From: Linda (joelinda1@home.com)
Date: Wed Oct 25 2000 - 09:49:01 PDT
[Adam, remember our discussion last year about broadband glut? Here's
more.
In the meantime, as fiberoptics get slaughtered in sympathy with
Nortel, there does seem to be some early evidence of money rotating
back into internet stocks. Who'd ever have guessed that Amazon could
lead the 'Nets?
Linda]
http://www2.briefing.com/Scripts/PowerAnchor.asp?varArticleID=SB20001023075800rvgreen
The Broadband Future Gets Fuzzy
23-Oct-00 07:58 ET
[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 growth 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 had 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 severe 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 reports of Q3, delivered in the last two weeks, for
DSL equipment and service providers have completely reset expectations
for the DSL market. Each of the following DSL companies issued a strong
warning about future revenue prospects.
Copper Mountain (CMTN)
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 much more conservative.
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.
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