Thanks Sergio, speaking of Janus funds..can you taste the broadbandy goodness?<g>(love that ad)
Originally Published 12/99 (janus fund report)
Bandwidth Tsunami...
the next wave
"There I was, climbing down a manhole under the streets of New York City with the CEO of Metromedia Fiber, wondering if the Big Apple's infamous alligator was lurking below," says Janus analyst Matt Ankrum.
"Luckily, it wasn't, but the experience was invaluable from a research perspective. While under the streets, I was able to count the number of conduits each competitor had and assess each one's ability to bring fiber to the customer. " Matt's journey under the streets of Manhattan provided critical insight into an important theme here at Janus - something we refer to as the Bandwidth Tsunami. There's a virtual tidal wave of data demand building that revolves around bandwidth, loosely defined as the amount of data traffic sent over a telecommunications network at any given time. As Internet usage continues to explode, this wave could easily become the telecommunications equivalent of the Long Island Expressway at rush hour.
Each mouse click requires the transfer of data from one location to another - across a number of telecommunication pipelines. Meanwhile, a host of new applications is rolling out, further fueling the Bandwidth Tsunami. For example, working parents can now watch their children at day care through an on screen video camera that relays images over the Internet. Additionally, cable companies are deploying video-on-demand, which will replace pay-per-view and enable customers to purchase any movie, whenever they want, all with the click of a button. However, all these new applications require one critical component: bandwidth.
Bandwidth demand is growing exponentially because data transmission requires 100 to 200 times the bandwidth of a normal voice conversation. While companies like Qwest and MCI WorldCom have created fiber-optic pipelines that are the workhorses of today, others like Level 3 Communications are breaking the mold. In essence, Level 3 is becoming a "bandwidth baron" by assembling what amounts to a fiber-optic interstate highway that will grow with and support bandwidth demand years into the future.
The one and only stumbling block is connecting consumers and businesses alike to this new supply of bandwidth. "The Regional Bell Operating Companies move at glacially slow speeds, and it's creating a bandwidth bottleneck. It's like trying to pump a river through a straw," says portfolio manager Jim Goff. However, there are a number of companies taking a creative approach to bridging this gap, such as McLeodUSA, a competitive local exchange carrier - or "predator" - in the Midwest. Jim added, "The predators are more nimble than the entrenched Regional Bells, and by arriving late to the game, they actually enjoy a significant competitive advantage." Unencumbered by older systems, McLeod is building state-of-the-a rt networks that employ the latest technological advancements, providing voice, data and Internet transmission. In offering superior products and services, McLeod is rapidly attracting new customers, grabbing a 41% market share in Iowa and 30% in Illinois.
Another area where we're finding exciting opportunities isamong "enablers," or companies that enable others to successfully execute on their business goals and objectives. Metromedia Fiber fits this description perfectly. It's building high-capacity fiber-optic networks in and around major U.S. cities that it sells or leases to other companies. A pair of Metromedia's fiber-optic strands has the capacity to transmit up to two terabits of data per second - that's the equivalent of sending the entire Encyclopaedia Britannica, volumes A through Z, from New York to San Francisco in 1/320th of a second. Exodus Communications, also an enabler, provides an outsourcing alternative for the hosting of corporate Internet sites. Web sites are expensive to maintain, and by outsourcing these functions, companies can reduce costs while upgrad-ing the reliability of their Web sites.
When we research a company, quite frequently we gain insight into other companies as well, which was the case with Matt Ankrum and Exodus. "I first heard about Exodus when I visited a private affiliated marketing company whose entire product offering relied on the Internet. If its site went down, it could no longer do business. Obviously, site main-tenance and support was critical to its organization, so the company decided to outsource its Web site to Exodus. In fact, early next year Janus will be doing the same."
Exodus has created a number of fail-safe rental facilities some-what similar to military bunkers. The customer supplies all the hard w a re to run the site, and Exodus ensures the site stays up and running. For the customer, it's approximately a 6-to-1 cost advantage to outsource site maintenance to Exodus because specialized systems and facilities do not have to be maintained to support a Web site. The customer also doesn't have to pay for unused bandwidth. On the other hand, if site traffic increases, Exodus simply flips a switch to supply additional bandwidth. From Exodus' perspective, the business dynamics are equally attractive. If Exodus has one bunker that hosts a single Web site, it still has to pay for the space, backup generators and redundant communications lines. But if Exodus signs up two customers, they've essentially cut costs in half; sign up three companies and costs are slashed by two-thirds.
Other themes are also benefiting from bandwidth's continued proliferation. "Companies are flocking to the Internet to stake their claim in cyberspace, and it reminds us of the California gold rush of the 1800s," explains portfolio manager Mike Lu. "As prospectors came West in search of gold, enterprising merchants sold picks and shovels - and made a profit regardless of whether people found gold or not." Today, "arms merchants " such as Cisco Systems are providing the necessary tools for the Internet to exist. Cisco provides the routers and switches that form the backbone for the Internet. Regardless of who ultimately wins the battle for dominance, Cisco should continue to experience strong demand for its products.
As demand for bandwidth continues to skyrocket, so too will the number of opportunities. This will call for increased scrutiny, focusing on those companies that are reinventing the way business is being done, and that also possess the business models, the best-of-breed products and services, and the visionary management teams we insist on. For us, it's the only way to separate the winners from the losers in the Bandwidth Tsunami.
As of 10/31/99, Metromedia Fiber was 0.1% of Janus Flexible Income Fund, 3.0% of Janus Enterprise Fund, and 1.1% of Janus Global Technology Fund. Qwest Communications was 1.6% of Janus Flexible Income Fund, 0.9% of Janus High-Yield Fund, and 0.4% of Janus Short-Term Bond Fund. MCI WorldCom was 0.9% of Janus Growth and Income Fund and 0.9% of Janus Olympus Fund. Level 3 Communications was 1.8% of Janus Enterprise Fund, 1.0% of Janus Global Technology Fund, 0.2% of Janus Growth and Income Fund, 2.1% of Janus High-Yield Fund, 1.8% of Janus Mercury Fund, and 2.0% of Janus Twenty Fund. McLeodUSA was 0.4% of Janus Flexible Income Fund, 3.5% of Janus Enterprise Fund, 0.3% of Janus Global Technology Fund, 1.5% of Janus Growth and Income Fund, and 1.1% of Janus Special Situations Fund. Exodus Communications was 0.1% of Janus Balanced Fund, 3.5% of Janus Enterprise Fund, 3.7% of Janus Equity Income Fund, 0.2% of Janus Flexible Income Fund, 2.1% of Janus Global Technology Fund, 0.05% of Janus Growth and Income Fund, 1.2% of Janus High-Yield Fund, 1.3% of Janus Mercury Fund, 0.05% of Janus Twenty Fund, and 2.3% of Janus Venture Fund. Cisco Systems was 4.2% of Janus Fund, 1.2% of Janus Balanced Fund, 1.9% of Janus Equity Income Fund, 2.2% of Janus Global Technology Fund, 3.6% of Janus Growth and Income Fund, 3.1% of Janus Merc u ry Fund, 3.3% of Janus Olympus Fund, 6.2% of Janus Twenty Fund, and 5.1% of Janus Worldwide Fund. Past performance is no guarantee of future results.
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