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August 28, 2000
Rat's Broadband Bandwagon
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Fat Pipe #2 - edge...
In spite of my crude analogy, I hope that we all made it through the Fat Pipe Game #1 - core restroom/plumbing. If so, I would like to proceed with Fat Pipe Game #2 - edge. One of the most important things about gorilla gaming and royalty gaming in high technology is to break it down into the simplist form to understand. If you can't do that, then the recommendation is simply to avoid it as an investment opportunity. Hence, sitting around chatting about the white papers of any technology and comparing detailed technical information is not going to get us to the end goal - which is:
Is there a game going on and who are the players in that game?
That's why we use the format of "what's broken and how is that fixed". It may sound simple and it may drive hard core technical experts crazy, but that's how the game is played in terms of investing. I'm not saying we need to leave all that technical white paper discussion to the VC firms that back the technology or to employees/investors involved in a highly technical career who understand it. I'm just saying that we have to break it down in its simplest form for all to understand if one has interest in investing in the space. The NGN companies - many of the new ones which were being formed in the 1994 - 1996 time frame - have just now come to our level of consciousness in terms of investment over the past 12 to 18 months. Likewise, there are a group of companies being formed at this moment who are building a technology that 'fixes' a 'broken problem' in some portion of the high technology market. We'll hear about those in a few years in the same manner that the IP/Broadband space slowly crept into our consciousness over the past year or two.
Down to the basic brass tacks.
What's broken and needs to be 'fixed'?
The Internet has opened the doors for this century to deliver services, products, applications, streaming video, streaming audio, e-commerce over the global infrastructure known as bandwidth. No secrets there. The problem is, narrowband simply cannot handle it. The old doors are simply not wide enough to fit everything through at the same time. Narrowband is not designed to handle the pressure and volume of the load. Period. It's "broken" and the pipe is bursting at the seams. We discussed this in Fat Pipe #1 - core, but I felt compelled to mention it once again to set the stage.
The 'last mile' is experiencing a bandwidth boom via technologies such as DSL, cable, fixed wireless and long haul optical networks. The on and off ramp to those long haul networks is how we get off and on the super information highway. Ring a ling a ling, dial me on, call up the ISP to pull my browser and applications right into the flow of traffic. Get me to that main Fat Pipe. The technical term for those ramps that get us on and off the highway is called a MAN (metropolitan access network). They're jammed. They're bottlenecked. They're clogged. Not even the plunger from h....e.....double toothpick is going to clear the load so the 'flow can go'. The engineers who designed and built the ramps umpteen years ago made them one or two lanes wide. It's easy to say they should have made them 20 or 30 or 40 lanes wide, but the fact is - they didn't. The 'need' for the technology simply didn't exist. If they had built them with that many lanes - could you imagine? Rush hour would be gone. Vanished. History. A 40 lane on ramp to the long haul highway which was 40 to 100 lanes wide. Then a nice exit via a 40 lane exit ramp right into the parking garage with lanes and lanes of traffic so there's no stopping. No clogged arteries. No bottlenecks. No time to shave in the car. No time to check your hair in the mirror. No time to sing with the radio. No time to exhale with a big sigh of air as you wait for that car you're in to inch ahead a mile over the course of the next 25 minutes. No waiting to download that 5 MB .pdf file. But, the engineers didn't build it that way. What they did build solved any problems that needed to be solved at the time. That's all changed now. We're clogged.
The old system has two sets of parallel infrastructure 'pipes'. One is a transport network to carry TDM (time division multiplexing) and voice. The other is a separate access or data network that rides on top of the transport network. This one carries the business-class data services like frame relay, ATM and leased-line services. Managing all the services, connectivity and bandwidth over these two distinct, but interconnected networks creates problems that range from provisioning scalability problems to service delivery constraints. Nothing like bottlenecked, clogged, inefficient management of what will soon be remembered as "The Way We Were" sung by (insert your favorite singer here)_____________________.
At the core, we've increased our capacity of flow via the NGN core Internet router. However, how do we get to that core where the flow is oh so swift and broad? Who takes our tickets? Who says 'all aboard'? What happens if all those thousands in line need to get to the bathroom all at the same time and are pushing like a mad mob doing the "I really gotta go now!" dance at the door to get in? Have you ever been to a rock concert, a professional ball game between the two best teams, an opening night of Hollywood's most touted movie of the year, lined up at Barnes & Noble for the new Harry Potter book the first day it is released or some such similar event where the crowd is a mass ball of energy that could turn nasty at any moment? They're all doing the "I really, really, really gotta go NOW!!!!!" dance. How do they all get in the door with the right amount of tickets that we need in the most controlled, efficient, quickest way to keep the 'flow' of the line that want access and have everyone survive the entrance - all in an instant? We need some cops. We need some security. We need some fast ticket takers that are bouncers, business managers, clerical clerks and accountants. We need something to dole out the pipe space on the fly as needed. In short - we need some serious crowd control. Otherwise, the mass mob waiting to burst in is going to jam and clog the entrance so nobody gets in with any sort of efficiency. That could get really messy......fast.
What's the fix?
Enter the 'edge' of the Internet. Living Internet life on the 'edge'. We need to take care of geometric growth in the broadband subscriber base. Something that integrates an ever expanding array of products and services from multiple vendors. We need something that makes it possible to manage provisioning, network operations and billing in a cost-effective way from the edge of the last mile to the network core. Oh, and by the way, it's got to be able to handle subscriber demand immediately. Bingo! Hello New Access Network. Goodbye "The Way We Were"! Bring in the box with the software. Bring in the custom ASIC's (application-specific integrated circuits). Bring in the network management. Bring in the routing protocols. Plug 'em in, hook 'em up and let 'em work.
Allow me to reference the portion of the article where Paul Johnson, co-author of The Gorilla Game was interviewed about the IP/Broadband space involving the 'edge' portion.
Internetstocks.com: Tell us about other growth stories among Next Generation Networkers. You favor Redback Networks (RBAK $123-5/16), Sycamore Networks (SCMR $123-3/4) and ONI Systems (ONIS $97-27/32), among others.
Johnson: To continue the Internet protocol theme, we believe Redback is very important in that infrastructure. Redback does at the edge of the network what Juniper does at the core. It provides the software value-added content for access. Subscribers come on to the broadband network and hit a Redback box that manages the account information and related services. It has a pretty clear field to itself and is expanding its terrain. Also on the IP infrastructure side, you move into transporting those bits in the access part of the market. Extreme Networks (EXTR $134-3/8) provides gigabit- and 100-megabit-per-second Ethernet in the data center and the access market, so it brings broadband to the edge.
To my personal investing style, it remains one of the most exciting portions of the IP/Broadband space simply because it doesn't really matter what kind of broadband we are talking about - DSL, wireless, cable, etc... - or which one of those technology 'wins' the most market share in the end. The edge handles all of them. The viability of an agnostic investment space - such as the edge represents - meets a lot of my needs in terms of longevity and the competitive threat risk/reward scenario for investing in the next generation networks space.
These guys are the cops. They take the tickets. They dole out the pipe space. They tally up the bills. They tell you where your row of broadband seats are located and send your group of 2, 3, 4, 7, 12 right to where you need to go at full speed ahead. You want the fastest, widest, most flowing seats in the house to download that full motion 2 hour video? Fine, I'll run the tab, give you the pipe to suck it through and do it in the most efficient manner so you enjoy the game - I mean movie. You need an extra seat? No problem. No waiting. Come right in and leave when you're done. Don't worry, I'll shut out the lights when you're finished. It's going to cost you more to send a 1,747 .pdf files to Houston and Dallas than just sending a little email to Mom in Nebraska which tops out at 4k, but you want the best seats and the best price to do it in the right amount of time - right? No problem. It doesn't matter if you're a small business, a mid-sized business, a larger than life business or a residential customer. It doesn't matter if you're coming to us via the subway, the bus, the air, a taxi cab, a cigarette boat, your own set of wheels or that bike with the jet engine packs - we'll get you on the information autobahn highway at full throttle speeds with the type of payment plan designed for your needs to bill you for exactly what and when you need it - all on the fly and in the now mind you. We control the mass mob to the flow, keep track of how many, how long and who travels our "hang on to your hats this is going to be fast" highway and prevent you from bumping into anybody else on the on and off ramp to the highway. We can handle thousands of you at a time. No problem. We've got you on the edge. That's our niche. That's our game. That's our fix.
Who are the players for next generation network edge internet equipment/solutions?
I will list them in order of the most recent market share (Q2 2000) as per Dell'Oro along with their current market caps:
1. Redback Networks (37.1%) - $20.7 Billion
2. Nortel (28.9%) - $238.8 Billion
3. Cisco Systems (20.5%) - $460 Billion
4. Unisphere (7.8%)
You might recognize that Cisco and Unisphere also appeared on the NGN core internet router list of competitors. Once again, we have the two different strategies of companies that participate in the 'end to end' solutions category as well as 'best of breed' niche category. Redback has owned the number one position in this edge portion of the NGN since the category began. However, there's simply no need to state the size, power and market position of companies like Nortel Networks and Cisco Systems. That's some serious competition. As I mentioned in the Fat Pipe #1 - core post, the customer base of a Cisco or a Nortel utilizes the 'moat' and 'value chain' that they have access to without a doubt. In spite of all that, Redback is hot and has been on the acquisition trail to beef up the stew and expand the offerings. The most important acquistion to date was the $4.3 Billion one of Siara which also brought the new CEO to Redback, Vivek Ragavan. The market that Siara competes in is expected to be around $20 Billion in 2001. Redback pretty much 'owns' the SMS (Subscriber Management Systems�) market which is around $2 Billion. The acquisition of Siara puts Redback in the total New Access Network market going forward in a big way.
On a side note. A few dollars in share price fluctuation of Cisco's stock price equals the entire market cap of Redback. That's a big company....
Folks, we have a real time, real money 'game' here. My personal investment choices to date in the space result in Redback and Cisco residing in my portfolio. Cisco is there because I've owned it for years. Redback is there because of first mover advantage, 'best of breed', market share and the amazing growth that this company has been experiencing. No need to point you to Cisco's website or history, but here's a link to yet another excellent Chris Larsen FAQ presentation in regards to Redback Networks:
How big is the pie these 4 are trying to eat?
As you see from the market share breakdown, they all have been enjoying some nutrition on the global pie basis. Goldman Sachs predicts the New Access Network market to be $17 Billion by the end of 2000 and $30 Billion by 2002. That's some serious pie capable of a growing waistline for these companies. Remember that the NGN core Internet router market has been projected to be around $10 Billion in 2003. Put some of those figures together to realize the potential Billions that are going to be spent on core and edge Fat Pipe Games alone each year over the next few years if projections are close to being right.
Once again, in this exercise we are looking to finalize the best candidate from each of the five Fat Pipe Games to end up with five 'best of best' candidates. Within each game, gorilla game strategy would indicate you buy the best two or three candidates and consolidate into the 'winner' once it was clear who was going to 'win' the space. This exercise is going beyond that to try and identify the 'top' candidate from each Fat Pipe space. Being that some of the games have much more to play out in terms of time before that identification can be solidified, I think it warrants mentioning for the sake of risk. If one doesn't have the capital of the intestinal fortitude to participate in a 'basket' strategy of the top candidates, then saving one's money to invest in the clear 'winner' of a niche space or 'end to end' solutions company may be the end result of the exercise.
Previous Fat Pipe series posts:
Original Post that provided the seed from Xiphias on 8/23/00:
My response - RE: Top 5 in Broadband to Xiphias
Pevey's "Strike Up the Band" Post:
Response to the "Do ya wanna play?" question:
Fat Pipe Plan of Action:
Fat Pipe Game #1 - core
Fat Pipe #1 - Core*
Fat Pipe #2 - Edge*
Fat Pipe #3 - Data Storage/Movement
Fat Pipe #4 - Fiber
Fat Pipe #5 - Optical
The +1 portion will be skipped in this series - Software
*Denotes already posted
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