Super-fast Internet for every American may sound like a pipe dream, but if the U.S. National Broadband Plan is even partially successful, it will mean billions of dollars of new sales for network equipment makers such as Cisco and Motorola.
The Federal Communications Commission wants to speed up Internet connections by about 25 times for 100 million homes by 2020, which would require service providers from AT&T Inc. to Qwest Communications International Inc. to make huge investments, such as on building fiber lines directly to homes.
It will cost operators $60 billion just to extend fiber to 50 million homes from shared neighborhood nodes, according to IDC analyst Matt Davis, and carriers have no assurance they can recoup heavy capital expenditures by charging consumers higher fees.
Nevertheless, if carriers go even part of the way toward the FCC goal, that would boost demand for advanced network equipment, as well as a wider range of products and services that benefit from greater Web use.
Ticonderoga Securities analyst Brian White said Cisco Systems Inc. and Juniper Networks Inc. would be among the top beneficiaries. Their routers, switches and other equipment help manage Internet protocol (IP) traffic.
"At the end of the day, we expect this plan to drive significant increases in data traffic and a continued transition to IP-based networks, accelerating demand for next-generation IP networking gear, a positive for both Cisco Systems and Juniper Networks," he said.
White raised his price target on Juniper's shares to $38 from $34 on Thursday. The stock was at $30.31 in early afternoon trading.
In addition to network gear, Cisco also sells high-quality video conferencing systems that require fast Web connections. Slow speeds have been a major bottleneck to their adoption.
Analysts say it is hard to forecast an immediate earnings boost for network equipment makers given the 10-year time frame of the national broadband plan, but they also encouraged investors to bet on long-term gains.
Internet service providers are already upgrading their networks to handle surging traffic, driven by smartphones and online video. Steve Clement of Pacific Crest Securities said market forces may compel carriers such as AT&T to cooperate with the FCC's goals.
"From a competitive standpoint, if masses of consumers are demanding those speeds in that time frame, that will put pressure on AT&T to push fiber deeper into the network," Clement said.
AT&T has so far focused on building fiber optic cables to neighborhood nodes, whereas Verizon Communications Inc. is laying fiber directly to many more homes.
Cisco unveiled a new router last week that it boasted can handle online traffic up to 12 times faster than rivals. AT&T is already using it and Juniper is expected to catch up with its own upgrade later this year.
Cisco shares have already rallied around 70 percent over the past year, while Juniper's have nearly doubled, on expectations of increased sales as the economy improved. Analysts say the shares, while no longer undervalued, still offer long-term growth potential.
The National Broadband Plan includes a target to improve energy efficiency, which may benefit companies such as International Business Machines Corp., whose software and services help manage energy use by monitoring and automating activity on the power grid.
The FCC is also calling for more robust wireless services, including a national network for public safety workers. That could help companies such as Motorola Inc., the leading supplier of wireless equipment to the public sector.
"Any development that allocates new dollars to public safety in the U.S. should benefit Motorola," Broadpoint Amtech analyst Mark McKechnie said.
Analysts said spending on network infrastructure will be a prime investment area regardless of the government's plan. Investors are expecting AT&T and Verizon to spend more this year on wireless infrastructure, particularly on backhaul networks that connect wireless broadcast towers.
UBS analyst Nikos Theodosopoulos said wireless investment would likely be a key topic at the annual CTIA wireless show, which starts in Las Vegas on March 23.
"Our sense is upside may be possible to AT&T wireless backhaul spending, as AT&T works to improve wireless capacity, following a 200 percent increase in mobile traffic in 2009," he said in a research report.
Companies such as Juniper, Tellabs Inc. and Ciena Corp. will likely benefit from such spending, he added.
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