Fiber: To Own or Not to Own

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 |  Includes: AKAM, GOOG, INAP, LLNW, LVLT, T
by: Tech101

One of our nation’s most important issues is "100% broadband adoption for all", because it is an important equalizer for all Americans, considering the "no child left behind" program. On the other hand, we increasingly face the reality of bandwidth use cap when telco, cable, and media executives are feeling threatened by the effect of over-the-top content on their business models. As Warren Schlichting, vice president of new business strategies at Comcast (NASDAQ:CMCSA) Spotlight, said, service providers need to be smart about how they allocate bandwidth that they bring online:

If we have a pipe that pushes a massive amount of content through there and we're not getting a return on that, it's probably not a good business for us.

The reason behind this change is the ubiquitous IP Video proliferation.

Metcalfe’s Law says: "The value of a network grows as the square of its number of users". Amazon (NASDAQ:AMZN) has been taking advantage of the power of internet long-tail and become tremendously profitable; YouTube could be the next winner that utilizes the strength of internet’s point-to-point connections. The true value of internet is that it connects every user any where in the world. This puts true nationwide bandwidth owners at high demand.

Up until now, many CDN (Content Delivery Network) businesses have been working fine without owning fiber. However, when large companies such as AT&T (NYSE:T) and Level 3 (NYSE:LVLT) start to make big push in the content delivery market and now focus “on rapidly expanding capacity” so they can do better in winning customers in the CDN space, the challenges could be real to the cache-only CDN business model adopted by the current industry leaders, Akamai (NASDAQ:AKAM), Limelight (NASDAQ:LLNW), and Internap (NASDAQ:INAP), and their growth could be limited without owning fiber and nationwide network support in the long-run.

There are rumors surrounding what Google (NASDAQ:GOOG) has been up to for the last three years buying all that dark fiber, since the company posted a recruitment ad:

Google is looking for Strategic Negotiator both in metropolitan areas and over long distances as part of development of a global backbone network.

Google bought fiber rapidly starting in 2005, when dark fiber was still plentiful and cheap. By the end of the year, Hunter Newby, then chief strategy officer at Telx, commented on the scale of the Google acquired network that: “It’s scary. They’re not fooling around."

Being scarily capacity large, Google’s acquisitions are starting to make sense as the market for internet based applications evolves. Google makes money from advertising, so they have to get the right content to the right people quickly. Google’s search engine indexes about 24 billion web pages, in addition to YouTube, Google Earth, Gmail, and many other services that consume huge bandwidth consumption. Google’s aggressive data center construction involves moving data around the world to present the data close to customers and end users. When Google/YouTube start to offer long-form video/IPTV, its transport needs become enormous. As a result, it faces the challenges of controlling overhead and bandwidth costs. That also explains why Google became the first investor in submarine cables that isn’t intending to sell capacity to other telcos. As the article “What’s it all about, Google?” in the June 2008 issue of Capacity Magazine published in UK stated:

Perhaps the clearest indicator of Google’s immediate direction was uncovered by accident by Greg Linden, who runs a blog called “Geeking with Greg”. While perusing the PowerPoint presentation that Google gave to analysts on 2 March 2006, he discovered the speaker notes: “With infinite storage, we can house all user files, including: emails, web history, pictures, bookmarks, etc and make it accessible from anywhere (any device, any platform, etc),” it said, “As we move toward the ‘Store 100%’ reality, the online copy of your data will become your Golden Copy and your local-machine copy serves more like a cache.”

If Google stores 100% of our data, it doesn’t just become a service provider – it becomes the service provider that every other service provider has to coexist with. This isn’t necessarily a bad thing, but in the battle for service provider supremacy Google built the hard part – compelling applications – first, while picking up the other part – a way to get those close to its customers – on the cheap, in the background. Carriers attempting the job the other way round will face a much harder job.

To add a little color to the story, yesterday Google announced that the company named Patrick Pichette as its new CFO. Pichette was most recently the Bell Canada (NYSE:BCE) President of Operations and also served as CFO from 2002 to 2003 during his seven-year stint with Bell Canada, a unit of BCE Inc.

Disclosure: none