I met the Godfather of New York Venture capital a few weeks ago and I was talking about an arbitrage opportunity of a lifetime in the communications sector. I started talking about the lack of competition and resulting high prices (which I highlighted last week) brought about by bandwidth being 20-150x overpriced. He just looked at me and said, “bandwidth issue? What bandwidth issue!” It just so happens that his current prize investment is an IPTV application. I just rolled my eyes thinking, “if he only knew!”, remembering what happened to all the web 1.0 companies that ran into the broadband brick wall in 2000.
This statement is symptomatic of the complacency amongst the venture community; those investing billions in the upper layers of the stack. Yet people on Main Street, as evidenced by the Kansas City Fiber video on the Fiber To The Home Council website indicating that 1,000 communities had responded to the contest with over 200,000 people directly involved, know otherwise.
The numbers tell a worse story. Because of the CLEC boom-bust 10-15 years ago, rescission of equal access, failure of muni-WiFi and Wimax and BTOP crowding-out Telecom spending has disconnected from other venture spending over the past decade. Based on overall VC spending telecom spending should be 2-3x greater than it is. Instead it stands 70% below where it was from 1995-2005. It took a while for competition to die, but now it is official!
Venture spending today for the sector, which used to average 15-20% of total VC spending is now down below 5% over the past 3 years. All the other TMT sectors have held nearly constant with overall VC spending.
Everyone should look at these numbers with alarm and reach out to policy makers, academics, trade folks, the venture community and capital markets to make them aware of the dearth of investment as a result of the lack of competition. Now, more than ever contrarian investors should look at the monopoly pricing and realize there is significant profits to be made at all layers of the stack.
