3 Things Driving the Biggest Investment Story of the Decade

The thesis is simple: Wealth is created by real economic growth, not smoke and mirrors.

Real growth, in turn, has historically been created by new technology.

Compare the average per capita economic output and standard of living before the industrial era with what came after the invention of the steam engine. The gains were enormous.

In all areas, as the developing world has caught up to more-advanced nations in the use of technology, we have seen the differences in wealth between the two shrink or disappear altogether.

A cursory look at the history of science and technology reveals one glaring fact: The rate of change is constantly accelerating. More has been accomplished in the last few decades than in the previous few thousand years. Investors often say, “The trend is your friend.” Technological innovation, therefore, is the mother of all friendly trends.

One of the biggest opportunities is profiting from the obsolescence of the “old internet”.

The Internet and its user base of billions worldwide are in the middle of a crisis — a bandwidth crunch that impacts us all. Every single year for the past 5 years, Internet traffic has doubled with no signs of slowing down.

Since the Internet boom of the 1990s, Internet infrastructure has not had a major upgrade in carrying capacity. Now, for the first time in more than a decade, we are on the edge of an immense spending cycle aimed at upgrading those “old pipes.”

The critical shift in standard necessary to keep those “pipes” from clogging is from decade-old 10G (10-gigabit) bandwidth capacities to the faster, higher-capacity 100G network. This new network bandwidth will become a global standard, running underground from city to city and undersea from continent to continent.

As with all creative destruction, there will be victims and beneficiaries of this trend. Luckily for you, this new spending cycle will be a multiyear benefit for one particular group: fiber-optic networking companies.

The fast lane of the information superhighway travels on pulses of light, moving primarily through fiber-optic cables and secondly through satellite. Over long distances — and increasingly over short ones — fiber-optic technology supplies the communications medium of choice.

Here’s why fiber-optic networking and equipment suppliers will be one of the best tech trades of the decade…

There are three big drivers of big data traffic. The first is video distribution.

Google’s YouTube, Hulu and Netflix have helped video become the biggest single consumer of bandwidth capacity in the network. In fact, Netflix and YouTube combined soak up more than half of all the Internet bandwidth in America.

What happens when we all switch to streaming video online? For one thing, these platforms keep adding higher quantities of video to their services. But video has improved in quality as well. High-definition video doubles bandwidth, for example, and emerging 3-D video formats can redouble it.

The second driver that’s causing this bandwidth crunch is voice.

Leaving aside the fact that widely used programs like Skype, FaceTime and Google Chat combine high-bandwidth video with their phone calls, communications are becoming more and more international. Such long distances demand more reliability. Moving alongside voice is also music, which is digitized and broadcasted through popular apps like Pandora, Spotify and more.

Last of our big three bandwidth users is data.

Cloud computing, or the shift of software and computing services from independent networks to online providers, is the big kahuna when it comes to data. When we store our data in cloud-based data centers, it’s channeled over vast geographical areas in order to maintain resilience and closeness to users. That means that when you plug into the Internet, the cloud must be able to accommodate incoming traffic from anywhere and everywhere.

There are, of course, less obvious contributors to the bandwidth crisis. But they’ll become more obvious as all “dumb” devices are brought into the “smart grid”.

Ultimately, there is no device that can’t turn “smart.” All that means is that if a device can benefit from an Internet connection, it’ll inevitably be connected to it at some point in the future.

Here are few possibilities:

• Every appliance in every house, fighting with laptops and TVs for Internet access.
• Every car you see on the road, downloading maps… and uploading vehicle data.
• Every hospital bed, sharing patient data with doctors.
• Your clothes, full of biometric threads that record data for your doctor.
• Every scrap of data on every computer, getting backed up to the “cloud.”
• Every plane in the sky, sending in sensor data of all kinds.
• Every thermostat, street light, and piece of factory machinery, logging in.
• Every vine in every vineyard or corn stalk in Kansas, talking to farmers.

According to a report Cisco commissioned, you could see as many as 50 billion connected “things” online… within six years from right now. Compare that to less than 9 billion today. Morgan Stanley puts that number much higher — at 75 billion.

That’s not just nine times bigger than our current “connected” economy… it’s also over ten times the number of people walking the planet. I can’t emphasize that enough.

At a potential of value of $19 trillion, that’s more than double the size of China’s economic boom… it’s triple the size of Japan’s output… it’s even bigger than the whole U.S. economy. Imagine taking all of our economic output and demand… along with all the wealth Americans have generated to get here… and tacking that onto the global market… in six years’ time.

The point is big data cannot be stopped. And somebody is going to need to build Internet infrastructure that can handle all the growth. At this rate, bandwidth infrastructure will become as important as road, water and electricity systems within the next decade.

Regards,

Ray Blanco
for The Daily Reckoning

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