Ike Smacks the Bear, But the Bear Strikes Back

Posted by Dan Caruso
April 16, 2008

Ike Smacks the Bear, But the Bear Strikes Back

Ike answered my push-back with an aggressive smack my direction (see comment in this post). Nonetheless, I believe he sidestepped my major complaint. My Heisman to Ike is that he tried to “prove” revenue is barely growing as price compression fully (or near fully) offset bit growth. He used an analysis of Level 3’s IP and Data business unit as a proxy to argue this. I thought this single data point is not sufficient to draw any conclusion. One only needs to read Ike’s prior posts to know that Level 3 is dealing with challenges unique to itself. Generalizing their reported results in this one business unit with what might be happening in the industry as a whole is dangerous with a capital D. An additional point is bandwidth is a bigger bucket than Internet traffic–and with all that is happening in the arena of private networks for enterprises (e.g., hospital, banking, education), wireless carriers and content (e.g. CDNs, Internet companies like Google, and media companies), non-Internet bandwidth must be considered.

One thing was true during the bubble, meltdown and now–bits were growing at a hefty pace. Ike and others say 50-60%; others say higher. The reason why I call the 2006 through 2008+ period a resurgence is (a) revenue is growing at double digit rates and (b) bandwidth-focused companies are enjoying profitability. I believe there is still noise, with XO and Level 3 being two prime examples. Nonetheless, I am seeing first hand a ton of real-world data that makes me confident in the resurgence.

Why is today better? One, supply is getting much more in line with demand. I will spend a lot of time on this topic in my upcoming Texas Hold’em series. Two, many telecom service providers are doing a better job at managing their businesses for financial results. During the bubble, management teams and their investors were undisciplined and inexperienced–in an Adam Smith survival of the fittest fashion, the meltdown painfully corrected this.

So Ike, I challenge you again–how do you back up your CONCLUSION that revenue is largely stagnant? How do you CONCLUDE price erosion is offsetting bit growth? Do you believe bandwidth companies are experiencing minimal revenue growth? Do you believe poor profitability?

In two ways, I hope your answers to the last two questions are yes and yes…and I hope that most others agree with you. Why? One, Zayo will be able to buy a few more fiber-based properties for a good price. Two, the Zayo team will look pretty darn good to our investors–as our financial results will be in stark contrast the perceived performance of our competitors.

Oh, and one more thing. It was me, not Ike, who coined the word “softswitch”. (Okay, maybe not.)