2009: Brace for Impact

5:30 PM -- The argument against another crash goes like this: Last time was driven by oversupply -- which doesn't exist this time -- and demand is continuing to rise. Both are true.

But I get uncomfortable whenever people start talking about the "inevitable." I wonder if rising demand really equates to inevitable network buildouts. It's possible to simply have an inadequate network, something many people accept from their cellular providers already.

That's why I'm predicting next year will be a bust for telecom equipment. Welcome to the next crash.

This is just a personal, gut-feel analysis, but here goes. Yes, demand will continue to rise, since the consumer's incremental expense of using heavier services is pretty much zero. (Consider Hulu LLC or the first wave of YouTube Inc. versus plain Web surfing, for instance.) But I'm guessing networks won't advance in kind, because publicly held carriers will put the squeeze on any non-emergency build-outs.

It's not disaster for the networks, but it adds up to a bad year for equipment vendors, because as this downturn worsens, any carrier spending will increasingly be deemed an extravagance. We all know the pattern: Shareholders driven by the short term are going to pressure publicly held companies into cutting staff, postponing the future just to save face on quarterly earnings.

Maybe I'm wrong. Plenty of privately held carriers exist, some of them quite large. Using the reasoning above, they might even see this as a chance to get the jump on competitors; some equipment vendors certainly claim to be finding gold there. (See Calix: Still No IPO.)

And maybe certain market segments could flourish. I could see access networks continuing to get built out, for instance, while the metro network is left to lag behind. It's not the best way to build a network, but it's what you do when money is tight.

The argument might not be airtight, but I'm still calling it: Next year is going to be awful. Growth at telecom equipment firms will slow drastically; some companies will have to settle for standing pat. And the root cause will be that the growth in bandwidth demand was not enough to force a wave of network upgrades.

— Craig Matsumoto, West Coast Editor, Light Reading

Mark Sebastyn 12/5/2012 | 3:28:12 PM
re: 2009: Brace for Impact Balsy call Craig. No doubt that the editorial integrity of Lightreading is intact.
rjmcmahon 12/5/2012 | 3:28:05 PM
re: 2009: Brace for Impact I'd agree with this analysis. It seems like the lessons from oil and OPEC in the 70s hasn't been learned by today's telco policy makers. Bandwidth is an enabler of productivity. The trick in the 70s was to convince OPEC that they could make more money on the productivity gains that came from oil abundance rather than pedantic adherence to the simpleton's model of extracting rents using artificial scarcity and distribution control of a base feedstock. Businesses (i.e. enterprises) don't tend to behave this way because, if they did, they couldn't compete. Instead most invest in their intellectual assets, which is, and has always been, the human himself. They do this by deploying modern bandwidth infrastructures.
paolo.franzoi 12/5/2012 | 3:28:05 PM
re: 2009: Brace for Impact

My take is that telecom equipment companies are struggling mightily. The exception seems to be companies that have significant Enterprise exposure.

If you look at the big players (Alcatel, Nortel, Ericsson, NSN, as examples), all of them are struggling in one way or another. Capex spending has shifted somewhat to "low cost geographies" and wireless. This means that on top of the pressures of customer consolidation, entry of large Chinese players, and the continued decline of the price per bit per second; that equipment vendors are under continuing profitability pressure.

Next up will be if the Enterprise customers slow their capex. If they do, then Juniper, Cisco, et al will see a slowdown in business.

HomerJ 12/5/2012 | 3:27:58 PM
re: 2009: Brace for Impact
speaking of a crash. anyone know what's going on with avago's ipo, and/or fire sale?
paolo.franzoi 12/5/2012 | 3:27:58 PM
re: 2009: Brace for Impact

I agree with you about this safety net. The move to rate cap and from rate of return means that the right capex number for any carrier is ZERO, unless that capex is directly related to new revenue or reduced cost. This is why cable has had to promise not to rebuild its infrastructure again. Investors want to get the low capex spending year profifts from the cable guys.

I am still baffled why service providers are spending billions to get into commodity residential services business and driving their costs up to do so.

Pete Baldwin 12/5/2012 | 3:27:58 PM
re: 2009: Brace for Impact 7: You're just not spending enough time talking to marketing people. :)

I do like your subject header there. What got me going on this was the continual hum about how telecom will have to slog on and keep building, even if the economic crisis lingers for a long time. So, I agree with you about the big players still struggling. I'm just not convinced of this safety net of forced carrier spending.

As for enterprise ... Cisco reports in about four hours. We'll see.
Pete Baldwin 12/5/2012 | 3:27:57 PM
re: 2009: Brace for Impact Cisco beat by 3 cents. Now we wait for any surprises in guidance.
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