Silicon Valley & The iTunes Ripple Effect

Earlier this year when Microsoft announced that it would spend billions of dollars to upgrade its infrastructure in order to compete with rivals such as Google, the company stock sank on the news. The tumble was uncalled for because Microsoft was actually tuning itself for a new web-focused reality. As Microsoft tried to future proof itself, it also gave Silicon Valley a much needed shot in the arm.

Microsoft’s spending, when coupled with that of eBay, Yahoo and Google, meant that lots of hardware and back-end software start-ups could see an uptick in demand for their wares. In fact for some it could mean a fast track to an IPO. I wrote about this in Business 2.0, which you can read here. One company not included in the list was Apple, which just might be one of the biggest booster of network infrastructure.

The number one online music store alone makes Apple a big player, and now there is news that the company is going to start offering full length movies for download via the iTunes store. These are download-and-watch, not download-and-save movies, which means Apple is going to be driving a lot of network usage, and downloads. (Note to broadband providers, Apple is your best friend – it can make people upgrade to premium higher bandwidth packages. Just think creatively.) With nearly 10 million video iPods sold, this service could actually be a legitimate player in the online movie business.

Lets look at the impact of these downloadable movies – in comparison with 5 meg music downloads, a typical feature length movie could be as big as one gigabyte. This means the average monthly download per user could increase sharply from 2-3 gigabytes. Lets assume it doubles, the network pipes both at the core and the edge will just fill up. (Cogent Communications sells bandwidth to Apple, so this could work out well for them.)

John Hodulik, telecom analyst with UBS Securities in a note to his clients writes that “strong consumer adoption of this service would increase demand for consumer bandwidth and have ramification for bandwidth among Internet backbone providers.” This could drive demand for new gear – including routers.

Dave Welch, chief strategy officer of Infinera, which sells optical gear that lowers the cost of running fiber networks in an interview earlier today pointed out that online video was driving the demand for hardware.

My good friend Dave “The King of DSL” Burstein points out that Cisco already is projecting 10-15% increased router demand because of video. Factoring in the pesky issues like an aggressive Alcatel and price declines, Cisco’s router sales could do well.

The iTunes for Movies could have longer term implications – the kind worth keeping an eye on! Of course, when the video bubble pops, the ramifications are going to be felt on the other end as well.