In the past week, I had the opportunity to speak at length with Anil Khatod, president of Global Internet Solutions at Nortel Networks (NYSE: NT). We covered a lot of items, all of interest not only to Nortel, but to the future of the Internet and demand for bandwidth. I'll be covering my interview with him over several articles. This one will not deal with Nortel directly. Instead I would like to go over the future demand for bandwidth.
According to Mr. Khatod, a number of items are driving the demand for bandwidth ever higher. Here are six of them that we talked about:
-- High capacity is developing at the edge of the Internet. As cable and DSL access gains further acceptance, a greater content demand is occurring. Users with this access have higher bandwidth coming into their homes and businesses, so they are pulling in more information. A 25-fold increase in bandwidth demand will come from "the edge" by 2003, according to Mr. Khatod.
-- The number of users on the Internet is increasing: 118 million users logged on in 1998, there are 300 million today, and in four years there will be 1 billion users. Think about your personal experiences today -- you only need to look around to see that people not so savvy about technology are starting to get Internet access, too.
-- Users are on longer and they bring in more content. Do any of you remember the good old days when you paid by the minute for Internet access? Today, most of us have unlimited access for a flat fee. Personally, I pay for constant access on my cable modem, so I'm always on. Also, this goes back to the high capacity at the edge -- as access speeds increase, people are likely to stay on longer.
-- There is a geographic connectivity pattern. Today, you are likely to hit sites around the world as you surf the Net. This pushes up the demand for bandwidth between different areas of the world.
-- The number of devices connected to the Net is increasing. A billion wireless devices are expected to be connected to the Net in four years.
-- Applications are becoming more effective. As this happens, there are more downloads, which require yet more bandwidth. Of course, we can return again to higher capacity on the edge of the Internet. If your speed is increased, you are more likely to download larger documents, program updates, etc. Rather than go to the post office to get an IRS publication, you can go to the IRS website and download whatever strikes your fancy. In the old days, at 2400 baud, that could have taken you hours! Today, with a cable modem or DSL connection, you can download very long publications in less than a minute.
The growing demand for access and content creates a circle that feeds on itself: More users of the Internet causes a demand for more services and applications. More services and applications creates a demand for higher connectivity speed. This creates a demand for more infrastructure, which leads to a greater development of the Internet economy. With this, more users are brought in, which causes more demand for services and applications
One of Mr. Khatod's statements especially made me pause and think: "Bandwidth demand will grow 100- to 200-fold in four years." I did a quick calculation, and that represents a projected 316% to 376% annualized increase in demand. All of this represents extreme growth potential for not only our Pathfinder company Nortel, but for other Pathfinder companies such as Enron (NYSE: ENE) that will help distribute the supply and demand with bandwidth trading, and Scientific-Atlanta (NYSE: SFA) that will provide the access speed to users at the edge.
Given all this, the news that Nortel will miss revenue numbers due to a slowdown in customer spending is surprising, but likely it's a case of too much expectation in the near term. The bandwidth buildout will occur over several years, and it will likely occur slower than many people expect, but it will still represent a high-growth industry. People have been saying for a few years that soon cable Internet would be everywhere. Well, it isn't. It takes time. The same will be true for fiber optics and for all bandwidth. The opportunities are long term.
Of course, we haven't yet gone into the projected growth for wireless access and the Internet, which we will look at next week, and which The Motley Fool Research Internet Report recently analyzed.
Pathfinder Port Update and Network Security
I sent my money for enrolling in the Nortel and Scientific-Atlanta Drips, and received confirmation from them this week. I have already enrolled in the Enron Drip, but I haven't seen confirmation of the first purchase yet. We're still working out how we'll exhibit the Pathfinder Portfolio on the site. Another question a reader asked was how much do I intend on investing each month? Right now I'm planning on $50 a month to Enron, and probably the same to Scientific-Atlanta. Nortel invests quarterly, so I haven't decided whether to send them money monthly, or wait until the quarter is coming up.
Before I go, let me throw in a little bit of shameless promotion for another of our products -- The Motley Fool Research Internet Report on network security. Do you ever worry about hackers getting in your computer? Have you ever had your credit card number stolen? (My card number was stolen last spring.) Does your business carry critical information? For all these reasons, security software is important. This report goes over the leading companies that provide it, and the pros and cons of each.
Parting Idea
Visit today's Fool news columns and the Fool's new "sector pages." The sector pages, which are rolling out now, offer the latest coverage on one sector (biotech, computer hardware, etc.), as well as educational background articles about investing in each sector. Finally, register with the Fool if you haven't! It's free and it gets you great free items, including the 13 Steps to Investing Foolishly primer. If you are registered, check out the freebies for registered Fools!
