Has the Net Stopped Growing?

Changing traffic patterns are further confusing the issue. In the early days of the Internet, every time a person went online, even just to e-mail somebody across the room, that transmission likely went out onto the public Internet, perhaps across the country or even across an ocean, before being routed to its destination.

But the Internet has matured, so more traffic is staying close to where it originates. In fact, UUNet reported that between 1997 and 1999, 30 percent of all U.S. traffic never crossed the national infrastructure but stayed within a local metropolitan network. And many smaller countries have built out their own Internet networks, which means less international traffic is routing through the United States. You can't look at just traffic on the national backbone to gauge Net use.

So the good news is that Internet traffic continues to rise at a relatively healthy clip - a rate that, in fact, would make any other industry sick with envy. Most analysts still see 50 percent to 100 percent annual growth in most regions.

The bad news is that even this kind of positive growth can't sustain the number of companies competing in the Internet business, and hundreds of them will go bankrupt before the industry regains its health. "I see a bloodbath," says Hugh Martin, CEO of ONI, a maker of networking equipment. "This is a 10- to 15-year problem."

Some $70 billion has been spent in the past few years on the long-haul Internet infrastructure. And an astonishing $240 billion in high-yield debt has been dumped into telecom carriers over the same period. That easily eclipses the amount of junk debt sold in the 1980s, when Michael Milken and Wall Street arbitrage firms used high-risk bonds to finance takeovers and leverage buyouts.

Some 295 communications companies were funded in the past 18 months just to build the switches, routers and other gear used to run fiber-optic networks, according to venture capitalists Blueprint Ventures. But Merrill Lynch calculates that spending by telecoms on optical communications will be only $8.8 billion this year, and not much more than that next year. "I can attest to the fact that every one of them is promising $100 million in revenue by 2002," says Brian Kinard, a partner with Blueprint Ventures. "Do the math, it just can't happen."

The major presumption driving the growth of these businesses is that the need for more capacity on the Internet would grow exponentially, through the widespread adoption of bandwidth-sucking applications such as virtual private networks and video conferencing.