Watching the spend from the web 2.0 companies

Folks,

(Gaucho)Chris and I had been chatting off board about Infinera, more about how I go about digging up info and conducting research, but it then evolved to a point where he and I shared some observations. It occurred to me I really ought to share some of those observations with the group. Here’s what I wrote back to Chris in a recent reply:


I’ve been watching, very closely, to the spending plans from the big web 2.0 companies for data center build outs, chiefly Facebook, Microsoft, Amazon and Google. Google reports on Monday. The other three have already reported and expressed continuation of investment dollars extending their data center reach across the globe. In addition, Facebook, Microsoft and Amazon killed it in the form of record revenues last quarter, which means plenty of more dollars to spend in these types of investments.

It is interesting to note where these companies came from and where they are going next. They all relied on a (massively successful) separate line of business to finance their data center investments. With Google and Facebook they relied on advertising income on a massive scale. With Amazon, consumer goods on a massive scale. With Microsoft, software and services on a massive scale. Apple, iPhones on a massive scale. Apple has the means to fund a massive data center network too, and have recently announced their entry into the space. Why they waited so long I can’t fathom, but they really have to if they want to support live broadcast TV streams without relying on companies like Equinix. Speaking of Equinix, that is another company to watch regarding spending plans.

All told, the spend is just massive, and we know Infinera at least has Facebook, Equinix, Google and Microsoft as clients. I don’t see this party stopping anytime soon.


Hope this helps explain why I am very, very bullish on Infinera.

Comments and observations are most welcome.

Best,
–Kevin

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One follow up to this as I sat back and re-read what I wrote.

The web 2.0 companies aka internet content providers (ICPs) are investing in their own data centers themselves because customer experience is a make or break proposition for these companies. They need to rely on the fastest networks possible. Not the economy or coach version, but first class.

Which means, they can’t rely on the pace or efficiency of the telecom companies to support their needs. The telecoms treat their network infrastructure as cost centers, which means finding the cheapest and most economical equipment. If it is good enough, just get it.

The ICPs do not think this way. Cutting corners in this manner doesn’t pay off, it just introduces risk.

Hence, the perfect pairing of Infinera’s technology, the best in the world, with the consumer experience-focused mandate of these companies.

Best,
–Kevin

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to tag on to that…it is not just the web 2.0, as you call them, companies that are making buy vs lease decisions regarding connectivity between their own data-centers. It is every Fortune 500 business that is looking at this. INFN should do well in this space. Better than the market

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Bashaar,

That is a fascinating observation, and honestly something that never crossed my mind. With your knowledge of the industry I have no doubt this will be yet another trend and revenue source. Good to know Infinera is in the running and should do well in the space.

A few weeks back you mentioned putting together a matrix of where Infinera competes and/or is best suited/situated along with others in the space. Did you make headway into that list and is it something you would feel comfortable sharing?

Your words have always carried a lot of weight on the Infinera boards. Your insights and perspective are most welcome and appreciated.

Thanks again Bashaar.

Best,
–Kevin

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The telecoms treat their network infrastructure as cost centers, which means finding the cheapest and most economical equipment. If it is good enough, just get it.

This isn’t true. The Telecoms have developed relationships with alot of the equipment providers. These relationships have been built on years of trust. A tier 1 telephone company never buys anything on “good enough” they are heavy regulated and must meet stringent standards that have been set by the PUC or PSC.

Which means, they can’t rely on the pace or efficiency of the telecom companies to support their needs.

This portion is true. The telecoms being regulated have a lot of red tape. They are an industry that is ripe for disruption. They have a hard time maneuvering because of the years of bureaucracy that has been built into the system. Not only with governmental controls but people running the business.

Cutting corners in this manner doesn’t pay off, it just introduces risk.

The telco’s are very risk adverse. They have to be in order to operate within the confine’s of the governmental controls. I would say that the ICP’s are free to experiment because they do not have any controls nor standards to meet. If their service is down it Oh well, but if the telco’s go down they must pay fines and write up reports to explain to the government identitiies.

Hence, the perfect pairing of Infinera’s technology, the best in the world, with the consumer experience-focused mandate of these companies.

While I agree that Infinera has great technology and I am long the company because I think they are the best, there is a lot more to deciding who to go with. Infinera is just now breaking into the Metro area but Ciena has had a 100 gig product that we have been using at the Metro level for three years. Because of this I do not think we will be using the Infinera product. They were to late to the game for us. But I do expect them to take market share at the Metro level.

Andy
Long Infinera

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Andy,

I was being flippant on my remarks concerning the telecoms and for that I apologize. It’s too easy to form generalizations and opinions from an outside view in (as a consumer who uses telecom services) without appreciating the context for those decisions and the decision making process.

Thanks for setting the record straight.

Best,
–Kevin

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Kevin,
You are doing great. I just had to put in my two cents. All of the telco’s run stringent test’s on all equipment before deploying it into their network. In fact Verizon ran a test on Infinera’s equipment. I believe it was in 2009. But Verizon still went with Alcatel and it was very controversial at the time.

Also it is very hard to get a national fiber network. In the 90’s they laid alot of dark fiber and some of the companies leased the fiber out. But now they are taking it back because of the explosion of data. So, while we won’t see the same build out as in the 90’s companies will still need to lay down more fiber to keep up. Yes Pete, Dyacom.

So while the ICP’s are building out the Data Centers, which the telcom’s stupidly didn’t do(and is the big reason they are being disrupted in that space which could eventually be the demise of their business) the Telco’s and Cable companies still have the majority of the back bone.

Andy

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I had quoted this in my Arista thread but wanted to repeat it he now that I have read through this thread. This was an analyst talking about opportunities for Arista (and INFN)

The growth in Cloud spending and the migration of demand from Telcos and enterprises to Webscale customers is creating winners and losers in the SMID Cap Comm Equipment space. We prefer companies heavily exposed to growing areas of IT spending shifting to the Cloud from Enterprise / Telco capex that isn’t keeping pace with growth of Web 2.0 spending such as Arista (Webscale switching / networking) and Infinera (Data Center Interconnect) vs. Brocade (SAN Storage) and Ciena (less exposure to DCI and more to Telco / Optical).

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Does anyone know if Apple is an Infinera customer?

http://fortune.com/2016/02/02/apples-big-data-center-plans-w…

Apple is spending nearly $4 billion on new data centers.

The prospect of Apple moving a big chunk of its IT spending out of Amazon’s cloud and into its own data centers caused a stir this week.

It all started when Morgan Stanley Apple AAPL -1.06% analyst Katy Hubert and her colleague Internet analyst Brian Nowak pointed out that Apple plans to spend $3.9 billion on three new data centers in the U.S. and Europe and that this is part of the company’s overall plan to move work away from Amazon AMZN -2.19% Web Services…

1 Like