Online Video, lifting all boats

YouTube, Joost and dozens of online video start-ups have done something many thought impossible: they have gotten the telecom executives excited. So excited that some of them are sponsoring Web 2.0 cocktail parties and cutting deals with little companies, hoping that Internet video will keep pushing the demand for bandwidth, and bring in some much needed relief.

There are some who dream of a return to the go-go days of late 1990s. (I think me losing my 16th pound has higher odds!) If the service providers are getting excited, well it is time for equipment and component suppliers to crack open that bottle of bubbly.

prabhu.jpg“The YouTube success story is merely one illustration of the remarkable changes that are taking place in the way we communicate and entertain ourselves,” writes Krish Prabhu, CEO of a decidedly dowdy hardware maker, Tellabs in his company’s annual report.

“As broadband Internet access has become increasingly available and affordable … it has fueled an insatiable hunger for video.”

Somewhere in his note, he points out that

If you download one minute of video to your iPod, you’re using four times the network capacity that’s required to download one minute of music. If you upload a video clip from your mobile phone, that takes five times the network capacity of one minute of talk. And if you use the Internet to stream a movie in high definition, that requires five times the network capacity needed to watch that same movie in standard definition.

A lot of people have forgotten this but back in the 1990s it was Napster that acted as a catalyst for demand for high-speed connections from the population at large. Of course people wanted to reach Amazon.com and Yahoo faster, but it was click-and-download music features of Napster that made us opt for expensive-but-fast broadband connections.

Similarly, we are seeing the YouTube effect, though this time instead of new connections; the demands are being put on network infrastructure and consumers clamoring for higher speeds.

Paul writes about this over on New Tee Vee, channeling our dear friend Tom Evslin.

One of the most compelling questions is about the “where,” as in where is more bandwidth really needed to deliver a better Internet TV experience; Tom’s surprising answer is that it may not necessarily be in that last-mile link to your home, but instead a little farther up the line, in the networks being built to deliver IP-based content.

Whichever way you look at it, it is good news for the guys making the widgets – finally there will be some demand for what they sell. The optical industry was particularly hit hard by the bust, but recent signs show that there might be sunny days ahead, at least from an IPO and M&A perspective.

Over the past few months, we have seen the return of the optical IPO. Today optical equipment maker Infinera filed for an IPO, though it should be a while before it can actually get out of the gates. (Full analysis to follow!)

I think more than the IPOs, it is the increased M&A activity that portends better times for the optical business. Yesterday, Cortina Systems announced that it is buying Immenstar for an undisclosed amount. Today JDS Uniphase announced that it is buying Picolight for $115 million (plus $10 million in cash earn outs). Now this is nothing like JDS Uniphase’ mega-billion-dollar buying sprees, but a calculated bet on markets which are seeing modest-to-strong demand driven by a massive infrastructure upgrade cycle.

How long can this party continue? I can’t say, though it is going to end sometime.

Last time around the whole infrastructure upgrade was driven by Web 1.0 start-ups before it spread to other sectors, before finally ending in 2000 with a rump-shaking-thump. This time it is video which is doing the leading, and it is hard not to think about another thump.

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