Question to the thread: The railroad boom/bust analogy has been used a lot recently to describe what is happening in the telecom industry. The question I have is whether or not the railroad analogy applies. As noted in the Washington Post article below, during the railroad boom too many parallel railroad lines were constructed to destinations, and other railroad lines were constructed to locations that did not have enough traffic to support the railroad. The resulting bust took a very long time to correct itself.
If the railroad analogy applies, the best thing to do now might be to get out of telecom or telecom equipment stocks, or else on the next rally. If the railroad analogy applies, we are in many years of further pain in this sector.
One reason the railroad analogy may not apply is because this equipment (except perhaps for the fiber itself) may be obsolete in a few years, vs. perhaps never for a railroad line. One question I have is how quickly does this communications equipment become obsolete? I am referring to fiber optic components, lasers, switches, routers, etc.
Suppose back in 95 about 5 times as many PC's were produced as were needed. Lets assume these were original Pentium 100 MHZ machines. Today these machines would be almost completely worthless, and I am guessing many would have been shipped overseas to be sold at a great discount in foreign countries. At any rate, the problem would be completely gone today, or close to it. In communications equipment, however, I am not sure how quickly equipment becomes obsolete. Perhaps it is still of value 5 years later, unlike PCs. I think the answer to this question will be a big factor in how long this telecom/bandwidth downturn lasts.
One other reason the railroad analogy may not apply is that the internet may be growing at a rate much faster than the traffic did on those original railroad lines. I have read all sorts of conflicting opinions on how fast the internet is growing and how much of a bandwidth glut there is, so this question will probably not be resolved for quite a while. It is a fact that video requires much greater bandwidth. If the last mile bottleneck is overcome in the next two or three years, perhaps by Ultra Wide-Band technology, then demand on the long haul networks should increase significantly.
One other issue with the telecom industry is the argument that the business models are flawed. In other words, pricing should be based on the amount of bandwidth that is used. I don't know what to say about this issue, any fix seems rather complicated. I heard that in Korea they have such a business model for bandwidth, and also that Korea has a much healthier telecom industry.
Thanks in advance for any replies. I have some positions in AMCC, JNPR, JDSU, and CIEN right now. I am wondering whether to bail or to buy more on the cheap. Also considering buying back into NEWP and GLW here. For anybody that missed it, there was a very bullish call on GLW in Barrons last week. Basically the argument is that Corning's other businesses will do well, and the stock should be purchased primarily for that reason, given the current valuation.
John
washingtonpost.com
a snip from the article:
"Telecom wouldn't be the first to go through such a boom-and-bust cycle. During the railroad boom of the late 1880s, so much money was invested building so many parallel tracks -- or tracks to places that would never support profitable service -- that the entire industry went bankrupt. Much the same story is told of the airline industry, which because of so many losing years has yet to turn a net profit." |
