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Bandwidth Dilemma: Buy when nobody is looking

Posted March 13, 2008

“The bandwidth problem is not necessarily one of technology or physical limitations. Like most other things, this is a money issue. ” – Andrew Snyder

By Andrew Snyder

Baltimore (TFN) — Could this be the end of the Internet? That is the surprising topic of an Internet-industry debate taking place in April. While some folks believe the Web is still in its infancy, there is a growing realm of analysts who believe the glory days are over.

I was not surprised this morning to read a New York Times article that described a major bandwidth crunch beginning to appear on the horizon. After all, my colleagues and I have been researching and writing about the subject consistently for the past two years. The Web is growing at a fantastic pace. Unfortunately, it is outgrowing the infrastructure designed to make it all work.

A prime example is Google’s YouTube. In 2007, analysts estimate the video-sharing site used more bandwidth than the entire Internet consumed in 2000. In just eight years, the Web has exploded by exponential proportions. Annual growth rates as video sharing, gaming, and movies take center stage on the Web are expected to range from 50% to 100%. That means bandwidth demand could exceed capacity in just three years.

If capacity is reached, the Internet would not suddenly grind to a halt, but it would slow way down and once user-friendly functions will feel antiquated and slow. The Web would no longer be the efficient tool it is today. And that is what is causing many industry experts to predict the end of the almighty Internet.

It is not that simple

Fortunately, the Internet is not going anywhere. Something so revolutionary and economically vital as the Web will not shrivel up and die in just three years, especially because of infrastructure limitations. Scores of big, wealthy businesses depend on the net for survival. They will ensure it continues to mature and expand, no matter what it costs.

A prime example, once again, is YouTube. The Internet titan made another predicted move yesterday when it announced a deal with TiVo that allows its user-generated content to be displayed on nearly any living-room television set. In just a few months, about 800,000 TiVo subscribers will have access to the seemingly infinite video content available on YouTube’s site. It will add that much more congestion to the world’s data pipelines.

The bandwidth problem is not necessarily one of technology or physical limitations. Like most other things, this is a money issue. For years, the telecom industry has been plagued with the problem of the so-called “golden mile.” Companies like Verizon can justify spending millions of dollars to lay thousands of miles of high-speed fiber optics. After all, one new cable can open up entire neighborhoods or even cities to their services.

What these companies have not been able to justify is spending the thousand dollars per household pricetag to tap each house in that neighborhood or city to the main trunk. Getting fiber optic lines stretched that extra mile into each individual household is an extremely expensive and limited task.

Somebody has got to pay

That is where your moneymaking opportunity lies. If these companies want to survive and take advantage of soaring Web growth, they will be forced to get high-speed connections into as many houses as possible. Right now, less than a quarter of all households have access to the Web speeds necessary to take advantage of future Internet features. The golden mile must be breached.

Investors need to take a close look at the companies that offer a viable solution. Right now, two of the top choices are Cisco (CSCO:NASDAQ) and Corning (GLW:NYSE). Cisco makes the routers and switching systems that make the Internet work and Corning makes the fiber optic cables necessary to get high-speed connections into every home. Combined, they make a powerful duo that will ensure your portfolio grows as quickly as the Web.

Fortunately, these investments offer two distinct risk profiles. Corning is an older, much more mature company that offers less speculation and risk. But it also does not offer the immense growth potential of Cisco. It will not make you rich overnight, but you won’t have to worry about slamming into a stop-loss anytime soon.

If you are looking for a bit more speculation and profit opportunity, Cisco is the play for you. A tech-boom leftover, the company still finds itself following the tracks of a rip-roaring roller coaster. News stories still set share price on fire and they still hold the potential to cut capitalization by ten percent overnight. If you are looking for large profits, and can take some risk, this is your kind of play.

My advice: grab shares of both. The markets are focused on credit, inflation, and oil. Not the Internet.

Traders are overlooking some very valuable opportunities. Grab them while they are cheap. When the dust settles on Wall Street, folks are going to realize these companies have some real earnings potential. The next few years are going to be fantastic.


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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