Reading the news these days is not unlike being hounded by the four horsemen of the apocalypse. Rather than being named Pestilence, War, Famine, and Death, this time they are named Depression, Nationalization, Foreclosure, and Bankruptcy. From the point of view of telecom and internet infrastructure, the whole thing is a bit surreal because for the sector there just hasn't been much pain so far. Sales may be wobbly in some corners and capex may be slowing, and a few companies with large existing problems may have succumbed, but with the telecom nuclear winter of 5-9 years ago still fresh in our minds this is like snow flurry so far. This can't continue forever, something has to give.
To an extent, the shrill cries are because it is the money people - banks, traders, etc - which are hurting the most, and they have big microphones and are seen as more important. When tech and telecom went into a coma last time it was our own fault and nobody bailed us out, yet when Wall Street screws up it's a different story entirely. But the situation sets up a bizarre confrontation for us all. If the money stays dried up and the spending cutbacks by carriers becomes a prolonged situation, where does all that traffic go?
Traffic does not follow carrier spending, it precedes and forces it. The average person using DSL or cable is effectively on an all-you-can-eat broadband connection, only a few percent ever come near even the lowest proposed caps. There is no economic incentive to use less bandwidth, and in fact it often represents a cheaper outlet for entertainment from the consumer perspective. Additionally, broadband subscriber growth may be slowing, but it isn't turning negative and isn't ever likely to, it might even speed up again given that the telecom part of the stimulus bill is supposed to bring yet more people online via faster connections.
A carrier spending freeze in the midst of constantly accelerating traffic is an unstable situation, but it is one brought on by external conditions in the financial markets. If the credit markets stay frozen, this outside force will transform the industry over time.
Congestion - The first symptom will be congestion. Networks are already running hotter, closer to maximum capacity, than they have before as capex projects are delayed. Engineers without sufficient funding to throw capacity at any problem will be spending more and more effort finding ways to get more out of the network assets they have. The equipment will become older and more heavily burdened. At some point network congestion may be less about occasional equipment failures and more about systemic problems. Content delivery networks should benefit as more and more traffic seeks to bypass choke points.
Shifts in Market Share - Those who have the capital to upgrade will be able to advance at the expense of those who don't. Recessions are the best time for the healthiest companies to separate themselves from the pack because they have more paths open to them and thus less competition. Who to bet on? Just follow the money.
The Rise of Wholesale - After the telecom bubble burst, the trend was against wholesale bandwidth businesses. The capacity glut made it virtually impossible to win. Anyone could buy a few waves and roll their own; wholesale was a broken business model. In the end, virtually every pure wholesale backbone was forced to give up the dream, even holdout Level 3 Communications (NYSE:LVLT, news, filings) added an enterprise unit assembled from those of Broadwing and Telcove. But in this new environment capex is bad and raw capacity is no longer so cheap. Renting what you need just when you need it is preferable - and that favors wholesale. Could a prolonged credit crisis reverse the trend entirely?
Caps or Rising Prices for Consumers - Eventually, the market needs to find some balance between consumption and price. We keep hearing this from last mile providers threatening to shape traffic in order to control their costs. Of course, it is a bit hard to take them seriously given the vast cash flows these companies generate. However, a prolonged slump with less money in the system will bring this to a head sooner rather than later.
I can't think of a time when this sector has been quite so unpredictable. The last cycle was very predictable, we just didn't want to hear it at the time. In many ways this is the opposite case. We have gone from too much money building too much capacity for too little traffic, all the way to too little money building too little capacity to handle too much traffic. Put that way, it might actually be fun to be in telecom for the next few years - which is probably why folks like Dan and Dave are so excited about the future.
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