While the U.S. has supplied a meager form of broadband to 20 million households (20% of the total), Korea has connected some 11 million households (73% of the Korean total) with real multimegabit pipes. While the U.S. pretends that the Internet boom was a scam and a delusion, the Koreans now run one-third of their economic transactions through the Net. They execute 70% of their stock trades on the Net, half of all banking transactions, and constant retail orders around the clock for everything from groceries to furniture.
While the U.S. depicts Internet commerce as mostly a mirage, Korea is living the reality. The Koreans accomplished all this in just three years. With the adjustments needed in a poorer society, the Chinese have made similar gains and now lead the world in total cell-phone use and are third in use of the Internet. While the U.S. communications industry remains mired in depression, the Korean and Chinese industries are thriving. Barron's warns against the overvaluation of Samsung, the Korean colossus that is selling at 13 times earnings and 7.3 times cash flow. The Wall Street Journal dwells portentously on an Internet bubble among Chinese dot-coms that have quadrupled in value over the last year. But while the U.S. economy ekes forward, then slips back, the Korean and Chinese economies are growing some twice as fast. While the U.S. pretends to have a stock market resurgence--the figment of a commendably reflated dollar--Korea and China are undergoing real equity expansions. U.S. economists still fool themselves that they live in a national rather than a global economy. But when the U.S. stock market goes up 12% and the U.S. dollar goes down 20%, the real effect is sharply cheaper stocks, not more-expensive ones.
Originating in the U.S. is nearly all the technology--the digital subscriber lines (DSL), the digital subscriber line access multiplexors, the cable modems, the optical carriers, the code division multiple access (CDMA) wireless systems, the chip designs that made Asian broadband possible. But the Koreans and Japanese are now rapidly taking over the industry, and the Chinese are rushing up from behind.
The Korean companies in the forefront of this drive are Samsung, the leader; the rapidly privatizing Korea Telecom; Hanaro Telecom; and SKT, CDMA pioneer and largest Korean wireless carrier. Combining leadership both in DSL, flat-panel displays, microchip memories and CDMA handset/cameras, Samsung represents a total play in Korean bandwidth and will join our list this month. Hanaro is the hero of the Korean saga, entering the industry to push DSL prices well below cost three years ago and forcing KT to follow. As usual, throughout the history of business, lower prices brought higher revenue and ultimate profits. "The elasticity was far greater than we thought," comments a Korea Telecom strategist. KT is now making money on broadband. Close to breakeven, Hanaro is rushing ahead to very-high-speed digital subscriber lines, or VDSL. The Korean government is expected to permit Lucky Goldstar to combine with Hanaro to create a more robust competitor for KT. Most of these Korean companies offer more solid value than the Chinese dot-coms that have recently experienced fourfold gains.
The Second Boom?
With traffic up close to a hundredfold in three years, the Korean example shows that when the new broadband connections are deployed, the Internet will undergo a new nonlinear surge comparable to the hundredfold U.S. rocket of 1995 and 1996. Igniting the boom of the late 1990s in communications gear, the U.S. upsurge came from a lower bandwidth base than the later Korean one. As countries around the globe begin imitating the Korean and Chinese models, American communications suppliers will gain a second chance for major growth. But it will not be easy. While Qualcomm has broken through in the wireless markets in both Korea and China, all of the ten companies competing for VDSL contracts in Korea are Korean. Led by Samsung, some are even competing for microchip slots with Infineon, Analog Devices, Texas Instruments, Metalink and Ikonos.
American carriers managed to handle the first Internet boom with wavelength division multiplexing, putting every stream on a different color of light and merging them in an infrared band down the fiber for a hundred miles or so, and then converting the dwindling signals back to electronics to do it again. R&R--recovery and regeneration--and sometimes 3Rs (with retiming added) meant that the network was constantly translating light pulses into electronic streams and then back again, through arrays of lasers and filters and erbium-doped amplifiers and down boards of mixers and muxers, serdes (serializers and deserializers), transceivers and analog-to-digital converters. It all worked well enough to handle the first Internet boom. It provided explosively growing markets for the companies making the transmission lasers and pump lasers, chiefly JDS Uniphase, and the semiconductor houses selling mixers, analog-to-digital converters and digital signal processors, namely Texas Instruments and Analog Devices. But the second Internet boom of broadband video, wireless imaging and ubiquitous wireless data, now happening in Korea and Japan, remains stillborn in the U.S. The local loop remains fractured, in a copper cast and a legal straitjacket. Backbone carriers compete on price, while the lords of the last mile maneuver in Washington.
Nonetheless, the three-year ascent of Korea from also-ran to bandwidth colossus shows the way to a new Internet boom in the U.S.
With Peter Huber's critical mass of 20 million broadband subscribers having been surpassed this spring, the transition to 100 million subscribers will occur before 2010, according to Huber, by which time the Telecosm will have undergone an all-optical transformation. But, well before then, it will jump to its new energy state or broadband paradigm with a rush that will be completely missed by technologists, Wall Street analysts and companies nursing older optical technologies. It happened before.
Excerpted from the July issue of The Gilder Report