Bandwidth Boom Means Wholesale Opportunities,Report Says

Posted: 08/1999

Bandwidth Boom Means Wholesale Opportunities,
Report Says
By Ken Branson

If the revenues of telecommunications wholesalers are supposed to double in five years,
and resellers’ profits are being squeezed by tight margins, why are so many companies
overbuilding their networks in the hope of selling or leasing their excess capacity?

Because, says the author of a recent survey, new applications will eat up the bandwidth
almost as soon as it becomes available. That’s true in the United States, and also true in
Europe, where regulatory barriers are coming down and demand is pent up, according to
Richard Kent, vice president at Phillips Group InfoTech Inc., Parsippany, N.J., author of
"Wholesale Carriers Services: U.S. Market Supply and Demand and Growth of IP
(Internet Protocol) Wholesale." Kent released a preliminary survey recently; the full
study is due out next month.

According to the preliminary study, global wholesale revenue could increase 166 percent
in five years, up from $37.49 billion in 1998 to $99.88 billion in 2003.

"The market is dynamic in terms of price sensitivity," Kent says. "So
more capacity comes online and prices drop. It’s not like a sudden glut; as it comes
online it gets cheaper. The good news is, people are using that capacity for things they
wouldn’t have dreamed of six months earlier."

For example, Kent says, Broadcast.com Inc., Dallas, is setting itself up as a
clearinghouse for ordering video clips over the network–a service for which the network
does not now exist. But Broadcast.com executives believe it will exist, and companies such
as Qwest Communications International Inc., Denver, and Level 3 Communications Inc.,
Broomfield, Colo., are investing in applications development as they build out their own
high-capacity networks.

Michael J. Mahoney is betting Kent is right. He is president and CEO of Viatel Inc., a
New York-based company building a pan-European network called Circe. Viatel has completed
3,150 route kilometers of its projected 8,700-kilometer network, linking cities in
Britain, France, the Netherlands, Belgium and Germany; 1,850 kilometers are in service.
Mahoney expects that roughly two-thirds of Viatel’s revenue will come from retail services
to businesses, but one-third will come from wholesale–carried on excess capacity his
company is building into its network right now.

"Our view is that bandwidth is subject to silicon economics, just like disk drives
and memory," Mahoney says. "Because it’s part of silicon economics, you can’t
ever have enough of it. Applications fill the available space, users proliferate and
demand increases. But, you have to improve your cost structure fourfold every 18
months."