I'm not particularly bullish for the US economy in general but I am convinced the Telco sector is going to have a solid recovery over the next 5 years. It's been lower than a snake's belly for 4 lousy years but finally growth is resuming.
Industry Pundits Say Telecom May Be Gaining A More Secure Footing
By Paula Bernier
After a downward spiral that has lasted about three years, many industry watchers say the telecom market is showing early signs of stabilization. The mood of the industry can best be described as one of cautious optimism.
“We are beginning to see signs that the market has found its low point and is now beginning to pick up,” says Mark Winther, IDC’s vice president for worldwide telecom. Bookings will take a while to translate into revenue, says Winther, who predicts service providers’ revenue will pick up “a few quarters out.”
Winther says businesses already have done a lot of cost cutting by eliminating jobs, “optimizing the hell out of networks” and lowering capex. “Enterprises now see they can’t save their way to success, they need to grow,” he says. “So they’re relaunching e-business, supply-chain and salesforce- automation initiatives.”
At the same time, he says, enterprises are showing new interest in integrated access services, which allow voice and data traffic to run over a single wide-area connection such as a T1. While enterprises can buy and operate their own integrated access devices, most businesses want a managed IAD service, Winther says. That could be an important stepping-stone for service providers that are trying to appeal to business customers with a range of managed services such as IP VPNs, he adds.
Winther says telephone companies such as the Bells and traditional long-distance companies are uniquely positioned to offer these services because they own networks and have long-time public network expertise. “A virtual network operator, like an EDS, can never do that as well as a Bell or an AT&T because EDS is calling multiple help desks,” he says.
Allan Tumolillo, COO of Probe Group LLC, also sees early signs of improvement in the telecom economy.
“It’s moving toward some stability, but I don’t think the industry is out of the woods,” he says. “In the U.S. market there is some reason to believe there is some growth for 2004, but not a lot. We hear that some of the telcos might be ready to move forward with some network contracts in 2004 aiming at the enterprise sector. If that holds up, that would be some spending increase from the bigger telcos, which should do well.” That would include equipment to support VPNs and other data services, with MPLS equipment likely to be part of the mix, he says.
Probe Group recently predicted North American revenue for business-related IP voice services would triple between 2002 and 2003. While VoIP VPN services will continue to grow steadily over the next several years, revenue from hosted and managed IP PBX offerings has surpassed that of VoIP VPN and will make up the bulk of future business revenue, according to the research firm.
Ethernet services also are hot. Metro Ethernet equipment worldwide revenue hit $2.5 billion in 2002 and is projected to grow 134 percent to $5.9 billion by 2006, a CAGR of 24 percent, reports Infonetics Research. “RPR, Ethernet over SONET/SDH, Ethernet over WDM, and [Ethernetbased passive optical networking] are all growing fast, with 5-year CAGRs over 20 percent,” says Michael Howard of Infonetics Research. “The pace of introduction quickened in the first half of 2003 worldwide for both service provider metro Ethernet services and new manufacturer equipment. Major service providers are pushing standardization efforts by groups such as the [Metro Ethernet Forum, Ethernet in the First Mile Alliance, Resilient Pack Ring Alliance], and public interoperability demos show that a new wave of products is entering the market. Between 2002 and 2006, Ethernet will make major inroads into metro telecom equipment spending, accumulating $19.4 billion.”
Equipment companies say they are pleased Bell companies BellSouth, SBC and Verizon together are seeking bids from vendors for fiberto- the-premises equipment, with the first contracts to be announced soon. Today most businesses and consumers receive their phone and data services over copper (or coax if served by cable companies). Bringing fiber closer to the customer would enable telcos to lower their operating costs, since fiber is cheaper to maintain, and would give telcos more bandwidth to offer a variety of services, possibly pushing the Bells to finally add facilities-based video services to their product bundles in a significant way. Danny Briere of consulting firm TeleChoice Inc. says the total RBOC order for the fiber-to-thepremises (FTTP) equipment should be at least an $800 million to $1 billion order per year.
How widely the Bells deploy FTTP technology likely will depend upon the outcome of the FCC’s long-awaited Triennial Review. The Bells say they hope the review will give them regulatory relief related to new local fiber builds. In fact, the Bells have made clear they must have regulatory relief before they proceed with FTTP technology.
Even if the Bells do receive that relief, however, there is no guarantee they will pursue the builds. In the past, the Bells have promised new technology and services (in the form of ISDN, DSL and fiber) in return for regulatory relief, but so far have failed to deliver.
Meanwhile, rural telcos have been more forward thinking in embracing new technology. Fiber access enables them to reduce maintenance costs and add new services, such as video, to their product bundles. At the same time, rural telcos have been actively updating outdated voice switches, in some cases with next-generation switching equipment.
In addition, cable companies have been investing in new equipment to support their videoon- demand services and are doing significant trials of VoIP equipment.
At the same time, of course, the industry at large appears to be moving toward packetbased networking.
Of course, all the investment — or potential investment — by telephone and cable companies in new equipment is predicated upon the economy moving apace. Traditionally, the telecom economy has lagged the general economy by at least a quarter.
In the long term, there should be reasonable opportunities in the telecom/data sector because businesses require those services and network operators need the equipment to offer those services. “The insanity spending we enjoyed in the ’90s isn’t there. It’ll be more like the ’80s,” says Tumolillo. “Growth will come back; it’s going to be slow.”
In the past year or two, service providers have invested in new equipment that would allow them to “sweat their existing assets” to whatever extent possible, by augmenting existing networks incrementally through new software and equipment. That means there’s been a lot of focus on how to automate call centers at the telcos, automate service provisioning, help service providers keep better track of their network equipment so they don’t have delayed or rejected service orders, and the like.
There also appears to be significant movement by large telephone companies to “converge” — or integrate — their various voice and data networks using technologies like MPLS and IP over SONET. Running fewer networks that support multiple services should result in lower costs for service providers in the long term, even though new equipment purchases may increase carriers’ short-term capital investment expenses. This is an extremely important development given the enormous focus on decreasing operating expenses and the move by most industry service providers to be “full-service providers.”
However, Terry Barnich, chairman and president of research and consulting firm New Paradigm Resources Group, which traditionally focuses on the CLEC space, says the telecom economy is hindered because so many companies are targeting the same customers.
“More sliding has to happen,” he says. “There are too many companies out there and too many companies are not solving the biggest problems.”
Replicating the Bell system, he says, doesn’t seem to be a very good business plan for competitive carriers. Barnich urges service providers to figure out how to target niches of the market in order to survive and thrive.
