Carriers: Banking on no surprises

We're back in the thick of it. IPOs are game again. Stockbrokers are moaning about stocks being overpriced but buying them anyway. Venture capital money is flooding back in.

Now that we're back in La-La Land, it's interesting to see Merrill Lynch come out with its top 10 surprises (both positive and negative) we might run into - the curveballs that can keep trends from progressing the way we think they will. Merrill Lynch notes that these surprises "have low probability [of taking place] but the potential to significantly impact telecom services stocks." What's notable is that Merrill Lynch is challenging a lot of what the telcos are pitching as their major money-makers - the "next big things." Here are some of Merrill's scenarios:

• 3G mobile data applications catch on . Merrill does not take for granted that data applications will catch on. There's a limit to how much you can do on a cell phone - and how much money can be made on data applications because many target users are already on unlimited-use data plans. If you add up all the promised revenue and growth from mobile data applications, you get far more peak-demand bandwidth than is reasonably available on the network today without a real relationship between bandwidth used and revenue received.

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We're back in the thick of it. IPOs are game again. Stockbrokers are moaning about stocks being overpriced but buying them anyway. Venture capital money is flooding back in.

Now that we're back in La-La Land, it's interesting to see Merrill Lynch come out with its top 10 surprises (both positive and negative) we might run into - the curveballs that can keep trends from progressing the way we think they will. Merrill Lynch notes that these surprises "have low probability [of taking place] but the potential to significantly impact telecom services stocks." What's notable is that Merrill Lynch is challenging a lot of what the telcos are pitching as their major money-makers - the "next big things." Here are some of Merrill's scenarios:

• 3G mobile data applications catch on . Merrill does not take for granted that data applications will catch on. There's a limit to how much you can do on a cell phone - and how much money can be made on data applications because many target users are already on unlimited-use data plans. If you add up all the promised revenue and growth from mobile data applications, you get far more peak-demand bandwidth than is reasonably available on the network today without a real relationship between bandwidth used and revenue received.

• Wireless competition turns tough. "Aggravated by carrier moves to increase revenues and market share," voice prices and termination fees fall, Merrill Lynch says. Seems to me tough competition is already causing consolidation, and we're yet to see the full effect of mobile virtual network operators, such as Virgin Mobile.

• Videoconferencing catches on. Merrill Lynch says a boom in videoconferencing will get investors to rethink the long-term bandwidth outlook. I agree, but the limiting factor here, which also applies to VoIP, is the upstream bandwidth and latency available to users on the access links. Fix that and everyone will be using videoconferencing, except they'll say it's really Web conferencing with Webcams.

• Data revenue growth re-accelerates. "Consumers rapidly adopt broadband and step up bandwidth usage. Corporates prioritize network performance and security. Wholesale stabilizes," Merrill Lynch says. What's interesting is the assumption that stepped-up bandwidth usage translates into higher revenue for telcos and cable companies. While it's clear that more businesses and consumers are adopting network-based functionality, a lot of that traffic is over unlimited-use links. Bandwidth doesn't equal revenue unless the present model is changed. What does come with greater application usage is demand for QoS and prioritized packets. QoS and prioritization - when it is tied to specific applications and provides concrete benefits - are things people will pay for, but they won't pay for bandwidth just for the sake of bandwidth.

Other "possible surprises" include economic growth slowing unexpectedly, broadband access technologies such as broadband over power lines gaining momentum, smart phones becoming a mass-market product, and regulators allowing rate hikes or rebalancing to help telcos meet universal service obligations and accelerate broadband buildouts. As with the above, Merrill doesn't believe these are likely, market-impacting events.