the decade ahead of us will instead be a time of essentially unlimited bandwidth.
"Bandwidth will be free," say some of the bright minds -- not because today's nascent bandwidth aggregators and builders will be so tapped out by a market flooded with unneeded capacity, but because we will be using bandwidth in such great gobs than we will begin to think of individual units of bandwidth as
cost-free, priced way below mills-per-something or any other tiny pricing unit you prefer.
That's the kind of business I want to own -- one so integrated into the threads of worldwide business and society that it has become an essential but taken-for-granted part of the environment. And keeps churning out profits, as volume grows and unit prices fall ... and revenue keeps growing.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Lucent Technologies and Qwest Communications, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at