December 19, 2006 – Vision is more important than minutiae in discovering stocks that will soar. Let’s consider one of the biggest changes on the technology horizon of the next decade (and already in play in Asia) that many people outside of the technology industry are not even aware of. What is it? Internet Protocol Version 6, or IPv6, as it is better known.
In the past several years, the United States has fallen well behind China, Korea, Taiwan and Japan in the development of internet technology. After a simple visit to Seoul, Beijing or Tokyo, one will easily recognize the inferior capabilities of the internet in the major U.S. cities versus that of their Asian counterparts.
In response, the U.S. government has mandated its Department of Defense to buy IPv6-capable systems and to transition to IPv6-capable networks by 2008. To realize this change, the DOD has mandated that all information products and services it purchases as of 2008 must be IPv6 compliant. Given that most routers, etc, are already IPv6 compliant, many companies and government divisions are transitioning over to IPv6 compliant equipment not because of any U.S. government mandate but because the industry is ahead of the U.S. government’s recognition that much of the world has already progressed beyond the United States.Currently, Microsoft, Hewlett Packard, and Cisco only sell operating systems that are IPv6 compliant. Apple’s MAC OS X operating systems have been IPv6 compliant since 2004. Advantages of an IPv6 network over the current IPv4 network used in the U.S. are enormous. They include:
(1) Increased scalability, much greater security, authentication, reliability, and non-repudiation;
(2) Enhanced use of multimedia and faster transmission of real-time including voice, data, and video transmissions;
(3) Increased capabilities with IP enabled sensors for logistics tracking;
(4) Improved wireless and mobility support; and
(5) Lower costs of deployment and management
Security on an IPv6 network is much enhanced due to the exponentially greater number of addresses it can handle versus the IPv4 network (which we discuss in more detail below). In 2006, it takes a virus less than half a day to scan all the addresses on an IPv4 network in search of targets. On an IPv6 network, with the same virus programs that exist today, it would take over a dozen years to search for the same targets.
IPv4, or Internet Protocol Version 4, was invented in the 1970s, and designed with a network consisting of only several thousand computers in mind, not a network of millions. Today, it cannot handle the traffic that is generated by the mass proliferation of cell phones, RFID tags, and other streaming data transmissions. The development of IPv6, or Internet Protocol Version 6, began over a decade ago. The IPv4 network can accommodate approximately 4.3 billion addresses while the IPv6 network can accommodate 3.4*100,000,000,000,000,000,000,000,000,000,000,000,000 addresses. Suffice it to say, with a capacity of this many addresses, even if every citizen in China were wired into the internet through PDAs, cell phones, and PCs, having enough addresses to go around for an IPv6 network should not be a problem.
This brings us to our next point. In Asia, due to population density problems in cities such as Seoul, Bangkok, and Shanghai, all of which have populations over 9 million people, there has been a tremendous push to advance technology (at least in Shanghai and in Seoul. In Thailand, technology advances are progressing, but at a much slower pace than their Asian peers). However, in order for economic development to progress, IPv6 is necessary. That is why China pledged to adopt a countrywide IPv6 infrastructure six years ago. In addition, Japan, Taiwan, and Korea have also met their IPv6 pledges by now.
The lack of vision over the past several years by the U.S. in this arena is tantamount to the blunder by IBM in the 1980’s when they continued to focus their corporate strategy on mainframe computers because their top executives believed that nobody would have a need for personal computers inside his or her home (IPv6 has been in development for over 10 years now). Furthermore, the U.S. is lagging behind most of Asia in other aspects of internet technology as well. Seoul is so wired-in that it is possible to log into the internet, travel cross-town in a bus and never lose your wireless broadband connection. Japan also has better and cheaper DSL coverage than the United States. And the enhanced mobility capabilities of IPv6 will soon enable someone to log-on from a Starbucks in Shanghai, hop a taxi to the airport, get on a flight to Beijing, and arrive at a hotel and never lose connectivity to the internet.
So what investment opportunities does the world’s conversion to IPv6 present?
In U.S. implementing IPv6 is expected to cost $1 billion a year for 25 years and result in cost savings of $10 billion each year. 8% of CapEx for ipv6 is expected for upgrades to architecture, software, training costs, change of security protocol, etc. The other 92% is expected to be spent on taking advantage of IPv6 capabilities. However, as I mentioned before, much of the expenses of transitioning over to IPv6 is naturally built in to the natural progression to periodically update technology so in reality, are not “extra” costs for companies. However, if you are a technology-minded entrepreneur based in the U.S., if you form a consultancy company focused on enabling U.S. corporations to take advantage of all the additional benefits and features of the IPv6 network, and become the expert in this, you should have a first-mover advantage and do quite well.
Unlike China, where the entire country is already IPv6 enabled, the U.S. will most likely see a transition from the current IPv4 network to an IPv6 network over a decade or so. In order to enable this change, companies will have to switch routers. However, leading router manufacturers such as Cisco and Juniper have been making IPv6 compliant routers for about the past two years (routers are typically upgraded every five years), meaning that not all companies will need to update their routers to take advantage of a new IPv6 network. However, even though upgrading routers is a normal transition in the evolution of technology, the IPv6 conversion should provide a steady demand for router equipment. Internet Service Providers (ISPs) will also need to ensure IPv6 compatibilities. But the single largest change in converting to IPv6 may be in software.
I like Microsoft for a number of reasons in this regard. One, nobody likes Microsoft right now. Every analyst out there, when Vista was released, said that Vista was boring and not likely to uplift Microsoft’s share price. They are wrong about this because most of them do not understand Vista’s importance to IPv6 conversion. Number two, most everyone feels that because Google has supplanted Microsoft as the number one global technology company, that Microsoft is dead in the water. This again is hardly true. Although Microsoft’s share price has gone nowhere for two years before finally breaking above $28 a share recently, I look for Vista to continue this revival. Bill Gates has stated that “In late 2006, when these products (software geared towards IPv6, like Microsoft’s Vista) come out, there will be a wave…We will have the largest marketing campaign we’ve ever had.”
Read the last statment that I’ve placed in bold again. To engage in their largest marketing campaign ever is quite an endorsement on Microsoft’s behalf for the importance of the new IPv6 network to the global economy. It will have a huge impact. Bill Gates recognizes this, and the last time I checked, Mr. Gates is still a brilliant man I wouldn’t bet against though every analyst seems to have deemed him irrelevant already given the meteoric rise of Google, and the loss of key Microsoft personnel to Google. I for one, however, am not going to bet against Mr. Gates.
Furthermore, in order to further encourage software developers to write programs for the Vista platform, Microsoft has pledged $100 million to aid companies in the marketing and distribution of software that will run efficiently on the new Microsoft Vista platform. While the Mac OS X operating system is already IPv6 compliant, windows based software still dominates the market. Furthermore Vista helps companies tighten up security as Vista is the first software program on the market that makes IPsec (Internet Protocol security) available for IPv6 sockets. Basically, to explain in as simple lay terms as possible, IPsec allows only trusted computers to communicate with the TCP/IP network and access the server, thereby adding another layer of defense from normal user authentication and dramatically reducing potential sources of attack. Microsoft’s Vista platform and software just may be the key to get them back in the game.
It may be out there, but I have yet to see proper analysis of the importance of the Vista platform to the adoption of IPv6. Instead, I’ve read many reports that have called Vista bland, unexciting, and unlikely to propel Microsoft back into the spotlight anytime soon.
If you bought into MSFT a couple of months ago when every analyst said they were dead in the water you’d be fine now. However, MSFT has had a nice run recently, and given that the U.S. tech index, NASDAQ is showing signs of technical weakness and being on the verge of a correction, I would again be patient and purchase MSFT on dips.
However, given that the progress of IPv6 is much further along in some Asian countries versus the U.S., it would be a mistake to concentrate solely on American markets as so many mainstream analysts in America do. Asian countries are beating the U.S. in the deployment and development of new internet technology now because of three factors: strong government support for transition, many more people going online, and a rapid adoption of wireless and small network devices in their online population (cellphones, PDAs, VoIP phones, gaming consoles). Japan, South Korea, Taiwan, and China are the ones heavily on board with IPv6 for all types of networking.
For the growth of IPv6 to approximate the growth of online users in Asian countries is to be expected; however, the growth will strengthen even more as IPv4 services in Asian countries continue to convert into IPv6 services. Based on figures from Internet World Stats, Asia has a total population that is three times greater than the combined 1.1 billion population of Europe and North America. Furthermore, if Asia’s online user rate continues at its current 200% growth rate over the next five years, it will have 40% of its population online. Consequently, in five years, the number of online users in Asia may surpass those of Europe and North America combined by about half a billion people.
To not search for investment opportunities in Asia that will benefit from this technology revolution would be grossly negligent, so in Part II of this blog entry, we’lll discuss just this subject matter.
