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Emerging Investment Opportunities Created By An Evolving Internet Environment


We see two major trends that seem like they will last for 18 months or longer in the internet space. This upgrade cycle is driven by two major issues: capacity and standards change.  Let’s look at how to invest in this trend, not trade it.

There is a huge capacity demand driven by video services like Netflix. The Netflix streaming movie service alone now accounts for more than 20% of all internet bandwidth between 8-10 PM each weekday night in the US. And, this continues to grow each month. This is compared to most internet activity which only uses tiny amounts of the available bandwidth, such as texting or emails. Surfing the net is also, for the most part, not a huge drain on internet resources.
Bit streaming services for years have been the big users of bandwidth, transferring bootleg movies, top selling cd’s, and pirated software. Bit streaming services usually are slow and an hour and thirty minute movie may take two to ten times as long to download. Data did not have to be to the client on a timely basis so you could instantly see a movie.
Real-time video streaming takes magnitudes more data and speed in comparison with bit streaming delivery. DVD level quality takes three Mbps and HD video five Mbps.
In the chart above you could see how the move to real-time video and movies over the internet could rapidly overwhelm the capability in the US. Currently the US consumer pays twice as much as his European counterpart for half the speed. Some ISP’s are already putting on "fair access policies" to put a quota on the amount of data each customer can use. Even some “all you can eat” ads for ISP’s have FAP’s in the small print. In addition, some ISP’s have cut off the top five to ten percent of bandwidth hogs
Standards Change:
The current standard for internet network addresses (IPV4 - think phone numbers) had enough numbers that it lasted for 30 years. All IPV4 IP numbers will likely be exhausted around August or September of 2011. The major blocks (think area codes) were exhausted February 22, 2011. Now each device on the internet really needs its own unique address, as each phone should have its own phone number.  IPV6 solves this by adding additional digits. IPV6 adds enough unique Internet Protocol Numbers to hold the system through each human having a billion IP addresses.
There are ways to “cheat” this for a while but it comes at the price of security and features. This “cheat” is called network address translation, NAT for short. Problems arise in its use for issues of security. Think about how Caller ID has pretty much made prank phone calls a thing of the past. When your IP address is not verifiable, the other party has to take on faith that you are who you say you are. Tracking back traffic to NAT addresses is problematic. Other issues are use of Voice Over Internet Protocol (OTCPK:VOIP) and a problem called NAT traversal breaking phone calls.  In addition, your geolocation for maps and shopping might not be able to accurate or even found.
There are other band-aids being talked about with big sounding names like Carrier-Grade NAT (CGN) or Large Scale NAT (LSN). These all have side effects that can potentially be highly disruptive to IPv4 Internet operations. Web Applets, Web Servers, and Data Base software might all need replacement or upgrades. Hard coded IP addresses will no longer work. Windows XP will be retired shortly and it does not fully support IPV6. Upgrade to new hardware and software is the only viable move for those users.
“There are too many devices in the world for 32-bit (232, or 4,294,967,296) IP addresses to be sufficient. The next version of the TCP/IP protocol, IPv6 offers 128-bit address space, or 2128 (≈ 3.4 x 1038) IP addresses; this is approximately 5×1028 addresses for each of the roughly 6.5 billion people alive today.” DD-WRT
Profiting In the Internet Upgrade Cycle
In the IPV4 to IPV6 upgrade cycle, we see three distinct sectors.
This sector is software that runs client computers like yours at home and the services on the other end of that connection you get through that client machine.  If you have Windows XP, it will be phased out starting in April. XP does not support IPV6 as well as Windows 7. IPsec is not supported in XP.
For business, this means that the server software on each system may need to be upgraded. Server 2003 is still the largest installed base of Microsoft’s server operating systems. Think of it as XP for businesses. The license fees from Server 2008 are in the thousands of dollars. There may be upgrade paths for this business at a lower cost but it is hugely expensive. For those companies skipping the server upgrade cycle and going straight to cloud computing, that server business still has to go somewhere.
When you look at a web page in Internet Explorer, 90% of the time it is going to be from a machine on the other end that is running web server software and a database. For years Sun’s open source software for databases, MySql and Apache server, ruled the web space.
Oracle bought Sun and controls the MySQL and Java technologies so heavily used on websites. ORCL’s move to make money off these once free software applications has already resulted in a cash cow by moving to support them on an incident charge basis as Red Hat does in Linux.
Apple’s machines already support IPV6 well but they have not gained any significant market share until the last couple of years. There are still nine PC’s running Windows to every Mac. The future for AAPL is rather neutral as their machines will not have a big upgrade cycle and they do not have server software or databases that are widely used.
All networkable devices need an Ethernet controller chip. These are inexpensive and now mostly a commodity, but existing wireless devices like routers that don’t have enough memory or that are not supported by their manufacturer will need to be replaced to support IPV6.
We estimate that 90% of consumer routers will need to be upgraded. The high-end business routers should be software upgradable. Wi-Fi chips being added to devices from cameras to cars are looking to add 738 million units in 2011.  Cisco is stating 1.3 billion new devices in the next two years. Those without wireless routers will probably be getting them to access these devices.
Recently QCOM sold their wireless network spectrum license for over three billion dollars. Within weeks Qualcomm spent all the cash buying Atheros. While this will only mean a 2% change to the bottom line it was a strategic play in the fast-growing wireless connectivity space.

We are looking at the consumer router manufacturers. The fully support IPV6 consumer and small office routers should have several features.
Tunneling is needed in order to reach the IPv6 Internet, where an isolated host or network must use the existing IPv4 infrastructure to carry IPv6 packets.
·         Packet Filters
·         Application Layer
·         Stateful Filters
For consumer routers the packet filtering is a basic feature to be compatible in our opinion. Older routers most likely do not have enough memory to support packet filtering even if the vendor supports a software upgrade of some kind. This lack of filtering makes them transparent and easy prey for those wanting to get access and control of a home network.
Home and Small Office Router Manufacturers:
·         Linksys
·         Netgear
·         D-Link
·         TRENDnet
·         Buffalo
·         ASUS
·         Belkin
·         Zoom
·         EnGenius
·         Rosewill
With a huge amount of low-end wireless routers that will need to be upgraded, we are looking at this as a prime sector for investment. 

There are three tiers considered in the internet. It’s all about who has to pay who and if you need a partner.
Tier 1 – a network that participates in the Internet solely via settlement-free interconnection, also known as settlement-free peering. Tier 1 operators typically have operations in more than one country. Tier 1 operators own and operate their own physical networks, and either own or part own their international submarine cable links. Tier 1 operators have revenue-neutral peering agreements with other Tier 1 operators, and generally do not pay for transit. No money changes hands between them and other tier 1’s.
Tier 2 – a network that peers with some networks, but still purchases IP transit or pays settlements to reach at least some portion of the Internet. Tier 2 providers are the most common providers on the Internet as it is much easier to purchase transit from a Tier 1 network than it is to peer with them and then attempt to push into becoming a Tier 1 carrier.
Tier 3 - a network that solely purchases transit from other networks to reach the Internet.
Tier 3 networks always pay fees to obtain access to the larger backbones.
Things to know:
·         Multihoming is a technique to increase the reliability of the Internet connection for an IP network.
·         A point-of-presence (POP) is an artificial demarcation point or interface point between communications companies.
·         An Internet exchange point (IX or IXP) is a physical infrastructure through which Internet service providers (ISPs) exchange Internet traffic between their networks.
·         QOS is the ability to provide different priority to different applications, users, or data flows, or to guarantee a certain level of performance to a data flow. Voice over Internet Protocol could have a higher priority that someone browsing the internet. A second later and the person browsing is not going to complain but the person with the long pauses in a phone conversation will. This is also at the heart of net neutrality.
In a world where the amount of data moving across Tier 1 internet providers is more every day, this is the supply and demand curve at work. They will be able to raise rates to Tier 2’s. The rest will ripple on down to the bottom line.
Tier 1 Internet Service Providers:

Verizon Business UUNet
TeliaSonera International Carrier
NTT Communications
Deutsche Telekom AG (DTAG)
Level 3 Communications (L3)
Global Crossing
Tata Communications

Time Warner
CMCSA (merging)
Cellular 3G, 4G, and LTE Carriers

Wimax Carriers and Suppliers

Alvarion Ltd.
Alltel Corporation
Intel Corporation
Proxim Corporation
We believe we have found a large sector where the business should increase over the next 12 to 18 months based on demand that is predictable. Upgrades cycles in technology usually have lots of pin action beyond the core reason
This was narrowly focused in three areas, that being the internet carriers, embedded chips, and routers. The business philosophy has always been the same for me. The real money was not made by the miners of the California gold rush, but by the sellers of picks and axes. A bottom up approach is generally the best way to play technology, as the biggest names seem to be the most fairly valued (or over-valued) already. Buy-outs in some of these smaller companies have already started and there is nothing to say they will not continue.
Jesse Livermore said that the first step of a bull market is to advertise it. I believe we have seen that with stocks like JDSU that have come back from the dead in recent weeks. Many of these are the same stocks that saw euphoric prices in the last big internet cycle that ended with the dot com bust. This time there are systemic and secular causes for their business to grow without the cataclysmic end.
David White
Chief Analyst – Technologies at
Host of “The Power Trading Hour
Weekdays from 9-10am EST exclusively at
Author of “The Path of Least Resistance”

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.