Great little CNBC article this morning:
cnbc.com
Oct 1 1999 6:02AM ET More on Stock Lab...
Buying Bandwidth with Global Crossing
by Pat Dorsey
Senior Stocks Analyst, Morningstar.com
Special to CNBC.com
It's amazing what a five-month-long soap opera will do to investors' perceptions.
Once upon a time, high-capacity bandwidth carriers such as Global Crossing Ltd. {GBLX} were red-hot, and blockbuster optical infrastructure deals, such as Cisco Systems Inc.'s {CSCO} $6.9 billion purchase of Cerent, were but a gleam in the eyes of venture capitalists.
Half a year later, things look a lot different. A nasty takeover fight with fellow bandwidth baron Qwest Communications International {QWST} for US West Inc. {USW} and Frontier Corp. {FRO} has driven Global Crossing's shares about 50% off their highs. Meanwhile, the shares of optical infrastructure outfits such as JDS Uniphase Corp. {JDSU} have almost doubled.
Sounds like it's time to take a look at the carriers again, don't you think?
In particular, Global Crossing looks mighty attractive at about $25 a share. For one thing, a lot of the uncertainty hanging over the stock was cleared just a few days ago when the merger with Frontier was approved by both the Federal Communications Commission and the two companies' shareholders.
GBLX one-year stock price chart
On another front, the company recently announced an agreement with Microsoft Corp. {MSFT} and Japanese Internet investment firm Softbank to create a $1.3 billion fiber-optic network that will link a number of major Asian cities. The most attractive aspect of this deal is that aside from kicking in $350 million of the network's cost, Microsoft and Softbank have agreed to purchase $200 million in capacity over the next three years. Not only does Global Crossing get help with the construction costs, but it also gets guaranteed capacity utilization once the network is built.
Both these events are positives for Global Crossing, but they pale in significance to the economic fundamentals that make the company's business so attractive.
First, a little background: Global Crossing sells usage rights to its fiber-optic pipes in units called STM-1 circuits. Each STM-1 carries 155 megabits of data per second. To put things in perspective, that's about 100 times the capacity of that super-fast cable modem you've been hankering after.
Global Crossing's initial transatlantic fiber cable cost about $800 million to build and carried 256 of these STM-1 lines. Let's put the cost of each STM-1 line at about $3 million apiece. That's a pretty high cost to have to make a profit on, especially considering that the price that carriers charge customers for STM-1s has been dropping rapidly.
Enter a technology called dense wavelength division multiplexing. DWDM dramatically increases the number of wavelengths that an optical fiber can carry and thus the amount of data that the same fiber can transmit. When Global Crossing recently doubled the capacity of its transatlantic cable -- which occurred 18 months ahead of schedule because of high demand -- all it had to do was to install some DWDM gear that pumped up the capacity of the pipe, not lay a whole new cable. Because this upgrade cost only $50 million, each new STM-1 circuit had a marginal cost of just $200,000. Needless to say, that's a lot lower than $3 million.
In other words, even though the price that Global Crossing can charge carriers for the use of its pipes is falling rapidly, the cost to Global Crossing of creating additional capacity is falling much faster. Sounds like a money-making proposition to me.
As for all those worries of a "bandwidth glut" that have been so rife in the Internet chat rooms and the press over the past few months, fuhgeddaboutit. There's an old economic maxim called Say's Law, which holds that supply creates its own demand. Given the additional bandwidth, people will develop applications to fill it.
Intuitively, this reasoning makes a lot of sense. How many times have you heard folks worry about a "processor glut" in computing power? Not often, because new software packages come along that make use of every megahertz Intel Corp.'s {INTC} latest creation can put out. With cable modems spreading like wildfire, DSL technology being rolled out, and innovative startups devising ways to deliver fiber directly to businesses, the demand for bandwidth doesn't seem to have anywhere to go but up.
Consider IBM chairman Thomas Watson's 1943 statement, "I think there is a world market for maybe five computers," and you'll get a feel for just how hard it is to predict the long-term level of demand for transformative technologies.
With U.S. Internet traffic doubling every nine months or so, European Internet traffic increasing even faster, and Asia just starting to wake up to the Web's potential, it seems a pretty safe bet that there will be more than enough demand for undersea bandwidth over the next few years.
Given that Global Crossing is one of the relatively few companies in a strong position to provide this relatively scarce resource, the stock is worth at least a long, hard look.
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