No. of Recommendations: 1
Since JDSU, AVNX, GLW etc. have such little visibility about a future upturn in business, it makes me wonder WHY and WHEN there may be a business upturn.This led me to think about the telecoms and their busness model for the future of the Internet (Next Gen fiberoptic).
The telecoms which are facing declining revenues and heavy debt from the first stage of their Internet investment, may not be in a hurry to resume spending if there is no revenue benefit from upgrading the Internet. In other words, their Internet business model may not be a profitable one, and therefore they may choose to lay off further Next Gen fiberoptic investment for the foreseeable future.

It seems the business model to date consists of the following:

1. revenues from selling DSL connections to residential customers. But 90% of potential subsribers in the U.S. have chosen not to hook up by DSL becasue the extra $40-50 per month cost is not worth it.
2. Selling T1 connections to business customers. The present Internet seems to be handling this volume adequately, and I do not know of any reliable projections that establish if and when the present telecom investment in the Internet will become inadequate for this market segment.
3. The model which Global Crossings GX) used selling IRU (indefeasible rights of usage). This business segment would be very valuable to large companies (banks, investment firms, gov't, and others) who need the reliability and safety of IRUs. This market segment could be very profitable to the telecoms, but it was based on an assumption of high elasticty of demand. That is, as the price per minute of chargeable time declined, the demand (usage) would increase faster than the price decline resulting in overall increasing revenues. Part of the GX failure was due to the demand not keeping up with the price declines which were forced on GX by competitive pressures. Nonetheless, in this case also, I know of no reliable projections that establish if and when the present telecom investment in the Internet will become inadequate for this market segment.
4. A fourth concept is the development of "killer apps" which would make an upgraded Internet imperative for the telecoms to invest again. However, such killer apps are mostly rumored, and there is not anything really in sight. Basicly, most Internet usage is a free local phone call, so there is no revenue opportunity there, even for e-mailing.

Thus, the telecom business model would depend on DSLs, T1 connections, and IRUs.

So, the business model for telecoms that would justify further big investment in NextGen fiberoptics MAY NOT be a profitable business model. If that is the case, it may be a real long time, if ever, that the telecoms are willing, or able, to spend more, if there is not a profitable business model to support their investment. As was recently discussed on the AVNX board, the question was raised as "Perhaps the AVNX solution of NextGen (highend) or JDSU (lowend) is an overkill which is simply not needed because the present Internet for the foreseeable future is more than adequate, and it would not be profitable for the telecoms to take the fiber network any further.

Anyway, these are just musing by someone who is not an economist (other than college basics 101) and not technologically trained. I would be glad to hear constructive comments from others who might shed more light, pro or con, about the subject.


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