Investment research house Nyquist Capital has sounded a warning that the expected surge in demand for bandwidth might be much lower than many anticipate. The warning comes after the firm analysed some of the recent data coming from the Japanese Ministry of Internal Affairs and Communications (MIC) and found that traffic was not increasing in the way that many had expected, something it noted was “troubling when compared with [the] image created by the market.”
The data, and Nyquist’s analysis of it, could have implications for the entire industry – service providers, equipment makers and policy makers – given that many demand models and investment forecasts are predicated on a so-called “bandwidth explosion” coming. This is particularly so given Japan’s leadership in terms of rolling out fibre to the home (FTTH) and fibre’s expected role in driving up overall Internet traffic volumes.
According to Nyquist, there has until now been a distinct lack of data or explanations for predicting a surge in traffic – something eerily familiar to the bubble in 1999. “This lack of hard data supporting this bandwidth explosion has weighed heavily on us, particularly because we have seen the damage that nebulous predictions of traffic growth caused in 1999-2001,” it said in its analysis.
Nyquist’s Andrew Schmitt also noted the claims from that time that Internet traffic was doubling every 100 days, which was later proven false. “This was pure fiction, yet the political and investment communities accepted it because it was a useful tool for justifying the irrational activity underway,” Schmitt stated. “History does not repeat, it rhymes, and the ‘Video Bandwidth Explosion’ sounds very similar to what was said in the telecom bubble.”
According to data from Japan’s MIC, Internet traffic increased to just over 2x in two-and-a-half years, with a CAGR of 38%. “Not as high as you would expect, but not terrible either,” Nyquist noted. However, it also pointed out that the numbers need to be adjusted for broadband subscriber growth in Japan, which when done the CAGR for download growth drops from 38% to only 18%.
As Nyquist noted, “Japanese Internet use isn’t doubling every year. It isn’t even doubling every three years.”
Schmitt said that the massive capex efforts underway by the likes of Verizon and AT&T in the U.S. could be based on demand for bandwidth that doesn’t exist. He also acknowledged that the data from the MIC could be flawed, or that Japanese FTTH subscribers behave differently to elsewhere in the world. But he said further studies needed to be made.
“No one has made mention of this before, and given the magnitude of investment based on the assumption a bandwidth boom is happening it would be useful to see these differences in behaviour precisely quantified,” he added.
The full analysis is available at http://www.nyquistcapital.com/2007/09/10/the-bandwidth-explosion-myth
by Geoff Long