Capacity providers and broadband Internet service providers have enabled quite a few businesses and created substantial equity value over the last decade, says Bill Barney, Pacnet CEO.
“Telecom did empower others, such as Facebook, Google (News 
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“Capacity prices have been falling aggressively over the last four years, but Google equity prices have doubled,” Barney argues. “No company has really grown more than 10 percent over the last four years,” he maintains. “Data center companies also have been hit.”
Content delivery networks also have faced the same sort of pressure, as “prices have fallen faster than we have been able to take costs out of the business,” Barney says.
In fact, Barney argues that the “last four years have arguably been the toughest ever,” as revenue growth and EBITDA have declined.
So you might be surprised at the prescription Barney gives for restoring profit margin in the capacity business.
“Glass and clouds,” he says. “The cloud is where we are headed in the future,” he says. “In the next five years we will all be in the same business--telecom, data center operators and CDN providers,” he argues.
The sort of obvious question is how that necessarily leads to 40-percent profit margins in what used to be the capacity business. Barney’s vision is that Pacnet (News - Alert) becomes a “cloud hosting services” provider whose capacity operations are just part of that larger business. It might be a matter of semantics whether that implies Pacnet is getting out of the traditional capacity business or whether it is adding more value to the capacity business.
It might matter if the valuations of CDN companies, cloud service providers and undersea capacity providers continue diverge. In other words, Barney is guessing that Pacnet’s valuation, not to mention its profit margins, will change as the firm increasingly becomes a cloud services enabler, not a capacity provider.
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Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
Edited by Juliana Kenny
