TCS Daily

Beneficiaries of the Bandwidth Blowout

By James K. Glassman - July 31, 2001 12:00 AM

Throughout the late 1990s, numerous companies built long distance fiber-optic networks in the United States, anticipating a huge demand for broadband applications. These carriers expected heavy data traffic from customers increasingly using high-speed Internet connections. Well, most consumers still don't use high-speed Net connections and the adoption of bandwidth-intensive applications hasn't kept up with the surge in fiber capacity. In large measure, this is the result of delay in the deployment of local broadband networks, which itself is the result of foot-dragging and noncompliance with the 1996 Telecom Act by the local Bell companies. Those actions have crippled the CLECs, the local competitors who were supposed to push the Bells to deploy broadband.

So without lots of high-speed connections to consumers, right now there's a lot of empty space on long-distance networks. That's why so many telecom network operators and equipment companies have watched their stocks nose-dive.

Given the bandwidth glut, capacity on fiber networks is now dirt cheap. And as any economist will tell you, that's a very strong incentive for people to create new applications -- new products and services to travel over those dormant wires. Since distribution is cheap, beneficiaries of the bandwidth blowout of the late '90s will include the companies who send things over those networks.

That means software, and not just the kind you use to run spreadsheets. Assuming copyrights can be protected, the bandwidth glut means new opportunities for companies that create video programming, motion pictures and other bandwidth-heavy digital products. Video-on-demand, that is, the ability to order any movie ever made, available any time you want to watch it, could finally become reality. As distribution gets cheaper, such services become more feasible, and history shows that new distribution channels are a huge boon to the movie business in particular. Some analysts feared that VCRs and video rentals would threaten the movie business because people would no longer want to buy more expensive theater tickets. In fact, the industry boomed. Movies on video provided a second life for theatrical hits, a way to recoup some money on studio bombs, and greater consumer awareness of rising stars and directors. Distributing movies to consumers via the Internet could be another bonanza for movie studios.

Right now, the most reasonably priced of the major film companies appears to be Vivendi Universal (Symbol: V). This French conglomerate also has large interests in book publishing and music (more software), a large cell phone network and a huge environmental services division. In fact, this division, which includes a water utility, an energy company and a trash hauling business, accounts for most of Vivendi Universal's revenues and profits. These unsexy businesses are the main reason the stock is fairly cheap, but there's plenty of upside if filmed entertainment booms in the broadband era. Vivendi's Universal Pictures studio has been on a roll lately with films such as Jurassic Park III, which raked in more than $50 million in its opening weekend. Vivendi Universal stock looks like a potential blockbuster when you see that it's trading at about 17 times earnings.

As you review your portfolio this summer you might also consider two tech firms that operate outside the limelight. I continue to hunt for the ignored or overlooked smaller tech firms that may end up delivering very sexy returns. A favorite of Forbes magazine's small-cap columnist Marc Robins is Excel Technology (XLTC) and I can understand why. The company makes lasers for a range of industrial and medical uses, has no long-term debt and trades at a P/E of about 18 - not bad for a high-tech firm with excellent prospects.

I'm also intrigued by Silicon Storage Technologies (SSTI). As a rule I don't like computer chip companies because I believe the costs of building new fabrication plants ("fabs") have risen too high to justify the investment in a fast-changing industry. However, if you want to hold shares in at least one semiconductor company as part of a diversified portfolio, there's a strong case to be made for this one. This maker of memory chips has healthy margins, a strong balance sheet and a P/E of about 11. This is a terrible time to be in the chip business, and the company could end up posting a modest loss in the current quarter. But for long-term investors it looks like the bad news - and then some - is already reflected in the price of SSTI shares.


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