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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: SecularBull who wrote (52760)	6/1/2000 2:58:00 PM
From: pater tenebrarum	Read Replies (2) \| Respond to of 99985

I'd have to dig up the article to give you the details on this...later. regards, hb

To: SecularBull who wrote (52760)	6/1/2000 5:23:00 PM
From: drsvelte	Read Replies (1) \| Respond to of 99985

The Economics of Fiber 31-May-00 00:08 ET [BRIEFING.COM - Robert V. Green] Every business needs a sustaining competitive advantage. Fiber optic networks have a unique one: the fact that they exist. Why? Because the sheer economics of how networks provide bandwidth favors existing networks, and the larger the better. SBC Invests in Metromedia Fiber Network: Why? On Tuesday, SBC Communications (SBC) announced a $432 million dollar 20 year agreement to lease fiber capability from Metromedia Fiber Networks (MFNX). This isn't the first time this has happened. In October, Bell Atlantic signed a $550 million 5 year deal with Metromedia Fiber last year and invested $715 million in the firm. Who has more money than the Baby Bells? Why wouldn't they just build their own fiber network? The key to understanding why SBC and Bell Atlantic would do this is the economics of fiber network bandwidth. Adding Additional Capacity It all boils down to one thing: it costs less to add new capacity to an existing fiber network than it does to build the equivalent amount of new capacity. Dan Cohrs, the CFO of Global Crossing (GBLX), once showed a slide at an investment banking conference which demonstrated this in a very direct way. A single fiber network costs $750 million to install, with capacity of 40 GPS. This gives 256 circuits that can be sold, with each costing $2.9 million. Global Crossing sells them for $8 million. When new capacity is added, the upgrade costs $51 million, but it creates 256 new circuits, which they expect to sell for $4 million in a year or so. However, by that time, the incremental circuits only cost $200,000 to build. This creates an ideal situation for a business: as demand increases, the fiber company is able to lower the cost of capacity. This increases volume. But the gross margin on the service increases. The markup on old circuits is only 2.5 times. The markup on new circuits is 20 times cost. Yesterday's Stock Brief (May 30), described scalable business models. Although not immediately obvious, the fiber network companies all have scalable business models. Bigger Is Better What this means is that bigger is better for fiber networks. It also means that it would be foolish to try to start a new fiber optic network company now, unless you have tremendous capital, or a unique niche. The Coming Fiber Consolidation Demand for bandwidth is exploding. Buildings are now routinely equipped with fiber during construction. When the second era of the internet arrives, with broadband video delivery, demand will increase even faster. And since bigger is better and building a new system is too expensive, even for SBC and Bell Atlantic, it means that existing fiber networks only get more valuable as time goes on. It is a race for the largest critical mass. This means, however, that eventually, a consolidation will occur in the fiber optic world, probably in less than three years. Large fiber network companies will acquire smaller ones. Existing fiber networks will be acquired by the largest providers of telecom data services. Three Fiber Choices The principles above are applicable to all fiber network companies, whether the service is leased dark fiber or services provided over fiber. To exploit these principles, the purest form of fiber business model should be chosen. The purest plays of the economics of fiber networks are the following: Metromedia Fiber Networks (MFNX); Global Crossing (GBLX), and Northeast Optic Network (NOPT). The following table summarizes these three stocks. MFNX GBLX NOPT Revenues 88.8 2,610 7.8 Market Capitalization 13,900 20,705 554 Price/Sales 156 8 71 Price/Earnings NM NM NM Price 5/30/00 $31 3/16 $24 7/8 $34 15/16 All three are investing heavily to expand their networks, which accounts for their losses. Valuation None of these stocks are cheap. But they are a lot cheaper than they were just a few months ago. It is still too early to tell who will wind up being the big fish that eat up the little fish. Global Crossing and Metromedia have already gone on acquisition streaks to extend their service offerings. Either could be acquired by a larger telecom company. But Northeast Optical Network, as a smaller niche player, will probably be the first to go. It probably won't happen this summer, given market conditions, but eventually, NOPT, with its unique Northeast territorial niche, will be acquired by a larger player. After all, when it is too expensive to build a new network, the only real alternative is to buy an existing one. Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com --------------------------------------------------------------------------------