How Ciena keeps the internet online, with CEO Gary Smith

26:17We're back with Gary Smith, getting into the classic Dakota questions to figure out how Sienna has evolved since the 90s. I think it's a great time to ask the sort of classic decoder questions. You're describing a shift in the business, a shift in your customers. How is Sienna organized now? What does that org chart look like? It's been easier for us in some ways because we've always been a leading technology company. So, you know, it's really about who appreciates that technology and collaborates. So, you know, this shift to, you know, the submarine markets and to the cloud players generally, you know, has been a good fit for Sienna because we move very quickly.

26:54We're at cutting edge technology. You know, the latest technology we have is actually on three nanometer chips. We were the first company in the world to have a three nanometer chip actually be used in the telecom space. And we're actually now working on our second. You know, we've got that out. It's carrying traffic around the world. And we're now working on our second version of that. So we've always been at the leading edge of technology. So it really is a natural fit with these cloud players. And so we're organized very simply. we have a large service provider team around the world. And then we have a dedicated team for the hyperscalers and cloud and an engineering team that works with them on the co-development and stuff of that kind of technology.

27:43So actually, I'm a great believer in simplicity of organizational design. So we have a very simple organizational structure that's evolved to address that. And that's how we're able to scale as quickly as we have. You've got the two big markets, the telecoms and the hyperscalers. Then you have the engineering organization. I'm assuming the telecoms and the cloud providers want different things. How is that expressed in what the engineering organization goes off and builds? It's interesting. There's a lot of commonality about what they want. So if you think about it from an engineering point of view and the latest wave logic technology that we've just developed, we actually take that same technology and we deploy it, you know, in slightly different variants to them, actually to both markets.

28:30So, you know, we get better scale of development over that. Obviously, you know, you're developing a single chip and then we do variants of it for specific applications that they want. But essentially that same technology is, you know, consumed across the service provider world, because they all want the same thing, basically better economics across the fiber that they've got and increased bandwidth. Now, the particular sensitivity, I would say, what's really the difference between the two markets is the cloud players are much more focused on power, which we all hear about from a data center point of view.

29:09It manifests itself exactly the same way in the telecom networks. And so we do do variants that are power-optimized for the cloud players, but that's the predominant difference. But that's really just taking the same core technology and just doing a different variant of it that's prioritized around power. So that enables us to scale the development and the rest of it. So we have a single global engineering team, you know, focused on this core technology. And, you know, Sienna, you know, has always been a very focused player. You know, we've been very focused on just high speed connectivity. And this has, you know, enabled us when most of our competitors are trying to do mobile or, you know, other kind of things, you know, for the past three decades, we just want to be the best in the world at moving optical bits.

30:08at a high speed. And the opportunity we have now as well is increasingly into the campus and potentially even inside the data center as well with that same core technology. And that's all in front of us. We get zero revenues from there right now, but it's the same customers that we have an opportunity with. So that's an exciting opportunity for us in the future. I want to talk about that a little bit more, but can I just ask one more question? You said power. That's just to me that you're building a data center, you have an energy budget, and then you hold all the vendors to some number on the line to make sure you hit your energy budget.

30:44And you're feeling that too, even as the person who's just like, here's the box that connects to the fiber line. Yeah. So that same mindset, they have the same, it manifests itself differently, obviously, but anybody talks about the data centers and the power and the rest of it, everybody is very focused on that for obvious reasons. But that same issue deploys when they come out onto the network too, because you're looking at basically you amplify, you put amplifiers on the fiber to do that. And these amplification sites, they want super low power because they're constrained around power and space.

31:22Right. I'm assuming they would rather spend their power budget on running the GPUs as hot as they can. Exactly. They don't want to spend it on the communications part of that. or they want to spend as little as possible on that. They want it optimized. And so we're able to do that for them. So both in terms of the footprint of the technology, I mean, we can now get down on a single plug, what used to be a rack of carts, you know, quite literally a rack of, you know, a six foot high, you know, wide rack, we can now get on a single plug, that same capacity. And that's what we've evolved over the last two decades with.

32:04And so, you know, we're well-placed with these guys to continue to drive down the usage of power on the network, not just in the data center. How big is Sienna? How many people are in all these various teams? We're close to about 10 ,000 people worldwide. We're very distributed. You know, this year's consensus revenues is about$4.4 billion, something like that, and we're profitable and we have a strong balance sheet. We very much invest directly into this technology. And, you know, because we've been such a focused player at it, you know, we felt that eventually that would be appreciated, this high-speed connectivity, and it's really coming into its own now because, you know, you have to make these investments for the long term.

32:50Some of our technologies take, you know, five years plus to evolve. And so, We're fortunate in this time right now, it's a good intersect point where that high-speed technology is super appreciated. Is that an even split? Is it 3 ,300 in engineering, 3 ,300 in hyperscaler sales? No, it's basically predominantly engineering. As you can imagine, this kind of technology is more about the engineering side. More than half of our team are engineering talent, as you'd expect. You know, and then we've got applications engineers at the front end that, you know, help, you know, make sure that we understand the applications and work with the customers on that.

33:35But, you know, more than half is engineering. As I said to you earlier, it's a very simple structure. One of the things that really strikes me is there is this core enabling invention, right? WDM, the company is built around it. CNS made a few acquisitions over the years. You've led a few of them. There's one in 2019. Is WDM still the heart of it? Is that proprietary Sienna? We're building around it. Is there a next way to use fiber that's coming? No, I mean, it's basically the journey that we're on. You know, we've made multiple acquisitions, you know, but really it's all been about, you know, the core mission, which is really high-speed connectivity.

34:14And, you know, what are the things that we need around that? A lot of the acquisitions have been around vertical integration of that. So we have more control over it. You know, it's not just the core technology, but it's the things around it that you need to do. Most of those things were where we could focus and we think provide competitive advantage by doing something to it. You know, the surrounding technologies. And so, you know, over the years, we've worked very carefully at acquisitions and organic developments that make us vertically integrated so we can control that. And it's not, you know, there's advantages to control and scale.

34:53But what really drove us was the fact that we think we can, you know, put competitive advantage in each of those technologies that we gather around the core technology, if that makes sense. The reason I'm asking that is because often you might want to buy a company that's early to the next turn. But it seems like WDM is still the heart of what you're doing and you don't see a finish line there. No. I mean, basically, it's this technology, the actual variant that we focus on is the coherent technology. And that's what has enabled this DWDM to scale so much. But there are other technologies around it as well that we've developed, like the CERDES, which is the serializer, deserializer, and those kinds of things, which is the analog conversion, which is incredibly difficult to do.

35:42And we've got some of the best technology in the world around that. So it's the moat that you put around that. But, you know, it's not the next thing. We think this has a lot of headroom. And, you know, and particularly this technology is all deployed right now. Think about it outside the data center. So as soon as it presents to want to come outside the data center, that's Sienna. The opportunity with the same kind of technology that we've got is now becoming apparent in the campus, which is these campuses are getting super big now. And then eventually inside the data center, because, you know, you think about the GPU and the compute investment that's going on that requires higher and higher speed over longer and longer distances.

36:30Even in some of these data centers, first of all, they're enormous. And you've got fiber going around them, sometimes, you know, multiple kilometers, even within a single data center, because that fiber gets wrapped around. And so we think there's an intersect point, you know, nearly for our technology there, because the technology there right now, which is called direct connect, which is what's required to connect all of the, you know, the racks within the data center and the intro data center. The physics of that is getting very challenged as these GPUs require higher and higher speed. And so we think there's a real opportunity for us to intersect that, you know, to your point, with exactly the same kind of core technology requires some variations on it over the next, you know, one to three years.

37:21Let me ask you the classic decoder question, and then I want to get into that. You've been at Siena for a long time. I think you've been there 30 years. You've been the CEO for almost 25 now. How do you make decisions? What's your framework? Depends on what kind of decision it is, right? I mean, not all decisions are equal. I very much feel it's a team game. So when we make strategic decisions, which I think is what you're really sort of alluding to around how we invest and what are the long-term things that we're focused on, we're very strategically aligned around what we want to go do. We're a very focused company, back to the point I was making earlier.

38:03I think people appreciate best of breed and we want to be the best in the world at what we do here. So, you know, the North Star is very clear to us. And then it's about what are the things that we need to do to get out into the future on that. So from that point of view, decision making is somewhat easier because we've framed, you know, or we've chalked the field. So we know where we're playing on. There's not some great conversation about some adjacencies and things that, you know, we might want to get into. So it's all based on our core technology. So to answer your question, if it's something strategic around those investments, it's always a team game.

38:44And, you know, we're super collaborative is how we work and getting cross-functional input into all of those things. So it's a process. But I would say as well that, you know, I think the role of a CEO sometimes is to say, okay, we've had the debate. This is the overall perspective of what we want to do. Let's go. You know, that's part of the role of the CEO, but it's really to facilitate the best conversations and discussions and then help, you know, drive to a conclusion. Let me just give you a hypothetical that I suspect you will shrug off, but I'm going to try anyway. You're looking at two big groups of clients, right?

39:29You've got your telecom companies. You've got your big cloud providers who are all racing into AI. You have some opportunity to grow that business by going into the data centers, not just landing the fiber at the doorstep. That seems like the much richer opportunity. I look at the state of the telecoms in the United States, for example. They're not growing much, right? They're churning customers between them. It would seem very obvious that your entire team would say, don't worry about them so much. We need to put all of our focus on the AI providers because that is where there's growth using our same core technology.

40:01But then you still have to service the telecom customers, I imagine. How do you balance that out? How do you make that decision to say these investments are going to go over here? It's actually much easier for us because, you know, back to the point I was making, it's the same kind of core technology. So the things that we, you know, when we move the ball down the field for the cloud players, we can apply that into the service provider space because it's the same core technology. So, you know, in terms of their needs, there's actually a lot of similarity around it. So, you know, when we start talking about the data center and the rest of it, another way of thinking about this is we provide optical systems where we do the whole thing for them, you know, the service providers.

40:38And we do that pretty much for the cloud players, too. So we do all of the systems for it, the software, what we call the WDM modem technology, the line systems. We do all of that, and very often we'll install it, support it, maintain it. We do that for service providers, and we do that for the cloud players. And then the point around the opportunity in the data center, it's not necessarily providing those complete systems, but it's taking them and putting them in plugs and then putting them in components. so it's a different kind of play but it's still it's still the core technology so anything you do to advance that also applies to our systems business and our systems business is both service provider and in the cloud so it's it's you don't have to make the uh you know which is your favorite children you know uh kind of choice which is where you're uh where you're going with that.

41:35And I think, you know, that's another benefit of a company staying super focused on its core technology and understanding, you know, what value do we bring to the world that is very difficult for anybody else to replicate. Well, can I ask you about that? Because it feels like the Trump administration is incoming by the time people listen to this. I suspect he will have been inaugurated. We'll be off to the races with a new kind of business climate here in the United States. Mergers will be in fashion again. They have not been in fashion for the past four years. If I was running Google or Microsoft, I would say, well, this is the core technology that's going to make my data center more efficient and move data faster on my cable.

42:18I'm just going to buy this company. Is that – have you been approached to be acquired? Are you – Well, I'm just wondering because I can see why over the past several years, all of that conversation was chilled. But it's also remarkable to me that a company like Sienna has remained independent for 30 years. Well, I mean, I think, and that used to be the conversation all the time. When Sienna started, I mean, think about 20 years ago, I'm not sure some of your viewers here will remember some of these names, Lucent, Alcatel, Nortel, even Nokia. The model was all what I called the generalist model, Nile, which was they were actually spin outs from their phone companies, you know, like Marconi, Northern Telecom came out of Canada.

43:06So, you know, the model was we had to be end to end. You had to put switches, routers, handsets, mobile infrastructure, and this thing called transport. We said, you know, when we started, no, you know, we're going to just focus on the transport piece because we think it can get to scale. And what's happened over the last two decades is the generalists basically, because they couldn't afford to be at the cutting edge in each of those areas, have all struggled. And, you know, you trace the genesis of all of those companies now, and basically they're all in Nokia. You know, it's Alcatel and Lucent and all the rest And we're all, the music stopped and that's where they ended up.

43:53You know, and the point I make about that is the whole system, you know, the whole end to end thing, you know, and being a generalist supplier, the world's too competitive for that now. It just absolutely is. And they used to say to us, well, when are you going to get bought? And we used to say, you know, listen, we're a public company. We have all the fiduciary, you know, responsibilities that you would expect with a public company, of course. but you know we think we can get to scale and be a real company you know just doing what we're doing now you know these things take a while and we've been you know public for 25 years but we're at a point now where we absolutely have scale you know we're very strong financially we can invest in this kind of technology we've got number one market share in all the key markets that we want to play in.

44:45So, you know, we've got a good opportunity to drive shareholder value from here. Do you think that DWDM, the multiplexing you do to virtualize the fiber, is that enough of a moat? You were describing the other acquisitions you've made and how you surround the core technology with other things to enter different markets is the moat. But is that core technology, is that something that, I don't know, if Mark Zuckerberg woke up one morning and was like, screw it, I'm open sourcing it, he could just do it? Or is that too specialized? There are other companies that have variants of this technology, for sure.

45:18It's just that we're able to implement it faster and quicker and better than anybody else. And we have the core competencies around it. You know, a bit of analogy is saying TSMC. You know, I mean, people kind of know how to do it, but yet they can't do it. Right. You can go to ASML and ask for a machine and that's about where it stops. Because it's people. And, you know, it's the folks that understand the 5%, 10 % on each of these areas that really make the difference to things when you put it all together and the other things that we've built around it. So it's like any of these things. It's a confluence that make up, you know, the competitive advantage.

46:01It's when you get down to the real technologies. So it's all of those things that provide the moat for us and the fact that we're focused and the fact that we're now so embedded with these key cloud and technology companies that were part of the collaboration process around the evolution of their networks and the relationships that you build up, that trusted relationship and the technology collaboration over time. And that's why we think we've got an opportunity to take that into essentially a whole new market for us of the campus and eventually inside the data center. We need to take on a quick break.

46:47We'll be right back.

46:59We're back with CNS CEO Gary Smith. Before the break, Gary and I were talking about how Sienna has managed to remain independent and so dominant in the market for so long. But I also wanted to know how much the geopolitics of big tech, especially around AI and the physical infrastructure of the Internet, is something he has to worry about. I want to talk about two things that seem like they're going to happen to the hyperscalers in particular over the next four or ten years. One of them has a lot to do with subsea cables, and the other one is obviously AI. Let's start with subsea cables. If I look broadly at our nation's big companies, Amazon, Google, Meta, Apple, they're about to enter into a world where an emboldened Donald Trump wants to just reset the international order.

47:46And then they own cables that connect our continents together. There's a lot of people who want to break the Internet apart in different ways. We might ban TikTok. We might not ban TikTok. China doesn't allow our apps there. There's a lot of interest in what is happening on our networks that connect our countries together and who gets what where. And then there's just the reality of they are wires in the ground. Like bad things happen to them. They get cut. There are wars. How much of that do you engage with personally? How much do you think about, OK, there are some fraught geopolitics that are about to change.

48:20I need to make some decisions to get ahead of it or be aware of it or insulate myself against it or insulate Sienna against it. How much of your time do you spend on that? Well, listen, I mean, you know, it's sort of under the headings of things you can control and then things that you can't control but need to be mindful of, right? And so it's definitely in that second list. You know, listen, we've had over the last sort of, you know, I could argue five, 10 years, you know, quite a lot of geopolitical dynamics going on. We are mindful of that, particularly being, you know, we operate in multiple countries around, you know, pretty much around the world, sort of 80 countries around the world.

49:03Our technology is widely deployed. You know, we are mindful of those kinds of dynamics. And I'll give you an example of it. we made a decision in the early 2000s that we would not go in and be a provider to the Chinese market for their major service providers. Now, there was a whole set of thought processes that went into that. Bear in mind, one of our competitors at the time was Huawei, and they were just emerging. And I don't think people appreciate this. The first real iteration of technology that Huawei came out with was actually in our space. So way before all the mobile stuff and all the other, you know, omnipotent things that they're now doing.

49:50And so, you know, in about 2003, we said, well, what is, you know, what's this company and what are they doing and how are they achieving price points that are just, you know, lower than our cost? Turns out they were being subsidized by the Chinese government, right? It's like we've seen this movie several times since 2003, actually. And so one of the processes that we had, just to give you an illustration to it, we said, you know what? We will not compete with them directly in the China market because they obviously want us in there because we've got leading technology and the rest of it. We're actually not going to manufacture in China either.

50:28So we're going to be, you know, the antithesis, if you like, of Huawei in every single way. We're going to be the alternative that's not China manufacturer, and we don't operate there. That was a very controversial thing. Imagine, you know, a young company just gone public and going, hang on a minute. Why are you not going into the largest market in the world, fastest growing telecom market in the world? So, but we have the strength of our convictions. And, you know, it's taken a while. But I think largely, you know, that was a good decision for us because we didn't get distracted by that Chinese market.

51:06They'll give you 10 % of that market, but they'll make sure you won't get anything else. And you'll partner with a local partner. And, you know, and I was fortunate enough to, I spent a lot of time in Asia. I lived in Asia for a number of years before I came to Siena. And I saw that movie, to your point, play out in so many different ways. And I was super sensitive to that. as was the team. And so that is an instance of us doing something because of the geopolitical dynamics at the time and us making a decision. And you don't know how that's going to play out because things can change and the rest of it, you've just got to, I think, be smart around what you think's the best thing for the shareholders and your company and stick to it.

51:54Do you mostly follow the lead of the clients? Do you have your own points of view on geopolitics? I'm thinking of things like when you land the cable in Europe and your device is there decoding all the traffic, there are a number of European spy agencies that might want to sit right next to that. But the NSA in our country would love to sit right next to that, right? Like when you landed in other countries that have different kinds of privacy and security concerns, they might want to be a part of that. Is that something where you say, okay, look, Meta owns this cable. You talk to Meta. We're going to do what the client says.

52:28Or is that we are simply not going to build these capabilities in the Siena devices? We're actually pretty fortunate that we don't have to make some of those tough decisions because it's not our cable. Right. You know, so to your point. But the data going over the cable, that's you, right? I mean, you're encoding and decoding it, right? Yeah, that's what we're doing. But even that technology is owned by the customer. So we've sold that to the customer, and what they do with it is entirely up to them. We don't have control over that. It's their network, is another way of saying it. It's their property.

53:04So you think about these submarine cables. So someone owns the cable. We put the technology on the end of it. It's their technology. It's they own that and they run it as well. We don't run it. So they run those networks. So, you know, we're fortunate in that we've always been able to, you know, sort of stay one step behind, you know, some of those dilemma questions to your point. So it's not something we have to apply not. When you think about the actual cables, you know, they're in international waters. What's the longest one that you operate? I think it's about 10 ,000 kilometers. and some of these cables around the Pacific where you really get the big distances.

53:43So they are very, very long cables. Now, what a lot of them do is stop off in different islands and different places and spur off. Some of the new cables going in are spurring off in different places so they're able to do that. We've also developed a technology that overlays that, which provides for resilience. So if you get a cut on a particular cable, then we can reroute it, depending on the architecture. It's called GeoMesh, and it's software and technology that's embedded into our core offerings that enable us to provide resilience across some of those submarine cable links as well. Because you get, you know, just in the normal run of things, I think it's something like 100 plus, you know, faults a year, you know, mainly trawlers, you know, dragging their anchors on fiber cables.

54:39Because they're buried at the bottom of the sea until they're not, right? So, I mean, they've got to come up somewhere. So, you know, typically it's in the shallower waters where, you know, you'll get some fishing vessel come across it. Do you ever get like angry shark? Do you ever get a text message that's like shark attack brought down the network? Actually, you know, I know that's a sort of common sort of question I get asked around it. You know, and there is a section around fish attacks and the rest of it. I think it's zero. I think it's just a bit of a, you know, I'm sure there are some examples of it that someone can point to over the last three decades.

55:16But, I mean, I've never heard of it personally. you know, a shark attack actually being, I think they've got other things to worry about than these little tiny, because it's about the size of a big hose pipe. So I don't think it'd be particularly interesting to them. We have this phrase that we've been using at The Verge. My friend Casey Newton came up with it ages ago. He calls it the splinternet, right? Where what we perceive is one cohesive internet, but really we're fracturing, right? We're fracturing into continent-specific, country-specific internets. As I talked to you about the cloud providers, it's very obvious to me that we now have a number of private internets operating at high speed around the world that are just owned and controlled by single companies.

56:00That dynamic, I mean, you have a long view of the internet, right? You're one of the few guests on the coders ever just straight up talked about Alcatel, right? You have a long view of the internet and how we've grown it and what it's for. The telecoms, by and large, were national champions, right? I mean, that's how they have thought about themselves. Even in the United States, that's how they've thought about themselves. That's where they came from. There's a new kind of nationalism in America around our tech giants, I think, in the Trump administration. Mark Zuckerberg says, I want the Trump administration to go fight the European regulators on my behalf.

56:32That's new. It hasn't come up before. We'll see if this jacket fits. You know, he's trying it on. But the way we build networks is expressions of national capability. The internet hasn't really, we haven't experienced that too much as the internet. It's been one global internet that all connects, and then we do whatever we want inside our borders. But we haven't actually split the networks apart. But now you've got big cloud provider, private networks. You do have rising nationalism around the world. You just have a pulling apart, maybe, of the internet. Is that affecting how you are building networks or how your clients are asking you to build networks?

57:07I totally understand the notion. And I think, you know, what you've got is a disproportionate amount, whether you want to, you know, it's a sort of English understatement. So understand for its context, you know, a disproportionate amount of the innovation and development of all of this has been done in the US. I mean, you know, most all these technology companies, for sure. and now you've got a point where you know now a lot of the network is you know to your point the big cloud players you know are investing in that network because that's their business model to it and the network is becoming more and more important now you know to your point when we talk about the network it's not really you know we talk about it in this homogeneous sort of form but if you think about this and you think about it in the context of sort of some large markets that the US cloud players are trying to get into, you know, take places like India.

58:05Now, you know, when they enter the Indian market, they are dependent upon connectivity from the local carriers. So, yep, they can tip up, you know, with the submarine cables and the landing stations and the rest of it, but then it's, you know, how do I get connected to all the people I need to get connected to in India, enterprise and consumer? They are then dependent on the local carriers for that, be it Barty or Geo or, you know, Vodafone Idea or, you know, or some of the wholesale carriers that are also there as well on fiber. So, you know, there's always going to be an interrelationship because as omnipotent as all of these cloud players are, they're not going to be able to connect to everybody's home, you know, across the planet.

58:56And so you've always got this interplay between service providers and the cloud players. And, you know, what often happens there, is that they will end up in some of these countries, the service provider will provide a specific network for the cloud player. And they call it managed optical fiber network. So MOFIN is the acronym for it. And we help facilitate that. So it's our technology. So it matches all of their global network, but it's owned and operated by, you know, the local service provider to support, you know, Meta or Google or Microsoft, et cetera. And so increasingly, you know, I'd sort of argue you're seeing that interdependency work.

59:44So it's sort of, you know, I wouldn't say counter argument to this. We're all splitting up because at the end of the day, to get to the consumers around the world, you've got to have, and that's not going to change. These service providers are not going away in that regard. They are the only ones that can provide that connectivity to it, ultimately, be enterprise or into the consumer. I'm fascinated with this because it does seem like the overall geopolitical dynamics of the world are changing and the internet will change with it. And I just keep coming back to the question I started with, which is the experience we have on the digital internet obviously impacts the physical internet that you are responsible for building.

1:00:26And I'm always trying to find the touch points between the two. The way we architect networks in India has a direct relationship to the Indian internet that those users experience. And it seems like those things are, if not diverging completely between different countries, they are certainly beginning down different paths. And that, to me, seems utterly fascinating. And I'm very curious as you think about, and I want to end with AI here, as you think about entering their data centers and saying, okay, we can envision some new high bandwidth, high capacity workloads in these data centers. which, you know, for the past 15 years, we have not really come up with massive new ones outside of streaming video.

1:01:09And streaming video is a lot, but that's basically what we came up with. Now there's some new ones, right, that might, in AI, that might hit all kinds of new industries. Do you think that that is just an exponential rise in how much capacity we need, how much power we'll need to use, how much networking capacity that we'll sustain? or is, to make the comparison earlier to dark fiber, are we building out a lot of capacity that we'll eventually use over time? You know, that's a great question. And having lived through, you know, the previous period of the telecom nuclear winter where we built out all this capacity and sort of, as it turned out, no one came.

1:01:47Yeah. It did facilitate, you know, all these business models, you know, that wouldn't have accelerated, you know, without that glut of capacity. you know, as it were. I get asked the question around, you know, all of these data centers, are we in another bubble around all of that and the rest of it? I mean, you know, listen, I think specifically around the data center piece, I think there's an insatiable demand for compute to build up compute power. Now, you know, these things always take longer than we all think, you know, to monetize and the rest of it. So we're probably going to go through some iterations onto that.

1:02:24But to answer your real question, I'm actually of the opposite view this time around. I think we're underestimating the amount of traffic and bandwidth that will be required to go do this because we're already seeing a clip up in cloud traffic and we're pretty well placed to see that. Yeah. Now, how much of that could I attribute to AI and the rest of it? Yeah, for sure. Some of it is, but I've got no way of really discerning which bit is which and it's not our network. But there's a definite uptick in cloud traffic, you know, just to connect to all of these data centers. We are absolutely seeing that.

1:03:03And I think that's going to continue because you've got a lot more data centers coming online in the next, you know, 18 months to two years around the world. That if they're going to, you know, monetize any of that, they've got to all be connected for, you know, learning and training and the rest of it. And that's before, Or, you know, I'd argue you've even really seen, you know, the applications in there for like medical use or, you know, the verticalization. I mean, we're using, you know, your chat GPTs and the rest of it. That's generating traffic, sure. But you start to get to any of that medical usage, for example, and the amount of graphics that are required in there.

1:03:43Graphics are about 10 to 20 times more bandwidth consuming than, you know, normal data. And so, you know, if you start to get to the monetization of that through these kind of vertical applications and the rest of it, I think we're underestimating the amount of traffic that's going to be there. Do you think when you plan out growth for the company, and obviously you're a public company, so you have to do it out in front of everyone and talk about risk. But when you plan out growth, in your most optimistic view, is it sustainable, the rate of demand that you see now? You're saying we're underestimating it.

1:04:21I look at it maybe a little bit more cynically, which is, wow, we are building a lot of capacity against business models that don't exist, right? OpenAI has yet to turn$1 in profit, and they want all of the power that the world can generate. They want every GPU that NVIDIA can build. That's a lot, right? There's an inherent promise there that this will all pay off. And maybe you would call that a bubble or maybe you won't. I'm just looking at it more mathematically. A lot of companies are going to sell a lot of things to these data centers. We're going to build a lot of capacity. And maybe at some point we will have built enough or not enough or something will happen, but that will come to an end.

1:05:00And then a company like yours is saying, well, we've had this rate of growth and now maybe it's plateaued or maybe it's going down. How are you thinking about that? I think about it like this. Don't confuse compute capacity with the network. You know, the network is always the afterthought to all of this. It's, oh, my gosh, yeah, I do actually need to connect these data centers. And, yes, I do need. They're thinking about, so what's the hierarchy of their thought process? it's that you know i need the compute i need the power i need the space you know those are the things that are driving their decision and then by the way oh my gosh i need to connect these right now i'm being flippant but you know it's it's it's down there i'd like to tell you it was right up there but it isn't um and that actually in the answer to this question is i think a good a good thing in that, you know, we're kind of only get there when they need it.

1:05:59They're not building out these enormous capacities because we see it. We're putting capacity out there and they're putting traffic down. I take real comfort from that having lived through 2002 and 2003 where, you know, our revenues went down from something like 1.6 to about 300 million in one year. So, So, you know, I've still got the scars for that. So I'm particularly sensitive to this. This is not the same dynamic to it. You know, they are actually putting capacity out and as fast as we put it out there, traffic is coming through it. So, you know, I think to your point and what a lot of other folks are saying is, is it going to get overheated in terms of the GPU stuff and the data centers and the rest of it?

1:06:45My own personal opinion, absolutely. Will there be a bit of a, you know, tail off in all of that? Absolutely. Will it take longer for applications in the AI world to truly generate the economic suspect? Absolutely. But we're not banking on that. We're just seeing this nice, steady growth in bandwidth, which I think will pervade throughout that. Another way of answering your question, bandwidth growth in the last two decades grows about 20, 30 % a year and has done, and is not cyclical. And when you think about it, it shouldn't be cyclical, should it? I mean, it's just, you know, we're putting more and more applications.

1:07:23We're using our phones for more stuff, you know, more people are getting phones, you know, and all these devices are now connected. So, you know, that has been very steady and consistent, you know, throughout, even when you get an economic downturn, it continues at about that pace. What we're talking about here is the advent of AI really on top of that. And so, you know, exactly what is it going to be? No one really knows. I mean, there's all kinds of models, but no one really knows. But it's reasonable to assume that it's going to come on top of that and could push us to 30%, 40 % bandwidth growth per year.

1:08:01And I think that's going to be pretty sustainable when you think about all the things of the promise of AI. And the real trick to it is you start putting any graphics down it. It's, you know. Every time you hear Sundar Pichai say multimodal AI, I can see the dollar signs. Yeah, I love it. Floating through the offices over there. So, you know, and we're planning our business basically on what we see. And we've taken our growth rates up. You know, typically this business has grown. We've grown about 7 % or 8%. We're now saying it's going to grow, you know, 8 % to 11 % over the next three years. And that's really without any massive entry into the data center or anything else.

1:08:43It's just what we see from a cloud growth point of view. You've talked a lot about entering the data center using the same core technology that you use for undersea cables and the telecom providers inside the data center. What are the barriers to doing that? And what were the things you assessed when you thought, okay, this is the market we have to address? You know, the barriers to entry there is you've got a technology called Direct Connect, which has been well ensconced there for, you know, really since the start of the communication in data centers. And, you know, you've got an ecosystem there that, you know, is going to be designed to elongate that for as long as possible.

1:09:22And the customers want to keep it for as long as possible. The analytics that we've done on it and working with them, they think that there's going to be an intersect point here where the physics of that basically get to the point where it's not sustainable. And we think we've got to the point with power and space where there's a good intersect to that. So it's the analytics around that and working with two or three of these players who are already our customers, but outside the data center. Is that them coming to you or are you going to them? You know, a little bit of both. We have strong relationships with them.

1:09:57So, you know, that collaboration has sort of been there. You know, we're realistic about it. The existing way of working and that direct connect, that's not going away. That's probably still the majority of applications for it. So you're looking at, you know, what are the subset of corner case applications for this kind of high speed connectivity. But, you know, even a small part of that is, you know, massive for us and, you know, massive from a scale point of view, given the amount of spend that's gone on in that space. So, you know, it's always about taking risk when that market isn't there right now.

1:10:33But if you wait until that market appears, it's too late. Right. You know, if you're waiting for, oh, what's the market share of this and what's the growth rate and the rest of it, you know, at the end of the day, you've just got to go with what your intuition is and, you know, what you're hearing and seeing from the customers and the rest of it. So we've got our first iteration of technology for this coming out at the end of the year. And that's, you know, a bet that we placed, you know, two or three years ago. And, you know, as you know, in some of these chip designs and stuff, the timing, you know, it takes a while.

1:11:05And you've got to kind of guess where the market's going to go, not where it is right now. So there's always an element of risk to it. And listen, you know, having gone through some of these before, you know, you're never going to get it completely right. You just got to be in the right vector and then, you know, pay attention and tweak along the way, you know, around it. And so we're listening intently. Gary, this is an incredible conversation. You're going to have to come back sometime. I could talk to you about this. Yeah, no, I enjoyed it. For hours on a time. I enjoyed it nearly. No, good questions.

1:11:36Good stuff. No, I enjoy it. We'll see. We'll see how the geopolitics of laying cable. We should have you back a couple of years from now. Yeah. And see how stressed you are about these undersea cables. I think that would be very interesting. Well, we're in for, you know, we're certainly in for some entertainment, aren't we? I know what we're writing about for the next four years. Gary, this is amazing. Thank you so much. All right. Enjoyed it. Nice to meet you. I'd like to thank Gary Smith for joining me on Decoder today, and thank you for listening. I hope you enjoyed it. If you'd like to let us know what you thought about this episode or really anything else, drop us a line.

1:12:13You can email us at decoderattheverge.com. We really do read all the emails. You can also hit me up directly on Threads or Blue Sky, and for the next 70-something days, we have a TikTok. Check it out. It's at DecoderPod. It's a lot of fun. If you like Decoder, please share it with your friends and subscribe wherever you get your podcasts. Decoder is a production of The Verge and part of the Vox Media Podcast Network. Our producers are Kate Cox and Nick Statt. Our editor is Callie Wright. The Decoder music is by Breakmaster Cylinder. Thank you.