Demand for global bandwidth is being driven by a "virtuous cycle" of industry forces that are simultaneously driving down circuit prices and vastly increasing the throughput capacity of new systems.
Bandwidth Markets Outlook: Bullish Carriers Shatter the Myth of the Bandwidth Glut Bears
Amid the doom and gloom on Wall Street, especially in the tech and telecom sectors, more and more signs are emerging that the highly touted worldwide fiber glut (or capacity glut - take your pick, you’re equally wrong! -- TAS) has been vastly overblown. In an effort to better understand the current state of the market, TSA has recently polled bandwidth buyers from all of the major market regions of the world. Among the major conclusions are that the near-term market for capacity worldwide is poised for very strong growth over the next eighteen months and that with few exceptions, capacity utilization levels generally do not support the notion of a capacity glut as many pundits have pronounced - not by a long shot.
1] TSA finds bandwidth markets stronger than ever.
2] Major carriers and other bandwidth customers are ready to buy - and buy big.
3] Price stability is expected over next twelve to eighteen months, which will lead to sharply renewed interest in long-term IRU deals.
4] Capacity utilization levels and capacity provisioning lead times - even while foreshortened in recent years - point toward an immediate need for new capacity.
5] Beside the most obvious factors such as Price, On-time Delivery of Capacity and Network Quality, many customers are focusing on bandwidth Supplier Financial Stability as well.
6] While the current financial environment does not favor new upstarts, the major carrier customers remain virtually unaffected by external capital constraints.
Despite levels of capacity inventory among carrier customers that might lead one to incorrectly conclude that carriers do not need to buy any more capacity for up to a year or more, most carriers have already reached or have neared their normal or even recently-foreshortened re-order point and are ready to buy and will buy big in today’s market.
How big? Planning increments for the next few years have already increased by a factor of five-to-ten times (5-10 X) over previous levels from STM-1s, -4s, and -16s a little more than a year ago to STM-64s and multiples of whole 10-Gbps wavelengths. And these are expected to increase by a minimum of ten to fifty times (10-50 X) over the next four years implying growth expectations of at least year-on-year doubling (100%+ CAGRs).
In recent years, prices have dropped dramatically in some markets by as much as 60% per year. This has lead many carriers to either delay purchases or opt for leased capacity in lieu of longer-term commitments to IRU ownership. This new research, however, shows overwhelmingly that most customers see a return to long-term IRUs going forward in favor of leases of any duration under the expectation that price levels will begin to stabilize in 2002 at annual, deflation rates of 15% to 20% for the longer term.
Why? The underlying drivers of demand are not a temporary blip on the radar screen but rather the result of a permanent shift in the way in which telecommunications services have become entwined in virtually every aspect of business from the bleeding edge to the trailing edge of every industry type and segment.
Also, reported network utilization levels range between 45% and 60% (and in some instances, significantly higher). Past experience indicates that average utilization rates much beyond these levels would lead to serious degradation of network quality and performance thus provides further evidence that new capacity needs to be added by carriers and added soon.
From an historical perspective, the amounts of new capacity coming on the market in the past several years has been an aberration along the continuum of ever-increasing transmission throughput and user demand. The past five years have witnessed the intense confluence of two groups of factors that has lead to immense growth in both demand and capacity availability.
On the demand side, growth has been fueled, in part by market deregulation worldwide, a surge in new applications ushered in by the Internet and worldwide web, and ongoing mass-market penetration of high-speed, always-on connections.
The supply side has been fueled by ongoing technological developments such as erbium-doped fiber amplifiers (EDFAs) and dense wavelength division multiplexing (DWDM) and also by the ready availability of capital for investment in large-scale infrastructure projects.
Among these key factors, the only part of the mix not still present in today’s market is the capital availability. Nothing else has decreased. Not the number of users - they continue to grow and spread further throughout the world. Not the applications - there is a virtually inexhaustible supply of new applications for telecom bandwidth waiting to be borne that is limited only by the human imagination. Not users’ increased reliance on an increasingly seamless and transparent telecom environment in all aspects of our daily work and personal lives.
Also undiminished are the technological advances - for as long as there has been humankind, there have been contests for the biggest, best, and the fastest and this applies to networks that people design and build as well.
But if capital for new infrastructure projects is missing won’t the industry collapse? In a word, no! The place to be today is fully funded if not also fully built. But the building job doesn’t stop there, it’s just a pause until today’s lit capacity gets sold out to bandwidth-hungry telcos who can’t raise the capital for their own green-field builds - at least on acceptable terms.
But the point of lit capacity availability is a very important distinction here. Despite the announcements of multi-terabit capacity networks spanning the world’s oceans, not one is yet fully equipped to handle even one terabit of traffic across any of the major market regions.
Why? They don’t have to. But over the next three years, the initial installed capacity (typically only 2% to 15% of the ultimate design capacity) of many of these networks will be exhausted and upgrades will need to be implemented - HPOEs, line cards, routers, etc.
These upgrades will be funded on a pay-as-you go basis - the true beauty of the underlying technology - by international cable owners and operators with positive cash-flow operations and a well-served and satisfied customer base. Among the most important ways in which cable operators can capture customers is by offering capacity at a fair price and following through on delivery of that capacity when the customer demands the circuits to be turned up. Carriers are increasingly dissatisfied with the long delays associated with consortium-style committee planning process that can take five or more years when the need for capacity is more on the order of twelve months and sometimes less.
In addition to these factors, network quality must be top-notch in terms of reliability, resiliency, and diversity. The same can be said for the operator itself. On-time delivery of circuits to the customer is a critical part of overall customer satisfaction.
Consistent with customers’ desire to buy on a long-term IRU basis, the cable operator must also demonstrate its ability to be around for the long haul. It is a classic “flight to quality” market environment that accompanies uncertainty in any market and will favor those operators with a sound balance sheet and a solid customer base. Several of the carriers in the study cited supplier financial stability as the number one factor influencing their capacity purchase decision.
The bottom line: Demand continues to grow unabated at both the retail and wholesale levels. The current financial environment does not favor new market entrants which will leave a relatively few financially stable, well-positioned players to execute on the operations side of the business.
Make no mistake, the largest customers - which are also by far responsible for the majority of the aggregate capacity purchased year-in and year-out - are not constrained by lack of capital availability. Their capacity acquisition needs are funded by internally generated margins on services they provide to their end-user customers.
It is a market primed for those cable owners and operators that were nimble enough to have aggressively availed themselves of the telecom-friendly financial markets, as the financing flood gates opened beginning in the late 1990s into 2000, and well enough along their network roll-outs to have established a solid customer base and service offerings in the market to begin producing strong revenue streams and positive EBITDAs in 2001 and 2002.
Now that the excitement of doing multi-billion development deals has settled down, the best players will concentrate on the relatively boring day-today details of running the business and producing nice “boring” profits for their investors. |
