I'd like to talk about a scarce commodity that drives the business plans of about a third of our portfolio. Demand for this stuff is expected to double every couple of years for the next decade, which is about the same rate the supply of it has been increasing for the past 30 years. It's called "digital bandwidth," and it's the ability of one computer to send data to another.
Back in 1983, I started using my first computer, a Commodore 64 with a modem that could transmit 300 bits per second through standard phone lines, to connect to other people's computers running "Bulletin Board System" (BBS) software. These days, modems that hook up to your phone run at 57,600 bits per second (bps), and I'm currently using a cable modem that does up to 300,000 bps when it's feeling particularly ambitious. But the real fun of the cable modem is that it's on all the time. I don't have to wait for it to dial up when I want to use it, and it doesn't disconnect me due to inactivity.
I'll probably be trading in the cable modem for a DSL (digital subscriber line) connection soon, because the cable people get mad if I try to run my own Web server. That's right, not only has my personal bandwidth consumption increased by a factor of a thousand over the years, but I feel my computer should be able to consume bandwidth without me.
Fifteen years ago, I was reading e-mail (at seven characters per second), posting messages to newsgroups (we called them "message bases" or "fidonet echoes" back then), and downloading a few tiny little programs. Now, I'm listening to streaming audio (such as this interview with JDS Uniphase CEO Kevin Kalkhoven on Fool Radio) and may get one of those miniature video cameras for real-time video connections someday. I'll probably do all my TV watching on my computer through the Internet in a few years. For a prototype of what I'm talking about, check out this just-unveiled sneak preview of Yahoo!'s (Nasdaq: YHOO) new FinanceVision, a streaming Web cast for financial news.
Someday, I'll even be downloading movies (from Blockbuster, or somebody else if they refuse to move with the times) instead of renting them. This may seem unusual today, but back when I was 12 years old my family thought e-mail was unusual. Like processor power, memory, and disk space, you just can't have too much bandwidth.
The Rule Maker portfolio's largest holding, Cisco (Nasdaq: CSCO), sells bandwidth. Specifically it sells routers that forward packets of data from one connection to another. To connect more computers, you need more routers to connect them to. To send more data along each connection, you need to replace your old routers with faster ones. Cisco also sells other router-like devices, such as DSL modems, that perform the same type of function (forwarding data from one connection to another) in different niches. The demand for bandwidth translates directly into demand for routers, and Cisco's challenge isn't to grow its market but to keep up with it. (Keeping up with Cisco as an investor is made easier thanks to Phil's newly published Cisco Research Coverage.)
Our newest holdings sell the technologies behind the connections. JDS Uniphase (Nasdaq: JDSU) sells fiber optic cable, which is the best way anybody's found of connecting routers to other routers. The backbone of the Internet is mile after mile of fiber optic cable, each of which contains dozens or even hundreds of individual plastic fibers that pipe light from one end to the other. A single optical fiber can handle gigabits of information every second, and newer routers can use improved technology to pump more data down the same fiber by using faster pulses, and several different frequencies of light along the same fiber. Want to know more about fiber optics? Check out this outstanding contribution from BitGeek on our Rule Breaker Seminar discussion board: 5 Seconds on Fiber.
Nokia (NYSE: NOK) takes a different approach, focusing on wireless data transmission. With the increasing importance of portable computing, portable bandwidth has its own category of demand. In addition, laying cables through urban areas is a serious and expensive pain that involves digging up roads and sidewalks, water pipes, natural gas, phone lines, cable TV, sewage lines, and who knows what else. Even for desktop machines, wireless modems can make a certain amount of sense if they're cost-competitive.
Intel (Nasdaq: INTC) has focused on bandwidth recently too. That was the whole reason for the low-cost Celeron processor -- if the primary use for a computer is to Web surf through a 56k modem, how much processor power is really necessary? Moore's law says that every 18 months the processor power you get for your dollar doubles. But if the modem is the bottleneck anyway, why waste money on a faster machine that will just sit and wait for the modem? PC prices dipped below $1,000, and have continued down below $500 today. Intel's competitors had been going after the low-end for years, but suddenly the low-end was where the action was, and thus the Celeron was born.
In the past year or so, Intel has even toyed with the idea of selling raw bandwidth as a commodity, via "bit factories," which was Intel's name for huge server farms that it could rent out space on. Unfortunately, being an Internet service provider is already a very competitive space that Intel isn't likely to dominate.
In any case, making servers run faster wouldn't fix the speed problem that users experience while trying to use the Internet through the phone lines. The Internet could have an ocean of bandwidth, but a 56k modem is a pathetically tiny straw to suck data through. The market is resolving the client-side problems by replacing the phone company with cable modems, DSL, and wireless, and only after that do the servers again become the bottleneck (because each server has to be a hundred times faster than an average client in order to serve a hundred clients at full speed). At that point, servers will need even more bandwidth, thereby providing more business for Cisco and JDS Uniphase.
Then, the clients can profitably use more processor power to handle streaming MPEG video and MP3 audio files, which means increased demand for faster processors, but faster servers may need more high-end processing horsepower, too....
Of course, all of this means that I, personally, will need a lot more bandwidth.
-- Oak
