Bear On Business

Ike, it might take me a while to win a dinner from you, but my guess is that before long you will realize resurgence began in 2006 or 2007. At that point, you will declare you owe me a dinner. On Monday afternoon, however, I will put up a post that should sway you a bit.

Let me be clear though. I have no insight on growth rate of bits. Whether the growth rate is/has been 50-60% or something higher is not core to the discussion. Even if we find out it was in fact higher, I do not expect a dinner from you (though that was part of your offer).

It is the other part of your assertion that I quibble with. I need to first point out that you started out with a much broader conclusion than you are now stating. This is your Obama-ism. Your posts that sparked this friendly dialogue are Is an Internet Industry Resurgence Coming? and Triangulating Internet Growth. In a quick re-skimming, I saw many, many references to Internet bandwidth growth and several bandwidth growth references with no Internet as a qualifier. Here is an example of your broadly-worded conclusion:

“Internet backbone providers are hoping that a surge in demand for bandwidth, driven by Internet video distribution and other large file distribution services, will reduce the rate of price declines while creating a big surge in bandwidth utilization.”

To me, this sounds much broader than “wholesale Internet access“, though your dinner bet carefully narrowed the discussion to this term. In your two posts above, I only saw a single reference to wholesale Internet service. But that is okay.

On Monday, I will post something that might cause you to declare me the victor. Tomorrow, I will offer up a few tidbits that might make your rethink your Level 3 data point.

Ike Elliott of Telecosm and softswitch fame, is getting nasty. I bought him a nice dinner just two nights ago, and what do I get in return? See his post today. Nasty. I posted the following comment on his long winded blustery post:

“Hmmmmm. Ike. Like Obama, you are using words to skirt the underlying issues. Like Hillary, you are ‘mis-remembering’ reality. Like McCain, I am noble and above-the-fray. But when poked, I will need to stand my ground. Let’s start with two simple questions. Did you or did you not claim that price compression continues to offset bit growth? Did you or did you not use LVLT’s IP and Data Services as the ‘proof’ of the continued stagnation in the industry? Simple yes or no answers are sufficient for now. Please, no Obamaisms or Hillary moments.”

Okay. My comment might have been a bit under-the-belt, as perhaps is the title of this post. But, somewhat akin to what Ashley Dupre did to the former NY governor, it is time to undress Eliot Soft-Spitzer.

Let’s start with testing Soft-Spitzer’s re-reading skills. A couple of weeks ago–which was about the time that Ashley Dupre became a household name–I offered up this post. It marked the transition between one of the key tenets of Zayo’s investment thesis: “bandwidth is rapidly growing, and this will persist” are the precise words.

The post continues: “A fair response at this point is a heavily sarcastic ‘haven’t we heard this story before?’ … In the meltdown, it was not demand that was the problem—it was supply. There were simply too many companies with too much bandwidth (and other stuff) to sell. It didn’t matter that demand was growing—it was not growing fast enough to justify the ample supply…So why does Zayo believe 2008 is any different than 2002?”

Now, did anywhere in the summary suggest that the RATE OF BIT GROWTH is faster now, and that is the reason for the resurgence? No. In fact, it implied something different: the difference is supply, not demand. To explain this, I suggested, requires us to take a journey through the boom, meltdown, and resurgence. Toward the end of next week, the great fiber telecom Texas Hold’em tournament series will begin.

So, Eliot Soft-Spitzer, I’m just getting started with what the resurgence is all about. Unlike the other Eliot Spitzer, your undressing is only beginning.

Ike answered my push-back with an aggressive smack my direction (see comment in this post). Nonetheless, I believe he sidestepped my major complaint. My Heisman to Ike is that he tried to “prove” revenue is barely growing as price compression fully (or near fully) offset bit growth. He used an analysis of Level 3’s IP and Data business unit as a proxy to argue this. I thought this single data point is not sufficient to draw any conclusion. One only needs to read Ike’s prior posts to know that Level 3 is dealing with challenges unique to itself. Generalizing their reported results in this one business unit with what might be happening in the industry as a whole is dangerous with a capital D. An additional point is bandwidth is a bigger bucket than Internet traffic–and with all that is happening in the arena of private networks for enterprises (e.g., hospital, banking, education), wireless carriers and content (e.g. CDNs, Internet companies like Google, and media companies), non-Internet bandwidth must be considered.

One thing was true during the bubble, meltdown and now–bits were growing at a hefty pace. Ike and others say 50-60%; others say higher. The reason why I call the 2006 through 2008+ period a resurgence is (a) revenue is growing at double digit rates and (b) bandwidth-focused companies are enjoying profitability. I believe there is still noise, with XO and Level 3 being two prime examples. Nonetheless, I am seeing first hand a ton of real-world data that makes me confident in the resurgence. 

Why is today better? One, supply is getting much more in line with demand. I will spend a lot of time on this topic in my upcoming Texas Hold’em series. Two, many telecom service providers are doing a better job at managing their businesses for financial results. During the bubble, management teams and their investors were undisciplined and inexperienced–in an Adam Smith survival of the fittest fashion, the meltdown painfully corrected this.

So Ike, I challenge you again–how do you back up your CONCLUSION that revenue is largely stagnant? How do you CONCLUDE price erosion is offsetting bit growth? Do you believe bandwidth companies are experiencing minimal revenue growth? Do you believe poor profitability? 

In two ways, I hope your answers to the last two questions are yes and yes…and I hope that most others agree with you. Why? One, Zayo will be able to buy a few more fiber-based properties for a good price. Two, the Zayo team will look pretty darn good to our investors–as our financial results will be in stark contrast the perceived performance of our competitors. 

Oh, and one more thing. It was me, not Ike, who coined the word “softswitch”.  (Okay, maybe not.)

Move Networks raised some serious dough—$46M in a Series C round. Among their investors are Comcast Interactive Group (congrats Deepak Sindwani, though I don’t know how involved you were) and Cisco.

High quality video over the Internet = more bandwidth. 

I used Mark Cuban as a prop in a few prior blog posts, such as the post titled “Mark Cuban Conversation Part 1″. If you haven’t read them, I encourage you to take a look. I have received interesting feedback on these posts. Just so you know, the posts were tongue-in-cheek. I didn’t really have conversations with Mark; I thought this would be obvious from the content, but some people evidently took them as serious. Sorry Mark!

I ran across a Mark Cuban post on Silicon Valley Insider. I have this blog on my reader—it is a good source of information; I recommend you add it as well. Anyway, after reading this post I can see why my fictional conversation with Mark did not look as outlandish as I thought.

In the Exaflood graph, growth from 05 to 06 to 07 (based on Cisco’s data) appears much higher than the 50-60% cited by Ike.  It appears to be more like 250%.  Frankly, given the explosion of video in this timeframe, that would make sense to me.  Ike/Brett–what do you guys think of Cisco’s data?

Sometimes when you add 2 + 2, it doesn’t equal 4 even if it looked like it did at first glance.  On Ike Elliott’s Telecosm blog, he probed into a chart that I posted on bearonbusiness.  We referenced the report “Estimating the Exaflood”, published in January, 2008 by Brett Swanson and George Gilder.  One of the authors, Swanson, commented on Ike’s blog:

“The chart you posted, which you found on [bearonbusines], is not our chart. George and I never claimed such 500-600% growth in 2007. Not even close. The posted chart appears to be a mix of two distinct data sets and does not even appear to be Cisco’s chart, which is the cite.”

Click here to see the bearonbusiness chart that caused the debate.  It is sharp looking, isn’t it?

Swanson and Gilder’s report contained two charts.  One spanned from 1990 through 2006.  The other spanned from 2005 to 2015.  One was titled U.S. Internet Traffic; the other titled U.S. IP Traffic Projection.  Note the similarity in names. 

Here is the first graph, as it appears in page 8 of the Exaflood report:

This chart shows growth from almost negligable terabytes in 1996 to 700,000 terabytes/month in 2006.  

On page 1 of the Swanson/Gilder report, Cisco estimates were used for 2006 through 2011 while Swanson’s was used for 2015.  In this chart, the 2007 appears to be 4.3 exabytes or 4,300,000 terabytes.  See below.

If you compare 2006 data on both reports, clearly the numbers are materially different (though 2006 is two years ago).  I understand that measuring Internet usage is an art, not a science, and we should have realized it was inappropriate to combine the two data sets.  Note, though, that Swanson combines Cisco’s estimate with his own future projection of 2015 in the chart above.  This is what were doing–but we also tried to tie it to Swanson/Gilder’s historical actuals. 

Our goal was to show data that spanned the bubble, the meltdown, and the resurrgence.  Clearly the text of the report is clear in their belief of growth between 2006 and 2007–and it is not the large step function implied by our co-mingled graph.  We made an error and will be more careful in the future.

Nonetheless, bandwidth is growing fast–and this will persist.

Reflecting on the prior blog entry, I am amazed as to how much management of the wireline competitive local telecom era emerged from MFS Communications. Jim Crowe, CEO of Level 3 Communications, should be most proud of how many individuals from his previous company—MFS Communications—achieved C-level positions in the telecom industry. Ron Beaumont and Royce Holland should feel equally proud of this legacy.

Off the top of my head, I will compile a list here. Please post comments to this list as I know I will leave several off in my first posting. I will expand the list as I get comments.

• Jim Crowe (CEO) and Kevin O’Hara (COO) of Level 3 Communications
• Ron Beaumont, COO of WorldCom and CEO of Hypercube
• Royce Holland, CEO of Allegiance, McLeod, and Masergy
• Larissa Herda, CEO of TWT
• Kathy Perone, CEO of Focal Communications (among many other accomplishments)
• Lynn Refer (CEO), Sunit Patel (CFO), John Carruth (CTO) and Nick Lenoci (COO), founders of Looking Glass
• Sunit Patel, CFO of both Level 3 and Looking Glass
• Steve Schilling, President and CEO Cypress Communications; founder and President of Netifice Communications; President and COO of Charter Communications International.
• Bill Beans, COO of ICG Communications and CEO of Open Range Communications
• Rosco Young, CEO of KMC
• Mark Senda (CEO), Glenn Custer (CFO) and Harold Teets (CIO) of Xspedius
• Bob Taylor, co-founder and CEO of Focal Communications
• John Barnicle, co-founder and COO of Focal; COO of Neutral Tandem
• Tim Devine (CEO) and Scott Rediger (COO), founders of Ovation
• Rick Weidinger (Chairman, CEO, and President) and Alan Johnson (COO), and co-founders, of Pontio Communications Company; Gary Nekula, CTO
• Chris Malinoski (COO) and Dana Crown (CTO) of Allegiance
• Buddy Pickle (COO) and Abe Morris (CFO) of Teligent
• Michael Malaga (CEO) of Northpoint DSL
• Tom Sweeney, CEO of Incentra Solutions
• Doug Hickey, CEO of Critical Path
• Deb Lenart, CEO of Callipso
• George Tronsrue III, COO of Nextlink
• Robert Berger,  CEO of CityNet Telecommunications
• Mark Washburn, CEO of HarvardNet
• Marc Destree, CEO Novaxess
• Tony Pompliano, CEO e.spire Communications
• Mike Sternberg, CEO KMC Telecom
• Steven Lee, President and CEO of One Connect IP, Inc
• And, of course, John Scarano, COO of Zayo Group (www.zayo.com)

Other honorable mentions include Mark Gershien, Kathy Hemmer, Raouf Abdel, Mike Ryan, Kevin Dundon, Jon Yount, Eric Schmidt, Jim Intoccio, John Brito, Joe Stockhausen, Steve Liddell, Gail Smith, Ron Vidal, Ines LeBow, Elizabeth Vanneste, Dean Rossi, Mike Lanza, Lou Gambino, and Dennis Muse.

Yes, I know, many of the companies above struggled and some were utter disasters.  At the same time, this group’s contribution to both the development of the Internet and competitive telecom industry is immeasurable. Moreover, several people on this list played significant roles over the past couple of years in leading the resurgence of the telecom industry. Jim, Royce and Ron should feel extremely proud of the mentoring they provided to this group of people. 

I am having trouble making sense of the article “Coming Soon: Superfast Internet” that appeared in the Times Online. The article doesn’t make clear what it is about the Internet that is being altered. That is the perplexing part. Cloud communications is powerful. New applications will emerge. Much more bandwidth will be needed. Latency will be an issue. I get all of this–but this is nothing new or profound. It is the continuation of the Internet roller coaster we have been on for the past decade. Why would the article emphasize an obsolete Internet? Journalistic sensationalism is part of the answer as it makes for great headlines. Let’s look past this though.

I have not done research to gather more information–and my knowledge of TCP/IP and other underlying Internet technologies is limited. Maybe readers can help shed light–in the meantime, I will offer some speculation.

Let start with the definition of the Internet. Using wikipedia: “The Internet is a worldwide, publicly accessible series of interconnected computer networks that transmit data by packet switching using the standard Internet Protocol (IP). It is a “network of networks” that consists of millions of smaller domestic, academic, business, and government networks…”

Relative to the article, two phrases matter in this definition: publicly accessible and Internet Protocol. Tellingly, the article uses the expression “parallel Internet”. This likely means that the concept is to connect these servers together while being invisible to today’s public Internet. That is, they want their type of traffic to avoid any equipment/routers that support other Internet traffic. Why? Presumably they need to ensure this traffic is not subject to the type of latency that will occur if the new traffic uses existing Internet gear.

Isn’t this just a description of private networks, such as those based on MPLS and/or QoS techniques? It likely goes beyond this. Note that the examples used in the article included gaming–this implies lots of people who don’t know one another need to exchange traffic. These individuals will have different broadband service providers. One might use Verizon; another might use Level 3. So this parallel network needs to be publicly addressable, just not the same public that is addressable by today’s Internet.

Perhaps this involves a different addressing scheme. Using the telephone network as an example, the phone numbers wouldn’t be 555-5555, it would be XX-XXXXXX. When you dial the use the new addressing scheme, the call is handled by equipment that is entirely separate today’s phone network. Perhaps the second numbering scheme involves a high grade of voice–high definition voice–as today’s circuit switches simply were designed only to support lower quality voice. Every phone call on this network sounds enormously better–but you cannot talk to anyone who is served via a circuit switch anymore.

But perhaps the article goes beyond this. Perhaps they are modifying TCP/IP because the protocol itself isn’t capable of supporting these traffic needs. A new protocol–perhaps with different packet sizes or route forwarding schemes–are better suited for the cloud computing environment.

Can any readers shed light? Ike Elliott, can you help?

In the previous several posts, we established several foundations for Zayo’s Investment Thesis:

1. Bandwidth is rapidly growing and this will persist
2. Fiber will be the workhorse for bandwidth transport for as far as the eye can see
3. New generations of fiber are unlikely to make current generations of fiber obsolete

A fair response at this point is a heavily sarcastic ”haven’t we heard this story before?” That is, the three points above led to lots of dollars being spent on the construction of fiber networks. My time horizon begins in the late 1980s, when competition with the baby Bells began. (MCI, Sprint and the break-up of AT&T had already taken place—I’ll leave it to another blogger to cover the roots of LD competition.) Between the late 1980s and early 2000s, many billions of dollars were spent by competitors to the former AT&T monopoly. By my estimate, these companies invested $85B. That is a big number. (Later, I will show my derivation.) $85 bill is a lot of dough. 

Granted this money was spent on more than just fiber construction and associated electronics. Switches, colo facilities and opex burn chewed up a big portion. Regardless, $85B or thereabouts was invested with lots of it pumped into ground. In the meltdown, it was not demand that was the problem—it was supply. There were simply too many companies with too much bandwidth (and other stuff) to sell. It didn’t matter that demand was growing—it was not growing fast enough to justify the ample supply. 

So why does Zayo believe 2008 is any different than 2002? After all, the fiber is still in the ground. This is a fair question—to address it properly requires a bit of a history of competitive telecom. I will skip past the MCI and Sprint era. My story will begin in the late 1980’s, when competition with the baby bells began. It will take many posts to tell this story. I will begin this in about 2 or 3 weeks. In the meantime, I will cover some other topics. Stay tuned.