SPECIAL REPORT: AFTER THE FALL
Analysts Remain Upbeat About Long-Term Outlook

By Rich Miller
CarrierHotels News Staff

Dec. 1, 2000 - Many industry analysts predict that despite the recent Wall Street selloff, the promise of IP-based data networks remains undiminished.
"We maintain that, over the long term, demand for bandwidth will keep pace with or even outstrip available bandwidth capacity," San Francisco investment bank Epoch Partners said in a special report released Wednesday.
"The fundamentals of large, well-capitalized data-network builders remain intact," said the report prepared by analysts Mark Langner, Todd Fernandez and Bert Bangayan. "However, not all communications services networks are built equally." Market consolidation has been inevitable for some time, according to several analysts.
"We are only in the first mile of the infrastructure buildout, and we expect this to be a long race that will see many mergers," analyst Rick Juarez of Robertson, Stephens said in a report last June. "Obviously, cash burn is an important issue for all stocks in the Internet world. ... This spring the market has been thinning the herd, saying it wants only the strongest competitors to move forward."
In some cases, companies planning to expand networks were forced to retrench under pressure from investors. In August, Pinnacle Towers abruptly canceled plans to aggressively enter the colocation market, saying it would return to its historic focus on cellular towers.The announcement came less than two weeks after the company said it would buy a Dallas telecom facility for $136 million.
If further consolidation places facilities and networks on the market, it could create opportunity for other players. But not all sellers will find ready buyers.
"There will be consolidation," said Jim Lavin, president of Switch & Data Facilities Corp., a Tampa, Fla.-based developer of carrier hotels. "(But) there aren't really that many people to acquire. There aren't that many people who can offer a substantial footprint."
Perhaps most importantly, a wide spectrum of analysts agree that the demand for IP-based infrastructure and services will continue to grow as digital communications transform the American business landscape.
"It's the critical infrastructure," said David Prior, an analyst with The Phillips Group. "Colocation will come to support the Internet evolution. These guys are going to need to replicate the central office model on an advanced IP basis. I believe quite assuredly that we're moving towards IP."
A report released Monday by Infonetics Research said major U.S. telecom service providers will spend about $42.5 billion on networking equipment in 2004 - a 220-percent increase in spending from $13.3 billion in 2000.
Juarez maintains a "SpaceDex" index that suggests that as of the end of 2000, the supply of Web hosting space will be 21.2 million square feet of space, compared to demand of 51 million square feet.
Analysts at Epoch, among others, reject the notion that there's a bandwidth "glut," saying such projections are based on erroneous assumptions about the inventory of "dark fiber" - unused fiber-optic cable that can be "lit" and leased to other providers.
But other analysts believe that serious questions remain about the future of demand for broadband and its implications for carrier hotels. One is Stephen Young of Ovum, who recently authored a report on the future of "telecom hotels."
"The key question is whether customers will continue to value neutrality, diversity and redundancy when near limitless bandwidth becomes available at commodity prices," the report predicted. "Some carriers maintain that that they have the scale, branding and competencies to lure customers into their facilities with services based on their own networks.
"If the carriers have got it wrong, there will be several million square feet of space in prime central business district locations looking for alternative tenants in a few years' time," Young concluded.
While analysts debate, Wall Street has spoken loudly and clearly.
"Even if one believes in the value of next-generation networks over their legacy brethren, access to capital in the public markets may remain constrained for some time," Epoch said in its report Wednesday. "Therefore, investors should stick with data-network builders that are well capitalized now."