Post of the Day
March 24, 2000
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
What is "bandwidth elasticity"?
Ok, all you new GBLX campers, one more time� gather round the crackling campfire and Uncle Robert will tell you a tale about a vision that has to do "Bandwidth Elasticity" and the fight between the Evil Bloated Stingy Telco Empire and the DWDM (Dense Wave Division Multiplexing.) Magic Sorcerers Global IP Network.
Once upon a time about five years ago a [...] ATT exec had a vision of creating a worldwide fiber optic network�oh no, that's another tale.
Campers, take a look at the spreadsheet located here for a few minutes and then come back, I'll wait:
First, my apologies, as I put percent signs in back of the numbers in the post discussing bandwidth elasticity that broguht up this question. The numbers are factors, not percents. Bear with me and you will understand.
Fiber optic capacity is measured in a unit known as a DSO circuit. The definition of a DSO circuit is at the bottom of the sheet for those who really didn't take the time to look. They are usually not sold in these units, especially for larger carrier needs, but the DSO is used to compare apples with apples and bananas with bananas in the carrier world. Please note, GBLX is not a long distance company. Eye with suspicion anyone who prints this description in the media, as declaring this is usually a good indicator their canvas bag of clues is empty! GBLX sells bandwidth capacity to long distance companies, Fortune 500 and foreign firms. Yes, Frontier was the fifth largest long distance company when GBLX bought them, but that's not what GBLX is about. Conservative estimates have data as about 80 to 85% of traffic by the end of 2003. Voice will be a small piece of the pie. In the not to distant future, GBLX will roll out their own little morsels of service companies they now own to utilize their world class network. Or they will buy them as they recently just did.
Notice in the pricing column that DSO's are priced differently in different markets, represented by the different network segments GBLX owns and operates. This is the most basic law of supply and demand, DSO's are priced according to what market they are in. The more capacity available, the smaller the cash flow from the network.
Bandwidth Elasticity simply states that as the price of bandwidth comes down due to more capacity coming on-line (the much talked about bandwidth glut appearing as everyone builds infrastructure), the circuit prices fall. A great example is the current voice long distance business. All the fighting over rates last fall put heavy pressure on the LD companies. Analysts were factoring dropping prices would be reflected on the bottom line of the LD companies. This turned out to be true, and it will get worse as long distance, as we think of it today, will go away over the next few years. If you look back you will see GBLX took a hit over their Frontier LD numbers a few Q's back. Many of the clueless Wise still refer to GBLX as a long distance carrier, including Bloomberg this week. I'm amazed at times.
As the pricing of the DSO's come down, basic economics, Moores Law (look at CPU pricing over the last decade) and common sense state that worldwide bandwidth demand will increase as prices drop. The same has held true in long distance and bandwidth will follow accordingly (actually there one and the same, but let's not get too confused). The relationship between the price of the circuit and the demand for more bandwidth is know as Bandwidth Elasticity. In the spreadsheet referenced (you did look at it, didn't you?) DSO prices are assumed to drop annually about 50% per year as demand increases 150% per year. This is bandwidth elasticity of 2.5. Many bright observers think the factor is higher than 5. As prices come down, demand increases un-proportionally. This relationship sways as capacity and demand move. Thus Bandwidth Elasticity.
See� not that complicated once someone explains it too you. Now back to the tale.
So, looking at the spreadsheet again and taking the annual 50% discount factor in pricing and the presumed bandwidth elasticity factor we can make some assumptions about the revenue stream per network segment GBLX owns and operates. That is what has been done with this spreadsheet. Remember, this work is at least 6 months old (and took 2 months to put together). Updated work is on hold until there is more stability in the belief GBLX will remain an on going stand alone network. I mean�what's the point. Would rather spend the time trying to do the comp work between Exodus and GlobalCenter, but that's another tale.
If we look out 24 months from now when the listed circuits will be filled, (BTW there is a rough 30% more capacity existing now than when this work was done), and they will be filled if the bright minds are right about the factor being above 5, we see GBLX should be rolling in an excess of about 12 billion a year in revenue, about what MCI Worldcom brings in now.
What happens then you wide eyed campers may be thinking? The pipes are full and prices are falling� oh no Mr. Bill�I don't won't to be a Bandwidth Barron anymore. But wait campers� to the rescue comes the DWDM Magic Sorcerer !! DWDM is the secret weapon that splits a single fiber strand into hundreds of separate little light paths and sends them side by side on their own unique color of light spectrum. In the future you may not have a corporate phone number, you will have a corporate light color. You can now be reached at Blue#169.
Think of the fiber optic data path as a light carrier beam with two flashlights at either end turning on and off a billion times a second (relating to 0's and 1's of the binary number system� 0 for off, 1 for on). Now think of 192 flashlights sitting side by side all blinking together. The DWDM Sorcerer takes all those flashlights, keeps track of the flashes, mixes them together and sends them down the same hair size fiber flawlessly. It really is [...] Magic Boys and Girls.
Soon the boxes will accommodate 384 flashlights side by side, then 768 flashlights� do you start to see the pictures of the future. Speaking of getting the picture� You may need this amount of bandwidth when you go into your favorite watering hole and watch the World Champion Boston Red Sox defend their title in the 2010 World Series on a 20 foot hologram in the middle of the bar. Five years later you will do the same thing in your living room. Now that will take some bandwidth.
Who makes all this magic for these light squeezing boxes? Well campers, they are names you know like LU and JDSU. BTW, look at the recent post highlighting GBLX's relationship with LU. Sweet Hugh? Anyone wanting to know more about DWDM in addition to my campfire fairytales, you can get a more sane overview here:
As I mentioned in other posts, the capacity of AC1 was doubled over the past year at about 5% of the cost of dropping another cable. Meaning the revenue stream from AC1 rose accordingly, factoring in discounted pricing. HUGE LEVERAGE!
If you take the time to work out the 12 billion revenue stream from the network, do the comp work of GlobalCenters using Exodus as a model, you will discover that you can buy the GBLX network now for free, yes free. In two years GlobalCenter should have the same valuation as GBLX does today if the market gives GlobalCenter the same market multiples as EXDS. This leaves out Asia Crossing, the venture portfolio GBLX holds, and their cable laying fleet (about 60% of the worlds capacity). You get them free too!
You now understand why I scoff a half baked story of an offer of $75 a share from DT. No matter what the price of any buyout now, short of some really outrageous numbers, I will sit down and sob like a child if GBLX gets sold.
GBLX is one of the most awesome money machines ever put together. Gary Winnick and Leo Hindrey and the boys know it too. I pray they stay the Preeminent Bandwidth Baron they are. But it will take a lot of capital, and time, and paytience, to finish putting the machine together.
PS . You can tell my wife is out of town again and I am bored. Hope you enjoyed my entertainment.
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