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August 25, 2000
Rat's Broadband Bandwagon
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Fat Pipe #1 - core...
I took Becky's excellent suggestion that we add the title of the technology segment to the number for easier threading, discussion and tracking. It also doesn't hurt that my oldest sister is named Becky and she's always provided excellent advice to me in the past. Now if my wife would just listen to her on Harley advice.....
In these Fat Pipe series of posts and discussion, I'll do my best to keep the explanation on a level we can all understand as retail investors. Although I would highly suggest reading all the 'white papers' that are available, it's not a process that meets the needs, time demands and interests of each individual investor. That's nothing to be ashamed about or feel overwhelmed with in your own understanding of technology. Reading the white papers can be a daunting task. Be happy you can turn your computer on, log on to this marvelous thing called the Internet and enjoy what it has brought to your life in terms of features, use and productivity as well as what it will continue to bring. I haven't written a check to pay a bill, visited a travel agent, licked a stamp, waited for a delivery of my dead tree version of an annual report in quite some time. That can all be done through the Internet as well as a large portion of my shopping. Frees up time with the family, career and study. I look forward to the day I can log onto the Internet, do my 'audition/interview' for an opera job via the Internet and save on airfare to New York City, hotel and expenses to give a group of three people a 5 minute impression of what I look like, what my voice sounds like while they make a value judgment 'yes, we want him or to hear the infamous words "thank you Mr. Brown. Next!". In terms of productivity, the idea has merit at some point in the future. If not, it's a neat dream.
Down to the basic brass tacks.
What's broken and needs to be 'fixed'?
The Internet as we know it today really took off in the early to mid 90's for a variety of reasons which we all know and benefit from at this point in our lives. What's wrong? Service providers are tearing their hair out to get faster gear so they can attempt to keep up with the surging global Internet traffic. Studies have shown that in some cases, the demand for traffic is doubling every 90 days. Just take a look back at how many users have signed up for AOL in the past few years. Here are a few words from what might be considered the 'typical' comment:
``Our traffic is rising eight- to tenfold per year,"says Mike O'Dell, senior vice president of technology at UUNet.
That's some very serious demand and helps explain the reasoning why Internet carriers have been willing to pay for the types of equipment that can unclog their network drains. Cheap? Hardly. This equipment is expensive and carriers are willing to pay the price for the performance. Why? It solves the broken problem. The drain is clogged and the infrastructure needs the equipment/software to get the flow going again.
I don't know why I got off on plumbing, but let's stick with that in spite of all the unpleasant connotations that it brings up. We all know and understand plumbing and it fits the title of Fat Pipe. <ggg> The restroom was built to handle the flow for daily use of 10 people who each eat three meals a day. Word gets around that the food is good and all of sudden, we have 100 people who want to use the restroom and the propsects for 1000 more standing in line. Amazing that it seems, they have all increased their daily need of 3 meals to include a few snacks between meals each day. As the food gets better and more people hear about the food and where they can get it, that line of 1000 people continues to grow. Houston, we've got a flow problem here!
What's the fix?
At this portion of the Fat Pipe game in IP/Broadband, we are talking about the next generation network core internet router. Routers are not new just as our bathroom example above is not new. We still need to route the traffic and information as we have been doing in the previous decade with the older generation of routers. However, this time, instead of just increasing the number of 'holes' in the restroom, we need the pipes that they connect, to be much larger and handle more 'load' than every before. Likewise, where a 'two holer' restroom worked before, we now want a 20 'holer, a 40 'holer', a 160 seat 'holer' and on and on and on. (Side note: The Juniper Networks M20�, M40�, and M160� Internet backbone routers represent an entirely new class of routers and were my 'inspiration' for the choice of 'holes' in our restroom.) In addition, the things we are flushing through those 'holes' are not the same as the obious things we have been fllushing before. Oh yes, the obvious things are still there, but now we need to add tires, bags of groceries, full length motion pictures, video, kitchen sinks, oodles of voice/data like noneother we've seen before in terms of amount, speed and flow. We need to keep the service providers from tearing their hair out due to a real problem of 'flow control'. That's the fix. That's the game. That's the niche. That's why the technology developed. To address a real problem and offer a solution to 'fix' the real problem.
Who are the players for next generation network core internet routing equipment/solutions?
It's a big group and I'll tell you why. Growth. Last year, 1999, about $1 Billion was tossed at this space. Growth predictions for the shorter term are that we will see $10 Billion tossed at the space in the year 2003. That's reason enough to make it attractive for a few companies to grab a slice of pie or two, isn't it?
Who's in the "We can fix your plumbing problems" Choir?
That's a long list competing for some pieces of that pie. They won't all make it to domination levels. Why? In addition to the hardware fixing the problem that needs to be fixed, there are standards that develop around the software needed and used to control all of the equipment. The market place needs standards. They want everything to work together because there are many pieces of the Internet backbone puzzle that have to go together and work together. If my solutions don't work with somebody else's solutions - we've got a problem. Software is the key to this game and who will have their software chosen as the 'standard' to be used in the space. If MCI Worldcom (no small company by any standards) buys some equipment from one company based on some standards and then needs to add more equipment and connect everything together, where do you think their next purchase is going to come from? Their toasters better damn well work with their coffee makers and ovens using the same software protocols. Nobody likes to have to replace an over or a coffee maker if the toaster won't work with them. That's a real watered down version, so don't get mad at me. I'm trying to break it down to the most basic level.
At this point in the 'game', it appears that Juniper and Cisco have the best position for eating pie. That's not to say the others are not going to get their hands on some tasty pieces, but it just appears that the game is tilted in that direction right now. Consider that there will be consolidation in the space going forward and that Cisco, as the incumbant gorilla of the previous generation of routing is always a threat and player. Cisco offers an 'end to end' solution which satisfies many customers needs and demands. They also have a huge global base of customers that cannot be overlooked. Juniper is a niche specialist in the core NGN routing space and is considered the 'best of breed' product/software at the moment. Juniper has a growing list of customers on a global basis and has increased their market share in the space quarter after quarter to a recent 24% from 16% (http://boards.fool.com/Message.asp?mid=13174570). The 'best of breed' strategy is obviously working for them in this niche market. As we all know, best of breed doesn't always win the 'game'. So, at this point, the 'game' is too early to call and say who won. In the meantime, both leaders are winning plenty of pie and so are the lesser players at this point. There will be updated and new equipment/software that bests each generation of product category as we move through the game. In spite of that, the game warrants close watch and more than one 'candidate' in your 'basket' strategy approach at this point. On a personal note, I happen to hold both shares of Juniper and Cisco.
No need to point out the 'moat', 'value chain' and global connections that Cisco has. It's an important company like none other. It should be viewed as an 'end to end' solutions company. Likewise, Nortel is another 'end to end' solutions company which has partnered with Juniper for their core NGN routers rather than develop their own or buy one of the smaller players. Hence, Nortel is no small chicken in the space and is a nice plum in Juniper's 'moat/value chain' formation. It allows them to participate in both the 'end to end' customers as well as the 'best in breed' niche market customer base. I wrote a post over on the gorilla game board that addresses that strategy, but is not specific about which category of the NGN I was talking about, but includes companies from the optical side, the edge side, the core side and Broadcom semiconductors all thrown together to discuss valuation metrics.
Since we all know about Cisco and their fine management, here's a great post to read concerning the other important player in terms of market share - Juniper Networks:
Chris Larsen is a young MBA student and a pleasure to have on the Fool boards making so many fine contributions. I highly recommend reading his study of the NGN space and he is one of the posters I was referring to when it came to 'other boards' and other excellent information in the space being discussed. He's not the only one, but I simply point him out in case you are interested and have time to look up any of his posts on the boards that fall under the "Fat Pipe" series.
The original intent of the Fat Pipe series was to extract the top company from each of the five series in hopes of one poster's goal of investing in the most attractive of those final 5 candidates. At this point in time, I'm not going to narrow it down to one candidate in any of the individual segments until we've all read and discussed the individual segments.
I don't think it hurts at this point to narrow it down to the top two or three and that's why I listed my thoughts as to what appears to be tilting towards Juniper and Cisco in the core space at this time. I'm certainly welcome and open to other opinions and views because I don't want this to be a 'Bruce says' thing at all. I'm just quickly running through the basics of each 'game' as I know it from my study. It's nice to have the kind words from everyone and all, but they aren't necessary. I get plenty of view from the other side that focus on the thought that it is all hype, overvalued, greater fool theory stuff to keep me humble and in check. In other words "caveat emptor".
Remember, I wear tights for a living....
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