False Hopes By Andrew Odlyzko "Insatiable demand for bandwidth" was one of the key and most destructive mantras of the Internet bubble. As late as September 2000, Kevin Boyne, the COO of WorldCom's UUNet, was quoted in the press as saying that "as soon as more capacity becomes available, the Internet community will find interesting, clever ways to use it." Such claims inspired the foolishly misdirected overinvestment that produced the telecom crash. History provides a valuable perspective that should have warned investors and managers not to believe in the "insatiable demand for bandwidth." Telecommunications has been a growth industry for centuries, but there has not been a single explosive increase in spending similar to what would have been required to make the business plans of the bubble years a reality. Back in 1850, spending on telecommunications (primarily the postal service, with a pinch of the electric telegraph thrown in) in the U. S. was about 0.2 percent of the gross domestic product. By 2000, that had grown to perhaps 4 percent (including the traditional voice telephony, Internet, cellular, and parts of the postal system). Thus over the last 150 years, telecom spending has been growing about 2 percent per year faster than the economy as a whole. That is a nice growth rate, but it is too moderate for the New Economy expectations. Consider Britain's postal reform of 1840: it reduced the cost of sending a letter anywhere in United Kingdom to one penny, bringing average postal rates down by more than 80 percent. The effect of this reform was that the number of letters sent jumped dramatically, up 122 percent from 1839 to 1840 (although much of this increase appears to have come from a decline in letter smuggling, not real growth in usage). However, the British Post Office's revenues dropped 43 percent in that period, disproving claims of the reform's most ardent advocates, who predicted usage would increase faster than prices would drop. There was pent-up demand for mail, but no "insatiable demand for mail." The 1840 Penny Post reform was wildly popular with the public and it made Britain an envy of the world. After decades of stagnation, communication traffic in Britain started to grow. The volume of letters delivered and the total revenues grew at annual rates of 6.3 and 5 percent, respectively, between 1841 and 1851. Eventually both revenues and profits exceeded the 1839 figures. But it did take time. Enterprises and individuals had to learn to use the less expensive and more convenient service productively. Similarly, it takes time for greater and less expensive bandwidth to be incorporated into our economy. In general, there have been many instances of underestimates of the growth potential of new telecommunications services. The electric telegraph (derided by Henry David Thoreau) and the telephone all had their skeptics. A more recent example is the infamous McKinsey study of the early '80s that predicted there would be fewer than a million cellular users in the U.S. in the year 2000--actually, there were nearly 100 million. But the rapid growth of the Internet in the early and mid-'90s caught many by surprise, causing general acceptance of unrealistically high growth rates. Yet there was plenty of publicly available evidence that the "insatiable demand for bandwidth" was simply not there. As simple examples, corporate and academic data networks were lightly utilized, and ISP subscribers were slow to upgrade their modems (with more than half still not having 56K modems as late as 2000). The Internet community is finding "interesting, clever ways to use" the growing bandwidth, so we should expect vigorous growth in data traffic, but not at the unrealistic pace that had been predicted. Internet traffic is continuing to roughly double each year, as it has every year since 1997. There is much bemoaning the slow pace of adoption of residential broadband in the U.S., yet if one looks at statistics, in three years this service has gained about as many subscribers as cellular phones did over five years at a comparable growth stage. However, while traffic is growing, there is no sign of willingness to dramatically increase spending. Service providers will have to resign themselves to modest increases in revenues, with growth in data coming at the expense of traditional voice. As with Britain's postal reform, we're now entering a phase in which companies and individuals must learn to use a less expensive and more convenient service in a manner that makes economic sense. ERRATUM to published Red Herring version: The version of this story published in the March 2003 issue of Red Herring has attributed the negative comments about the electric telegraph to Ralph Waldo Emerson. It was actually Henry David Thoreau who wrote (in "Walden"): "We are in great haste to construct a magnetic telegraph from Maine to Texas; but Maine and Texas, it may be, have nothing important to communicate." The growth rates 6.3 and 5 percent annually in volume of letters delivered and the total revenues for the British Post Office are for the period 1841 to 1851, not 1841 to 1951, as stated in the printed version.