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A New Telecom Investment Cycle is on the Horizon

Author: Naimish Patel
Entrepreneur in Residence, General Catalyst Partners
A New Telecom Investment Cycle is on the Horizon -By-Naimish Patel
Despite recent trends in the global macro-economic environment, bandwidth demand continues to double every 18 months, driven by increasing democratization of content creation, unrelenting demand for multi-media content, and rapidly decreasing storage costs. As investment in wireline and wireless broadband infrastructure continues, bandwidth consumption will no doubt continue unabated. From the perspective of a telecom service provider, however, increasing bandwidth demand does not necessarily come with increasing top-line revenue growth. – infact, service providers globally are experiencing flat or declining revenue per subscriber. Consequently, many service providers have resorted to becoming increasingly content-driven in an attempt to boost top-line revenue growth through the delivery of new content-rich services — Comcast’s acquisition of NBC Universal is a prime indicator of this trend. Although services like on-demand video, network-based DVR, and multi-media sharing do indeed offer top-line revenue growth opportunities, they unfortunately do so at the cost of lower gross margins, owing to their high bandwidth delivery requirements. As a result, service providers are increasingly feeling squeezed by the need to compete for subscribers (and thus deliver enhanced content-rich services), in the face of decreasing profitability of such services.

Compounding the telco’s profitability challenge is the fact that their capital and operational costs are not falling as fast as bandwidth demand is rising. Through the 90s, telecom service provider profitability was sustained by rapid cost reductions in networking equipment, driven by a combination of Moore’s Law and innovations in photonics. Over the last decade, however, such cost reductions have become severely limited by the physics of power consumption and cooling. Without a fundamental economic disruption, the telecom industry is on a path to profitability crisis, the ramifications of which will no doubt be felt far beyond just the telecom ecosystem.

Just as there are sea-changes occurring in the economics of bandwidth delivery to consumers, so too are there in enterprise service delivery. As the economics of computing drive increasingly centralized architectures and highly consolidated datacenters, telecom service providers are experiencing a transition in their traditional enterprise customer base to an increasingly consolidated set of datacenter and cloud computing customers. As the availability of real-estate and electrical power in close proximity to high population-density areas becomes more limited, computing and telecom providers alike are being forced to build epicenters of computing further and further away from their clients where the costs of power and real-estate are favorable, often close to sources of renewable energy like hydro and geothermal. As computing epicenters become more consolidated and at the same time geographically disparate from their end-users, the connectivity requirements associated with inter-datacenter and datacenter-to-end-user traffic patterns fundamentally change.

Opportunities for Investment

These industry challenges and trends create opportunities for entrepreneurs and investors alike. The last wave of innovation in telecom infrastructure ended almost a decade ago, leaving in its wake an ecosystem starved for innovation and ripe for economic disruption. Moreover, in contrast to the telecom boom when hundreds of startups were funded to compete for the same market share, today’s more rational capital environment actually creates better return opportunities to those investors willing to think counter-cyclically and be on the leading edge of industry transformations.

Advice to Entrepreneurs

Don’t be afraid to think big. History has repeatedly shown that great companies built upon transformative ideas often emerge from economic downturns. Realize, however, that fund raising in such an environment takes perseverance, as capital efficiency weighs heavily in investor mindset. Seek out investors that resonate with your vision, understand what it takes to execute upon it, and are willing and able to support you through the process. The harder your investor makes you think, the better prepared you will be to tackle the challenges ahead.
 
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Reader's comments(3)
1: From: Mrs. Mary David

This mail may be a surprise to you because you did not give me the permission to do so and neither do you know me but before I tell you about myself I want you to please forgive me for sending this mail without your permission. I am writing this letter in confidence believing that if it is the will of God for you to help me and my family, God almighty will bless and reward you abundantly. I need an honest and trust worthy person like you to entrust this huge transfer project unto.

My name is Mrs. Mary David, The Branch Manager of a Financial Institution. I am a Ghanaian married with 3 kids. I am writing to solicit your assistance in the transfer of US$7,500,000.00 Dollars. This fund is the excess of what my branch in which I am the manager made as profit last year (i.e. 2010 financial year). I have already submitted an annual report for that year to my head office in Accra-Ghana as I have watched with keen interest as they will never know of this excess. I have since, placed this amount of US$7,500,000.00 Dollars on an Escrow Coded account without a beneficiary (Anonymous) to avoid trace.

As an officer of the bank, I cannot be directly connected to this money thus I am impelled to request for your assistance to receive this money into your bank account on my behalf. I agree that 40% of this money will be for you as a foreign partner, in respect to the provision of a foreign account, and 60% would be for me. I do need to stress that there are practically no risk involved in this. It's going to be a bank-to-bank transfer. All I need from you is to stand as the original depositor of this fund so that the fund can be transferred to your account.

If you accept this offer, I will appreciate your timely response to me. This is why and only reason why I contacted you, I am willing to go into partnership investment with you owing to your wealth of experience, So please if you are interested to assist on this venture kindly contact me back for a brief discussion on how to proceed.

All correspondence must be via my private E-mail (dmary4love1@yahoo.fr) for obvious security reasons.

Best regards,
Mrs. Mary David.
Posted by: mary lovely david - Monday 26th, September 2011
2: Hi my dear,
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Your new friend Mounace
Posted by: mounace love love - Thursday 09th, June 2011
3: Good post
Posted by: sai nair shree - Friday 05th, February 2010
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