The Broadband Future Gets Fuzzy
Updated: 23-Oct-00
[BRIEFING.COM - Robert V. Green] The broadband internet era, yet to arrive, promises a full integration of video and computing technologies. For at least three years, the expectation has been that explosive growth in the internet would continue, if only we could get enough bandwidth installed. But it looks like demand for bandwidth is dropping, and the next era of the net hasn't arrived yet.
The Fiber Glut Fears
The first significant shift in perception about the broadband future happened this summer. Fears that the fiber optic network industry was overbuilding, or become positioned to overbuild, have steadily grown over the past months.
The fear finally bubbled to the surface with a story in Thursday's (October 19) Wall Street Journal entitled "Operators of Fiber-Optic Networks Face Capacity Glut, Falling Prices." The story even published a chart showing a sever over capacity problem developing in just one year. (The source was Adventis).
This article is only the most visible sign of the doubt that has been developing all summer.
The immediate focus of glut fears is the lowering of stock valuations. That doubt has lowered the prices of fiber optic network companies, such as Global Crossing (GBLX), Level 3 (LVLT), Metromedia Fiber Networks (MFNX), 360networks, and others, even if they meet revenue estimates currently.
The overlooked implication of glut fears is this: "we know what demand will be, going forward."
In prior years, demand was difficult to project, because everyone expected the broadband era of the net to be too big to accurately calculate.
Lower Expectations For DSL
DSL is a last mile solution for broadband over existing telephone wires. For much of the past three years, there has been an ongoing debate as to whether DSL or cable would capture the broadband consumer marketplace.
Cable was clearly the favorite in the early days, 1997 and 1998. But as DSL sales started to explode, and cable installations, particularly @Home's (ATHM) faltered, in 1999, DSL became viewed as the contender for the broadband last mile winner.
But the earnings report of Q3, delivered in the last two weeks, for manufacturers of DSL equipment have completely reset expectations for the DSL market. Each of the following DSL equipment manufacturers issued a strong warning about future revenue prospects.
Copper Mountain (CMNT)
Covad (COVD)
Paradyne (PDYN)
Westell (WSTL)
When everyone at the platform level warns, there is only conclusion: the end user isn't buying.
The expectations of explosive growth in the DSL marketplace vanished in October 2000. With so many vendors lowering expectations to sequential revenue drops for next quarter, the conclusion is that the marketplace isn't as big as first thought.
High valuations, high price/sales ratios in particular, won't now return to any of these stocks without proven strong revenue growth.
Wireless Broadband
The third big infrastructure disappointment has been the sale of wireless broadband equipment for last mile installation. Expectations were extremely high for companies in this sector at this time last year, but are now
Adaptive Broadband (ADAP) is perhaps the best example. Last year at this time, Adaptive Broadband came into the investor spotlight as the company most likely to capture the wireless broadband market, for last mile installations. With the exposure came a tripling of the stock price between November and January.
But the market never matured. Adaptive Broadband simply hasn't delivered on the revenue expectations of 2000. But they haven't lost much share to anyone else. The market was just immature.
Where Is The Killer App?
When all platform vendors are finding the market smaller than expected, it means only one thing: the end user market is smaller than everyone thinks.
This bears repeating: the end user market for broadband internet use is smaller than everyone thinks.
It must be, or the infrastructure companies would be doing better than they are.
The only conclusion from this is that the killer application that pulls everyone, businesses and consumers, to higher broadband needs really isn't here yet.
TiVo Steals The Show?
We have always believed that the killer application for broadband internet would be on-demand video. Movies, or a variation of them, delivered on request, for a fee.
The development of this type of technology would replace VHS tape rentals, pay-per-view systems in hotel rooms, and home cable and satellite movies.
For businesses, the broadband future is video conferencing. Currently implemented on an ISDN platform, which requires dedicated connections, IP based video delivery could liquefy the $5 billion ISDN market. But it isn't here yet.
But while we all wait for this technology to get fully developed, TiVo sales continue. If TiVo devices, which store movies offline, become entrenched enough to satisfy the latent demand, the on-demand IP video world may find sales hard.
The TiVo storage system automatically records, digitally, as much as 20 hours of video you want to capture from satellite or cable. It is easy to program, and works well. (ReplayTV offers a similar system.)
The broadband vision was based on satisfying demand for video entertainment. For example, today, if you could have an internet service which broadcast any movie or TV show on request with a modest payment for each viewing, and perhaps a flat fee for unlimited monthly viewing, wouldn't you prefer that to cable or satellite companies picking selections for you? The internet open platform could make anyone your entertainment provider. Your choices would expand greatly at possibly lower cost.
But this demand may be satisfied by TiVo devices.
If TiVo establishes itself as a standard, the way VCRs did, there will be less market drive for the killer app of broadband - on demand movies delivered over IP.
A corollary is the sale of DVD movie systems. Imagine how strong DVD system sales would have been if no one had a VCR already. DVD is better, and there are sales, but it isn't anything like it would be if VCRs weren't so prevalent.
The expectations for the broadband video based future are similar to what expectations for DVD players might have been, if there was no VCR in place.
It is time to watch TiVo sales closely, as it may be a significant indicator of whether the full vision of the broadband future ever actually arrives.
Conclusions
These thoughts are more of a worry than a prediction.
But when doubts start to accumulate instead of confidence, stock prices suffer. That's what's happening now.
Expectations for every broadband platform provider were lowered in the past month. Expectations for every stock associated with broadband should also be lowered. That's happened for a lot of stocks, but not all. Yahoo (YHOO), for example, still has a lot of valuation in it based on its acquisition of Broadcast.com last year.
But if you are holding a stock that you think will boom in the broadband era, you should reconsider your expectations.
After all, the person next to you, who might be a buyer, has already lowered his expectations.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com. |
