Broadband May 23 2000 2:59PM CST
The Need for Speed
by Chris Connor
With the explosion of on-line multimedia offerings such as movies, multiplayer computer games, and business applications, consumers have demanded faster access to these multimedia offerings than they have traditionally received via standard 56k modems - much faster in fact. Companies crave higher access speeds as well, because faster access will cut down on the cost of materials like CDs, paper, and video tapes. For example, the porn industry wants faster Internet connections so its customers can just download movies straight from a site, which eliminates the need for buying video tapes for each potential customer. The music industry also desires faster connection speeds, since most songs are a few megabytes in size and most modems today run at 56 kilobits per second. The answer to this need for speed is broadband A.K.A. "fat pipes".
Broadband comes in several different forms, but the two big ones right now are cable modems and Digital Subscriber Lines (DSL), with fiber optics looming in the background as the biggest source of broadband for the future. Cable and DSL offer users connection speeds that are exponentially higher than 56k modems at around 1.5 megabits per second. In addition, both technologies stay connected to the Internet while a regular phone number must connect to the Internet each time a user wants to get on line and can be automatically disconnected during the worst possible times - like while chatting, playing games on-line, or downloading big files.
However, speed and the always-on feature are where the similarities between cable and DSL end. Cable access does not require a phone line, offers the Internet Service Provider (ISP) and high-speed connection from the same company, does not require long contracts, and it distributes bandwidth (the amount of data that can be transmitted in a fixed amount of time) that is shared by the cable users on a particular network. On the other hand, DSL offers a one-to-one connection between the customer and the ISP, and allows the customer to choose from several ISPs. With DSL, the data is transmitted over regular phone lines so DSL is better suited to handling two-way communications than cable - which was originally used for just receiving information.
What is the best way for investors to profit from the booming broadband industry? In light of the already intense competition among companies offering broadband access, investors would be wise to avoid that area and concentrate mostly on the equipment suppliers for DSL and cable access. Broadband equipment suppliers should continue to benefit from the immense growth in the industry, even as a plethora of broadband access providers emerges, because technology is much harder to duplicate than services.
The dominant cable ISP is At Home {ATHM}, but Terayon {TERN}, Broadcom {BRCM}, and Conexant {CNXT} offer better ways to invest in broadband over cable. Broadcom and Conexant make the chipsets for cable modems while Terayon makes the actual cable modem using its own proprietary technology called S-CDMA. Although Conexant is one of the biggest communications chip makers and is rapidly growing its revenues, <b<Broadcom and Terayon appear to have greater futures in broadband access over cable due to tighter degrees of focus and superior cable technologies. Terayon uses its version of CDMA (primarily a wireless technology), S-CDMA (Synchronous-Code Division Multiple Access), to eliminate noise on even the oldest cable systems and to efficiently use bandwidth by differentiating the data using codes. Broadcom dominates the cable modem chip market because its chips have become the industry standard in a way similar to the way Intel's chips have become the standard in the realm of PCs. In fact, Broadcom looks to be one of the broadband elite with its cable modem chip leadership and a growing presence in DSL, broadband wireless, and gigabit Ethernet (a local area networking (LAN) technology). Broadcom also recently started an optical networking division.
Although there are roughly three times more cable modem subscribers than DSL subscribers in North America, DSL does have a pronounced advantage over cable because of its one-to-one connection between the customer and the ISP. In other words, DSL customers do not have to share bandwidth with their neighbors. Leading the pure-play DSL pack are two companies that have been public less than one year: GlobeSpan {GSPN} and Copper Mountain Networks {CMNT}. Both Broadcom and Texas Instruments {TXN} are significantly larger companies that make DSL chipsets, but they are not pure DSL plays. GlobeSpan is also a leading developer of DSL chip sets and Copper Mountain Networks is a leading comprehensive provider of DSL solutions. Other major players include Adtran {ADTN}, Paradyne {PDYN}, Efficient Networks {EFNT}, Aware {AWRE} and Pairgain Technologies {PAIR}. (Pairgain is scheduled to merge with ADC Telecommunications {ADCT}). Bringing up the rear are DSL companies like Interspeed {ISPD}, Metalink {MTLK}, Tut Systems {TUTS}, and Orckit {ORCT}.
Investors interested in companies that are building infrastructure for broadband access might want to check out broadband network companies such as Global Crossing {GBLX}, 360 Networks {TSIX}, Metromedia Fiber {MFNX}, and Level 3 Communications {LVLT}. These companies sell their bandwidth primarily to ISPs and telecommunication carriers, so the broadband networks also benefit from the insatiable need for broadband without being saturated by competition. The leading barrier to entry for the broadband network market is considerable start-up costs, which is why none of these companies have generated any real earnings yet. However, some companies are leasing capacity before their networks are completed. Basically, the broadband network companies are willing to build their networks now at huge losses so they can reap immense profits in the future when these networks are completed. The biggest of these companies, Global Crossing, has a fiber-optic network that almost spans the entire globe - serving 24 countries and over 200 major cites. Global Crossing has essentially built an international fiber optic network that competitors will have a hard, if not impossible, time duplicating because of the time and cost required to deploy fiber under the oceans. Broadband networks must also be wary of building networks with old legacy equipment, because the network must be upgradeable for the future. Many companies will try to equal what Global Crossing has done, but very few will succeed any time soon.
Investors also may want to take a long look at a few of the major fiber optic makers. Fiber optics is a key enabler of broadband because regular phone lines simply can not compare to fiber optic lines when it comes to broadband levels of speed. With that being said, the fiber optic component industry is characterized by a mixture of large companies with sustainable competitive advantages like JDS Uniphase {JDSU} and Corning {GLW}, small companies with dynamic products that have just began to generate revenue like Avanex {AVNX} and Sycamore Networks {SCMR}, and one young private optic company that could not only revolutionize the broadband industry but the wireless industry as well. That company, Terabeam, looks to take the "fiber" out of fiber optics. Since building fiber optic networks all the way to a business or residence is prohibitively expensive, Terabeam looks to transmit high-bandwidth optical signals (starting at 1 gigabit per second) through the air. Not only does transmitting optical signals through the air bypass expensive infrastructure to each building, it does not require a spectrum license the way that microwaves do. Another key advantage that Terabeam's optical signals have over radio frequency (RF) signals is that Terabeam's technology is point-to-multipoint, while the overwhelming majority of RF technologies are point-to-point. With point-to-point technology, additional networks are required to tie all the points together as opposed to Terabeam's technology, which will offer service to multiple customers through one hub. The biggest downside to Terabeam's technology is that it can send an optical signal only 3 kilometers - so this limitation rules out using the technology in all rural and most residential areas. Nevertheless, Terabeam accelerates the practicality of an all-optical network because it offers a solution to the "last mile" (connection to the actual user) problem. All-optical networks benefit the whole fiber optic component industry because this industry supplies the building blocks for such networks.
A second key enabler of broadband that deserves attention from investors is digital signal processing (DSP). DSP is essentially enabling traditional copper phone lines to carry high-speed data because it compresses video, images, and voice into more transmittable sizes. DSP also boosts the capacity of Cable TV systems, which allows them to offer the hundreds of channels that have been derided as being excessive. According to Broadband Access Technologies by Albert Azzam and Niel Ransom, DSP "is even allowing power lines and home electrical wires in the wall to be used as high-speed data transmission lines". The big four companies involved with DSP are Texas Instruments, Lucent Technologies {LU}, Motorola {MOT}, and Analog Devices {ADI}. However, Texas Instruments dominates the DSP market with close to a 50 percent market share.
Stay tuned as Wall Street City will analyze several key companies in the broadband industry over the next few months. Additionally, the major areas of the broadband industry will be explained in greater depth. Here are the stories that have followed this initial story thus far.
DSL: The Baskin Robbins of Broadband
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