July 1, 2002

Observations And Predictions For The Telecom Equipment Biz

What follows deals with all telecom equipment instead of just the Dallas optical switching part of it.

Over the last several months, the industry's financial condition has continued to deteriorate. Telecom news has become a bore, as its litany of woes are just not really news anymore. They are about as predictable as sunrise. There is no horse race or mystery in the progress of the following logical four-step process:

  1. Spending for telecom services goes down,
  2. The RBOCs' and carriers' income goes down,
  3. These companies cut personnel and equipment expenditures in relation to
    reduced income.
  4. Equipment companies incomes go down and they cut personnel and expenditures
    in relation to reduced income.

You might as well play "beat the analyst" by recording your own personal observations and predictions. The media seems to concentrate primarily on repetitious layoffs and poor balance sheets of telecom equipment firms. Analysts they have quoted the last couple of years have not not done very well at forecasting. Granted, fortune telling is tough for mere mortals, but I would like to compete with the analysts for the fun of it and proclaim:

  1. General business improvement is vital to any telecom recovery. Mergers, buyouts,
    3G wireless phones, new management, honest CEOs, etc. can't make a huge
    difference in recovery speed for telecom manufacturers. So, given their declining
    sales, more cuts are as normal as rain in monsoon season. The companies can't print
    money.

  2. Bandwidth usage is growing enough right now that within a couple of years data
    communications could return an acceptable profit - and enough to restore some
    equipment vendor health.

  3. The telecom biz that exists in three years will be greatly changed. VOIP, MPLS, and
    "more routers-less traditional switching" will gain an upper hand. There will be fewer
    major equipment vendors.

  4. The industry will NOT dump standards big time to embrace cheap innovative equipment
    from startups that would like to ignore them. There may be additional or changed
    standards, but standards will remain a key factor in equipment sales. That does not
    mean that some vendors won't continue anti-competitive lawsuits against standards
    bodies. They just won't be able to really loosen the grip of standards, perhaps just
    swap them.

  5. The public will accept less quality of service (QOS) in exchange for continued cheap
    phone service. Cell phones taught new generations to accept this. Your home phone
    service may not continue to be immensely better than your cell phone as it is now in
    most places. (Sure hope this is NOT the case, however.)

  6. Ignore the talk implying how much sales in China are benefiting US and European
    companies. There may be huge sales there eventually, but the Chinese have
    proven themselves masters at KEEPING the money made in their country IN their
    country. Allowing profits to return home to companies investing billions there is
    definitely not a priority. Show me one firm that has brought out far more money than
    their costs. I have noticed in the last ten years that potential sales in China keep growing
    and the never really defined payoff date keeps slipping off into the future.

  7. Much of the world production - and perhaps eventually even much of the design
    innovation - in telecom will move to China. As the leading world equipment vendors
    have been competing in attempts to modernize their Chinese industrial base,
    the Chinese have been learning much. The heavy presence of Asian companies at
    this year's poorly attended SuperComm should be a wake up call to Nortel, Ciena,
    Lucent and the other players. As with the crash of the telecom sales boom, I knew
    it was coming but underestimated its speed in arriving.

  8. Ciena will be a much stronger power in telecom equipment by the time a turnaround
    in the market comes.

  9. Cisco will have a much harder time hanging onto its percentage of the router market. But
    they are finally making some headway against traditional switching.

  10. Without some major sales, cash infusion, or selling off important company parts, it does not seem
    like Nortel or Lucent can just keep trucking on for another year. So it will be no surprise if a
    major change in their operations is announced before then.. Suspect this will most likely
    occur when the $1.00/share delisting price is at hand. Wonder if Microsoft might be planning on
    getting into telecom at a bargain price by a purchase of one of these. If they ARE thinking of this,
    my guess is that Microsoft would:
  • Drop their strategy of "appeal and delay until everyone has forgotten what the monopoly
    charges were all about to begin with",
  • Accept whatever sanctions are imposed by Judge Judy,
  • Loudly complain that Microsoft will be mortally wounded by the sanctions, and
  • Proceed to acquire a Nortel or Lucent and hope that folks don't get too
    alarmed by the monopolistic dangers of MS having simultaneous control of phone/data
    business, computer operating system design and a fair percentage of personal
    database information (Passport, etc.).

    Of course, Ciena and Cisco may have enough money to buy a Nortel or Lucent,
    or Microsoft could just buy into/bail out either financially-weak firm (or both) by purchasing
    just 20% of their stock at at a time.
  1. I hope the WorldCom financial investigations do not spread down to the equipment
    vendors' sales practices. There could be a lot more crying if that onion gets peeled,
    but it's far too late to dig into this. The vendors are too near bankruptcy and the
    perpetrators are likely long unemployed if not lucky enough to have escaped a bleak
    near term sales future by leaving telecom.

  2. When equipment sales return and demand is ahead of delivery capacity again, expect
    to see some problems surface with the oft saluted, seldom questioned idea of outsourcing
    manufacturing. For any type of large surviving switches and other complex gear with
    many different types of circuit boards, separating the design engineers from the plant
    may prove counterproductive. For routers and such it will remain the norm, but with the
    complexity and hundreds of possible ways to mix and match components in larger
    systems, designers had best not need a plane ride to see how their ideas are being
    implemented on the line. Expensive problems with alpha and beta systems will be early
    warning signs. To avoid corporate admission that total outsourcing is a mistake, engineering
    groups may get larger mini-manufacturing capabilities for extensive tests and wringing
    out before full mfg. commitments are made. But the cost of these can quickly balloon.

Went to a public Biotechnology meeting a couple of weeks ago in Dallas. Discovered some Star Tech folks and other techies recently associated more with telecom visiting there. They were there evidently seeking alternate opportunities in biotech. The CEO of a small pharmaceutical company delivered an excellent talk touching on the state of his industry. Unfortunately, like telecom, it is currently experiencing some rather puny earnings. From a contact I made at the meeting, I received an invitation for lunch at the City Club in downtown Dallas. The 68th floor view from that posh dining establishment was excellent, but I was not able to provide my host with the "telecom turn around before 2004" prediction he was hoping for.

Chuck Bealke