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Kevin O'Hara is president, chief operating officer and a board member of Level 3 Communications Inc., responsible for expanding the Internet Protocol-based network's presence in the telecommunications industry. O'Hara's resume also includes stints as president and CEO of MFS Global Network Services, president of MFS Development and in management positions at Peter Kiewit Sons Inc.
Anyone involved in broadband networking today knows first-hand that our industry is supply constrained. Right now, for instance, some companies are taking months instead of weeks to fill orders for high-capacity circuits from their customers. Colocation space in data centers around the world is being snapped up as fast as it's built.
And yet there remains a surprisingly resilient fear that the industry as a whole is threatened by a looming glut in the bandwidth market.
This fear, in my view, is misguided. The worldwide demand for bandwidth will continue to outstrip supply for years to come.
Recent analyses of the bandwidth market bear this out. They indicate that-using extremely conservative measures-demand will rise about twice as fast as supply between now and the end of 2003.
One of the biggest mistakes made by proponents of the glut theory is to look at the entire stock of fiber in the ground around the world today, equate it with bandwidth - and conclude there is too much supply. But it's not the overall supply of fiber that's important. What matters, at any given point in time, is the supply of bandwidth at the right price.
Internet Protocol technology is doubling in price performance every 18 months or so. Optical technology, the other key component of new-generation networks, is improving even more rapidly. Indeed, optical technology is the most rapidly improving technology in industrial history.
These advancements are driving down network unit costs, and they will continue to do so for many years to come. In the process they will make much of the older-generation fiber in the ground obsolete. Technically, that fiber will work, but it won't be able to compete with new generations of fiber that move bits with substantially greater efficiency.
Even if you ignore that critical point and assume every network is equally cost efficient, you still can conclude safely that supply and demand will remain out of balance. A study by J.P. Morgan Securities shows that if the top 10 U.S. carriers somehow found the massive amount of capital it would take to light every one of their existing and planned new fibers with cutting-edge transmission and multiplexing systems, overall network capacity would grow something like 77 times between now and the end of 2003.
That sounds like a lot-until you consider how fast demand is rising. A recent analysis by Nortel Networks predicts demand for bandwidth will rise by 132 times today's levels over the same period. That's almost double the increase in supply predicted by the Morgan study, which I would argue will actually turn out to be much lower because of cost-efficiency limitations and big constraints on capital.
What are the new sources of demand? They are being created every day. As companies like Level 3 push down the cost of communications, more and more businesses are turning to the Internet to offer Web-based services that simply weren't economical before. In economic terms, bandwidth demand is highly elastic, rising more than 2 percent for every 1 percent drop in price.
This is another concept that seems to elude the critics. They look at dropping prices and conclude, wrongly, that communications revenues will decline as well. But it's only the revenue per bit that go down; overall revenue climbs as customers order higher-speed connections for increasing amounts absolute dollars. Indeed, the ability to drop prices continuously is a key part of the economic dynamic in new-era communications. It's the best way to create value and build market share.
We're in the very early stages of a true revolution in communications that will see Internet Protocol establish itself as the lowest-cost alternative for a host of existing applications, including bandwidth-intensive uses like broadcast video entertainment. What's more, we will see the rise of a host of still-unimagined applications for broadband networks, as costs continue to decline and human ingenuity and the entrepreneurial spirit work their magic.
Keeping pace with this rapidly increasing demand will be the real challenge for network companies. Worries about glut, meanwhile, will become a thing of the past.
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