Internet traffic is still growing strong... if only somebody could figure out how to make money on it

June 20, 2003

4 Min Read
Report Explores Internet Growth Puzzle

Internet traffic growth is still growing, according to a report released earlier this week by researchers at the University of Minnesota. Unfortunately, the revenues associated with it don't seem to be keeping pace.

Andrew Odlyzko, director of the Digital Technology Center at the University of Minnesota, who authored the report, says Internet traffic is steadily growing about 70 percent to 150 percent per year. On a conference call yesterday to discuss the results, he said traffic growth slowed moderately over the last couple of years, but it had mostly remained constant for the past five years.

These results help dispel claims by some researchers and equipment executives that Internet traffic has actually been declining (see Internet Growth Slows). In June 2001, John Roth, former CEO of Nortel Networks Corp. (NYSE/Toronto: NT), blamed his company's $19.2 billion loss on shrinking Internet traffic (see Sour Grapes of Roth). He quickly back-peddled from that statement.

Despite growing demand, carriers still haven't figured out how to make money from their growing data networks. Although the volume of Internet traffic exceeds voice traffic on carrier networks, voice is where the money is.

In 2002, Internet services, including dedicated access, dialup modems, and residential broadband, generated a total of $35 billion in revenues for carriers in North America. In total, carriers generated about $354 billion in revenue in 2001, with similar figures in 2002. Revenues from cellular services grew to about $80 billion in 2002.

The transport portion of the network has become commoditized, making it difficult for carriers to increase margins in this market, says Odlyzko. New growth is expected from the edge and access portions of carrier networks. But he says it will come at a high price.

“It’s a nagging concern for service providers,” says Stephen Kamman, an analyst with CIBC World Markets. “Basically, this report shows us that there is still a significant amount of uncertainty in the market and that we should expect some more lumpiness going forward.”

For equipment providers, the news is a mixed bag. IP vendors are likely to get a slight boost as carriers spend what little money they have on upgrading access and edge aggregation networks (see Router Vendors Look for Bottom). But the picture is less rosy for optical transport manufacturers and component vendors. Because carriers over-invested during the bubble, much of their networks, especially the optical core, will not need to be upgraded for a long time. Optical vendors have felt much of this pain already (see Long-Haul Lag Lingers).

Odlyzko blames the “irrational exuberance” of the late 1990s for the current financial woes of carriers today. Back in the bubble days experts claimed that Internet traffic was doubling every 100 days.

Comments from executives like Bernie Ebbers, the former CEO of WorldCom Inc. only helped fuel the fire, says Odlyzko. He cites a presentation Ebbers made at Boston College in March of 2000 where the CEO told audience members that WorldCom's capital spending would exceed $100 billion by 2003. (Yes, friends: billion.) Two years later Ebbers left his CEO post under a cloud of scandal, and WorldCom filed for Chapter 11 bankruptcy protection (see WorldCom's Ebbers Resigns and WorldCom Files for Bankruptcy).

According to Odlyzko's report, which uses data that dates back to 1990, traffic actually only doubled every 100 days from 1995 to 1996. He says that carrier executives, Wall Street analysts, and journalists perpetuated the myth long after traffic growth had stabilized.

“The problem was that those business plans had been formed in willful ignorance of actual demand,” he says. “The Internet simply did not grow as fast as had been predicted. Because of the misunderstanding of what consumers wanted, the whole industry crashed in spite of its technical excellence and plentiful capital expenditure.”

The report, which surveyed service providers in North America, found that, in aggregate, the Internet backbone carried a total of 2,500 to 4,000 terabytes worth of data in 1997 and between 80,000 and 140,000 terabytes in 2002. Odlyzko says the illegal swapping of peer-to-peer content was one of the largest drivers in overall traffic growth in 2002 (see P2P Plagues Service Providers).

— Marguerite Reardon, Senior Editor, Light Reading

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