Rodent Regatta

A TREATISE ON VALUE
Telecom gives way to bandwidth

Most of the following posts are about telecom companies and their struggles. No one disputes that the telecom bubble and its implosion were as noisy as when the dot com bubble burst. The noise is one thing, the signal in all of this is likely to be quite another. Picking up the pieces of the telecom bubble is likely to produce outsized returns for the insightful.
First, a bit of background by way of bullet points:

• a majority of voice phone calls will one day be placed over IP networks


• the Internet is here to stay as a part of personal and corporate communications and data processing and IP packets are the fundamental unit of measure


• video and data have grown dramatically to surpass voice calls as a component of bandwidth usage – more digital packets


• copper has limits rooted in physics that fiber optics can surpass by orders of magnitude


• glass fiber and optoelectronics are improving at a rate that is roughly comparable to the rate seen in personal computing, microprocessors and the Wintel phenomena that dates to roughly 1981; i.e. Moore’s law applies to optoelectronics as well as PC’s


• with improvements in fiber optics are comparable improvements in price:performance

These facts point to some conclusions. First, communication isn’t going a way. No matter how many telecom’s buckle under the accounting problems, mismanagement or turmoil, people are going to continue to process, store and move information. The most conservative estimates of Internet traffic growth show rates of increase in the neighborhood of 80%-100% per year. If those estimates are off by a factor of two, remarkable growth in the movement of voice, video and data is still expected.
This brings us to value. If we need communications networks and those networks are likely to switch from a legacy copper foundation to a fiber optic foundation over time, some company (or companies) is likely to emerge as the low-cost producer of bandwidth. That company has the potential to gain an outsized share of the market for communications in the future. (Remember, fiber in the ground may constitute a fiber glut, but NOT a bandwidth glut. It takes optoelectonics in the network to light it and turn it into bandwidth.)
Value may get created in the ”last mile,” where wireless, cable television and traditional local phone companies are competing. Value may get created in the ”long-haul” business where a company provides the connections to the metro networks. Wherever one chooses to look, there is a strong likelihood that a company or companies will emerge with a near monopolistic control of the economics of bandwidth. Those required to maintain an old, tired legacy network while attempting to build their own fiber optic network will be faced with suboptimal pricing as one network’s revenues subsidize the others.
As one looks at the telecom valuations today, it is easy to see that none of them are prized catches. However, a time to look for bargains is when everyone is looking elsewhere. Future wealth will result from buying bargains when they are on sale. Telecom is on sale. The trick is to assess which of these companies has the vision, grit and resources needed to prevail. Extraordinary value will accrue to those who understand the transition from legacy telecom to bandwidth.