Is an Internet Industry Resurgence Coming?
Last week found that the Internet is still growing at a brisk 50-60% rate, in terms of bandwidth utilization. That is certainly not as good as the 250% to 500% rate predicted by some (as in a recent speech from John Chambers of Cisco), but it is still a rapid growth rate.
The problem for the wholesale Internet service provider industry, though, is that revenue is not growing at a corresponding rate, because wholesale Internet access service prices are compressing at a rate that very nearly offsets all of the bandwidth growth. So, for the provider of Internet backbone services, you get little or no additional money for providing 50% more capacity every year.
Backbone providers like Level 3 Communications are hoping for an Internet resurgence, but to achieve that, at least one of two things have to happen:
- The bandwidth growth rate needs to accelerate, or
- The rate of price declines needs to decelerate
The table below shows the combined effect of price declines and bandwith utilization increases on year-over-year revenue growth rates in the Internet industry:
| Industry Internet Year over Year Revenue Growth | |||||||||||
| Rate of Price decline in price per Mbps | |||||||||||
| Rate of Bandwidth Growth | 20% | 22% | 24% | 26% | 28% | 30% | 32% | 34% | 36% | 38% | 40% |
| 50% | 20% | 17% | 14% | 11% | 8% | 5% | 2% | -1% | -4% | -7% | -10% |
| 55% | 24% | 21% | 18% | 15% | 12% | 9% | 5% | 2% | -1% | -4% | -7% |
| 60% | 28% | 25% | 22% | 18% | 15% | 12% | 9% | 6% | 2% | -1% | -4% |
| 65% | 32% | 29% | 25% | 22% | 19% | 16% | 12% | 9% | 6% | 2% | -1% |
| 70% | 36% | 33% | 29% | 26% | 22% | 19% | 16% | 12% | 9% | 5% | 2% |
| 75% | 40% | 37% | 33% | 30% | 26% | 23% | 19% | 16% | 12% | 9% | 5% |
| 80% | 44% | 40% | 37% | 33% | 30% | 26% | 22% | 19% | 15% | 12% | 8% |
| 85% | 48% | 44% | 41% | 37% | 33% | 30% | 26% | 22% | 18% | 15% | 11% |
| 90% | 52% | 48% | 44% | 41% | 37% | 33% | 29% | 25% | 22% | 18% | 14% |
| 95% | 56% | 52% | 48% | 44% | 40% | 37% | 33% | 29% | 25% | 21% | 17% |
| 100% | 60% | 56% | 52% | 48% | 44% | 40% | 36% | 32% | 28% | 24% | 20% |
So, for example, if there is 50% growth in bandwidth utilization from 2007 to 2008, and if prices decline by 33%, then there will be no increase in revenue for sellers of Internet bandwidth. However, if there is 100% year over year growth in bandwidth utilization, and only a 22% decline in prices, then there will be a 56% increase in overall revenue for the sellers of Internet bandwidth.
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.
So far, the big surge hasn't materialized. Will 2008 be the year?
Dan,
Thanks for the good comments today. On the first comment, I should point out that John Chambers and Cisco had recently predicted a 5X year-over-year growth in bandwidth...I'm no longer trying to claim that the bear-on-business chart claimed that. You have rightfully acknowledged an error in that chart and as far as I am concerned, that book is now closed. So, I should update this post here to clarify who I am pointing to when I say that some think there is a 500% increase in bandwidth coming...given the recent history of posts here, folks could get the wrong impression that I meant you, when in fact I meant Chambers/Cisco. Sorry for being unclear.
On the second comment, I do have data to back up the hypothesis that price declines have eaten much of the revenue benefit from increased bandwidth utilization in 2007: from Level 3's quarterly reports. I'll have a post on that in the morning.
Posted by: Ike Elliott | April 14, 2008 at 06:17 PM
Over the past year, I've personally spoken to the vast majority of the fiber based suppliers of bandwidth in the U.S. Though there are a few exceptions, their bandwidth business is doing well. Growth rates of 15-20% are common and many are growing at far faster rates (30-40% in some cases). As you know, this was not the case in the 2002 through 2005 timeframe...but it began to change in late 2005. We are seeing this first-hand in our Zayo Bandwidth business.
Though you show lots of numbers above, I don't see anything in your "analysis" that leads to the conclusion...you seem to be speculating...do you have any data?
Posted by: Dan Caruso | April 14, 2008 at 04:52 PM
For the record, our original charts never predicted a 500% increase...we showed a big jump between '06 and '07 (sloppy) but forward looking views were consistent with the 50-60%. We did no original work in this area, just attempted to relay what others have done.
As for your post above, I will comment separately but I think you are reaching conclusions that might not be based on actual data.
Posted by: Dan Caruso | April 14, 2008 at 04:45 PM