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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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fiber_r_us 12/4/2012 | 11:52:46 PM
re: Report Explores Internet Growth Puzzle http://www.dtc.umn.edu/~odlyzk...
slickmitzy 12/4/2012 | 11:52:19 PM
re: Report Explores Internet Growth Puzzle Correct me if i'm wrong here, but isn't the report only measures the north american market ?
If so then it's missing a key point, which is the east asian market.
The east asia market is becoming one of the biggest markets in the internet overall market.
corvo 12/4/2012 | 11:52:11 PM
re: Report Explores Internet Growth Puzzle one doesn't know what to figure out from an article like this.

internet growth still growing would suggest that the rate of increase in internet traffic was still increasing . if the increase was, for example, 10 % last year than it would be say 20 % this year, so that the cumulative increase for the two years would be 32 %. is that what the article is suggesting. i have a feeling that internet traffic is growing but growth? not so sure.

then theres the steady growth. how can the growth be steady ifit ranges from 70 to 150 %. thats a rather wide range i should say.
amauldin 12/4/2012 | 11:52:09 PM
re: Report Explores Internet Growth Puzzle The link to the "Internet Growth Slows" article is an referenced in an incorrect manner. The data in this story released by TeleGeography shows Internet bandwidth, not Internet traffic. In addition, the data shows that the rate of growth has slowed, not a decline in Internet bandwidth. No one that I am aware of has ever claimed that Internet bandwidth or Internet traffic is declining.
ninad 12/4/2012 | 11:52:04 PM
re: Report Explores Internet Growth Puzzle headers :-)
themaninblack 12/4/2012 | 11:52:03 PM
re: Report Explores Internet Growth Puzzle Wrong...the number one reason for growth in internet traffic is porn.
materialgirl 12/4/2012 | 11:52:03 PM
re: Report Explores Internet Growth Puzzle So what if traffic is growing, if no way exists to meter it? The money chain gets broken, and traffic growth no longer supports infrastructure growth. Odlyzco's numbers are great in showing this breakdown. The question is not packet volumes, but how we support this technology financially. "Bandwidth is either a precious monopoly or a valueless commodity".
rjmcmahon 12/4/2012 | 11:52:00 PM
re: Report Explores Internet Growth Puzzle Anybody asked how many golden cheeked warblers remain? Has anybody counted lately?

And exactly how is this question related do to this thread or to our industry?

For those who enjoy anecdotes or who are looking for the beginnings of new journey, the following may lead you somewhere interesting. Have fun. Use Google (which is not provided by the RBOCs nor the MSOs). And see if you can relate things to the 1994 Texas gubernatorial race, to our industry's future, and to the "little people". Hoping you choose to take the surf.

http://www.whitehouse.gov/news...

Q. Won't the rain erode the trail? How do you stop that?

THE PRESIDENT: Pardon me?

Q. The rain, won't the water erode the trail? Do you have to keep redoing it?

THE PRESIDENT: No, actually we're not going to put it on the creek bottom. You'll see, there's a series of flats, as you come up the canyon. The canyon is not uniformly steep. And so there will be -- one side of the canyon will be steep, and the other side will be relatively flat. We've cut out a trail, mainly cedars. Cedars are a -- you know, some of the big stands of cedars are important, because they become nesting materials for things like the golden cheek warbler, although we don't have any on this property.

On the other hand, the little cedars, they crowd up on these beautiful hardwood, and they soak in a lot of water. I mean, they take 30 percent of the water, more or less, that is taken in by these trees, are taken in by cedar. And cedar is just a plague of a lot of places around Texas.

Q What did you mean when you said you burn it?

THE PRESIDENT: It means, we take a match --
BobbyMax 12/4/2012 | 11:52:00 PM
re: Report Explores Internet Growth Puzzle About 85% traffic on internet is pornographic mail. Even your citizens have become addictive to pornography. Millions of people are just idling over internet. This, in itself, is an addiction.

US Government does notwant to put any restriction on prnography and considers pornography as an integral part of american freedom. In absence of true frreedom and liberty sexual and pornographic freedom has become an integral part of american freedom.
gbennett 12/4/2012 | 11:51:51 PM
re: Report Explores Internet Growth Puzzle BobbyMax said:

About 85% traffic on internet is pornographic mail.

Maybe yours is, but you must be subscribing to it.

Sure, our mailboxes are full of spam these days, and a big hunk of spam is porn (and to make things worse - not even good porn :-)

But to say pornographic email is a majority of Internet traffic is patently wrong. I've seen estimates that over 60% of "Internet traffic" (by the way, what does that mean exactly...where and what are we measuring???) is made up of P2P traffic like KaZaA. A porno email contains one or two small JPGs of maybe 60-100kB. In contrast an MP3 music track is 3-6MB. And an AVI movie just about fits on a high capacity CD (about 720MB).

All kinds of spam are a threat to email as a useful form of communication, but as far as I can tell they can't compete with P2P as a way to clog up Internet bandwidth.

Does anyone have useful data on this?

Cheers,
Geoff
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