Hi JW,
I really enjoyed your reply and its unfettered bullishness about the technology side of the fiber optics business. You may be surprised at how much I agree, and at how boisterously I was pounding the table throughout 1999 on exactly the same themes that you discuss. There is no question whatsoever that we are witnessing a stunning revolution in the realm of instant communication and that the world is going to be, in aggregate, better off*** for all the millions of hours that we've poured into the effort.
That said, I simply don't see where your enthusiasms for the technology have addressed in any way my basic premise about the nature of the interaction between technological advance and the ebb and flow of advantage to the retail investor. My basic premise is that the essential flaw of the economic model for the creation of huge and capacious bandwidth pipes is that this is not particularly good for the companies (and behind them, investors) who've placed their bets on prior generations of communications networks.
While the telecoms of the past, the ILECs, PTTs, and the likes of T, WCOM and FON are witnessing rapid erosion of pricing power, the newcomers represented by for instance, LVLT, NTOP, GBLX and MFNX have never made a dime (except pro forma, in the case of GBLX), and may not be able to, in view of the proliferation of competing carriers. My point, and I do have one, is that there has never been an industry, with the possible exception of government subsidized space ventures, that has been able to go on indefinitely without making a profit. And that is precisely what concerns me about the telecommunications industry at present. Don't get me wrong, I agree with everything you've said about the marvels of the FO revolution and I don't disrespect the efforts of thousands of researchers in any way. I simply am trying to figure out, in the last analysis, how are we, as retail investors, gonna make a buck or two out of it? I can see thousands of company executives, engineers and their bankers and venture capital backers making out just fine. But what I wonder is how the average investor is going to profit from this? That was the thrust of my concern and I'd say your argument has done nothing to allay my concern that the bubble in stock prices of the telecom infrastructure companies cannot remain at the extraordinary level it is today, in view of the fact that the industry that this gear is sold into, namely the telecom carriers, is witnessing continuing and escalating profit compression. What you really have to question is basic. How much demand is there for bandwidth, at what price and is the system providing more of this commodity, bandwidth, than can be absorbed by the market? If there is insatiable demand, then the industry can flourish. If there is a natural limit to how much corporations, governments and consumers are willing to spend on telecommunications and media entertainment services, then there is a very real cap on the growth of the industry.
OK, from time to time I get tired of my own Jeremiads. I'll freely admit it. But one thing that I know about any business is that it comes to an end when people can't make a buck or two out of it. One of the fascinating trends in the high bandwidth world today is the growth of services such as Napster, Gnutella, Scour, etc. These are all bandwidth hogs. They are the sorts of services that will suck up all the new bandwidth that is being provided. There is one key thing that all of these services have in common. That is, they are free to the consumer. As such, it seems that there is no business case to be made for the development of a network for the provisioning of services and products that are to be given away. That is the conundrum that I see, in a nutshell. And I suppose you'll critique me once again for being facile and glib and trying to sum up the networked file sharing phenomenon in a couple of sentences, but I think it always gets back to the basics. But how are all these FO companies going to be profitable in an environment where the ultimate goal is to give away the store?
Just wondering, Ray
***I'm reminded of the potential of instant communications and capacious bandwidth to completely run amok as in the case of the EMLX hoax. That was a wonderful example of the confluence of excesses of bandwidth, emotion and disinformation. Maybe some of SI's retail investors, who lost a bundle on that fiasco, would have a comment on the value of capacious, unfettered bandwidth. :) |
