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2002 Top Ten: Forecasting Follies

Light Reading
News Analysis
Light Reading
12/26/2002

We’ll soon be saying goodbye to 2002, and lots of people will be saying good riddance. It turned into an annus horribilis for many in the telecom industry – or maybe that should be anus, to reflect the number of times pundits proclaimed that we had hit bottom.

Let’s hope that when we carry out this exercise in a year’s time, we’ll be ridiculing the folk that failed to recognize the market upturn. But right now, the reverse is true. The people and organizations on the following list (which includes Light Reading in one instance) simply didn’t face up to the facts in 2002, for one reason or another:

No. 10: Harry Carr on Tellium
Back in January 2002, Harry Carr, CEO of Tellium Inc. (Nasdaq: TELM), predicted $288 million in revenues for his firm in 2002 (see Tellium Looks to Make Its Marks). Well, they could still make it – if they report a $229 million fourth quarter. But given the company's recent track record, it's not too likely (see No. 3 in Turkey Awards).

No. 9: RHK and Frost & Sullivan on OSS
During the worst downturn in telecom history, research firm RHK Inc. said the market for operations support system (OSS) software would push to $50 billion by 2005 – roughly the size of New Zealand's gross national product, and nearly three times Cisco's 2002 revenues (see RHK's Fat OSS). Not to be outdone (or in a spirit of misguided camaraderie – you choose), rival researcher Frost & Sullivan came up with similarly huge projections for billing OSSs alone (see Billing Software Market Worth $30B?). Now we ask you, Who's the biggest OSS?

No. 8: Merrill Lynch and others on free-space optics
Free-space optics (FSO), a wireless technology that uses lasers to connect buildings to fiber at high data rates, was the basis of big reports and forecasts from several analysts up until mid 2002. At that point, it was clear the market opportunity for FSO had gone down the drain with many CLECs, which were supposed to be the key buyers (see The New Reality of FSO). Among the bullish were IGI Group Inc., Merrill Lynch & Co. Inc., and The Strategis Group. “As an analyst, I take some of the blame for this," admitted IGI senior analyst Tony Carmona. "But sometimes we all get caught up in what looks like really cool technology. But I’ve come to realize that a lot of this stuff is baloney. Carriers just aren’t buying it.” No. 7: Numerous sources on Asia
Despite ongoing rants about robust demand in the Asia-Pacific region (the latest being from the International Telecommunication Union (ITU) – see Asia: Biggest Growth Is Yet to Come), it seems opportunities may be far from limitless there. Indeed, rumblings of fiber overbuild, intense competition, and pricing pressure raise alarm bells (see Is a Bubble Building in Asia?). For the diehards clinging to Asia as telecom's Promised Land, we offer the following quotation from Michelle Sie Whitten, president and CEO of China-based cable provider Encore International Inc.: "You don't hear a lot about profitability in China, yet you see a lot of money chasing money there."

No. 6: Light Reading on Lightwave Microsystems
There were omens, but we stubbornly kept the component player on our list of Light Reading's Top Ten Private Companies, albeit with some caveats pointing to the overall tanking of its chosen segment (integrated optics) and management's insistence that the IPO market would return (see Lightwave Microsystems). We should have listened to that little voice over our right shoulder: A few months later, Lightwave Micro had followed its star right over the cliff (see Obituary: Lightwave Microsystems).

No. 5: Ciena and Tellabs on Europe
In today's troubled times, the phrase "international incumbents" sounds pleasantly distant, foreign, unhindered by FCC regulations. Sadly, Ciena Corp. (Nasdaq: CIEN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have ignored the danger signals coming from the other side of the pond and have chosen to rework their strategies to focus heavily Over There (see Tellabs Looks to Europe and Ciena Follows the Incumbents). Now siren song's turning into a scream, as leading carriers such as France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT) report ongoing struggles for stability (see France Telecom: Not Out of the Woods, Has Catastrophe Hit the European Telecom Market?, and Debt Weighs on Euro Carriers).

No. 4: Nortel and Lucent on breakeven
This booby prize is a tie. As the year progressed, Lucent Technologies Inc. (NYSE: LU) was feeling for the point at which financials would reach the breakeven level, indicating that sufficient layoffs and cost-cuts had been made. It hasn't hit that bottom yet: A major restructuring announcement in October revealed that 10,000 more jobs will be cut, while the company's product line continues to be "rationalized" (see Lucent Lowers Breakeven, Cuts Again, Lucent to Cut Headcount, Products, Lucent Silences SpringTide, Lucent Clarifies Product Strategy, and Lucent Proposes Reverse Stock Split).

The third quarter proved particularly challenging as well for Nortel Networks Corp. (NYSE/Toronto: NT), which predicted first flat growth, then a 10-percent drop in revenues, then an 18 percent drop (see Nortel's Bottom Sags).

Bottom line (pun intended): Having shrunk headcount by more than half in a two-year period, neither Lucent nor Nortel is sure it's small enough yet.

No. 3: Vik Grover on various telecom **UPDATED 12/27**
Buy WorldCom Inc. (OTC: WCOEQ). Accumulate Qwest Communications International Inc. (NYSE: Q). Hang onto Allegiance Telecom Inc. (Nasdaq: ALGX) and Level 3 Communications (Nasdaq: LVLT). Sell Sprint Corp. (NYSE: FON). Such was the advice delivered by Vik Grover, managing director of equity research at Kaufman Bros. LP -- not in the telecom heyday of 1999 or 2000 -- but in 2002, when we think he should've known better (see Cool Hand Vik).

In his own defense, Grover points out the many solid calls he's made, including a "sell" on Winstar prior to its bankruptcy in 2001, a stance other analysts booed and hissed. And interestingly, Level 3 and Qwest stocks have actually perked up in recent months. Will next year's Follies include "Light Reading on Grover?"

No. 2: Strategis on telecom
On February 25, 2002, The Strategis Group had this to say about a survey it conducted on the state of the U.S. telecom market: "In one of the strongest signs of a turnaround revealed in the new survey, 70% of respondents reported that their organization's sales are expected to rise in the coming six months. This dovetails with results showing a rise in perceived demand for products and services across all industry sectors." 'Nuff said.

No. 1: Jack B. Grubman on telecom
The former Salomon Smith Barney analyst made $20 million in salary and bonuses while reporting bullishly on AT&T Corp. (NYSE: T), Global Crossing Holdings Ltd., Level 3 Communications, WinStar Communications Inc., WorldCom Inc. (OTC: WCOEQ), and other carriers. When his reports failed to tally with the reality of the telecom downturn, stockholders cried that he'd misled them on purpose, allegedly to sustain his firm's financial relationships with the subjects of his reports. Grubman is now the target of over 45 separate complaints filed with state and local regulatory agencies, the Securities and Exchange Commission (SEC), and the NASD, the association of broker-members that serves as the regulatory arm of the Nasdaq market (see Grubman Gets Some New Suits, WorldCom Restatements Top $9B, Williams Shareholders Sue SSB, AT&T Shareholders Sue Salomon, Salomon, Grubman Sued Over Level 3, etc.).

— Mary Jander, Senior Editor, and staff of Light Reading

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nemo
nemo
12/4/2012 | 9:07:30 PM
re: 2002 Top Ten: Forecasting Follies
I almost missed this tidbit of news. Salomon Smith Barney carefully buried it by arranging for its release late in the evening on the Friday before Christmas. The headline seems to imply that justice has been served: "Analyst Grubman to Pay $15 Million Fine".

http://news.yahoo.com/news?tmp... _nm/financial_grubman_dc

The really interesting news is buried even more carefully. Scroll down and you can read:

"Grubman left Salomon with a forgiven $19 million loan, $12 million of cashed stock options and $1.2 million in payments spread over 18 months."

Do the math: 19 + 12 + 1.2 - 15 = $17.2 million in profit, $15 million in punitive fines. His profits exceed his punishment. This does not include his salary from previous years, which was reported to be in the $20 million per year range.

The second largest telecommunications company in America has become the largest bankruptcy case in world history, and we are still being deceived.

Even when the crooks are caught, we don't punish them. We don't even make them pay back their $19 million dollar loans. Heck, we don't even fine them as much money as we "forgive" them.

When I went Christmas shopping two weeks ago, I used my credit card with much greater frequency than usual. I used my card only five times in November. I used it about half a dozen times in the space of two hours as I went down the line of stores in the mall, checking items off from the list my family made for Santa.

I stopped at the supermarket on the way back home. When I was in the checkout line, my credit card was denied - I had to pay with a different credit card. A telephone message was waiting for me from the credit card company. I had to explain each charge and convince them that my card had not been stolen.

Why does our financial system monitor an ordinary person buying several hundred dollars of Christmas presents more closely than it watches a Wall Street analyst who collects tens of millions of dollars per year?

And why do I have to pay my credit card bill for Christmas presents when Jack Grubman doesn't have to pay back a $19 million loan?
solver
solver
12/4/2012 | 9:07:26 PM
re: 2002 Top Ten: Forecasting Follies
Nemo said:
"And why do I have to pay my credit card bill for Christmas presents when Jack Grubman doesn't have to pay back a $19 million loan?"


Think long, think hard, and when you finally figure it out, you'll probably want to move to a lonely shack in Montana send out little "packages" to corporate executives.
solver
solver
12/4/2012 | 9:07:25 PM
re: 2002 Top Ten: Forecasting Follies
Nemo said:
"And why do I have to pay my credit card bill for Christmas presents when Jack Grubman doesn't have to pay back a $19 million loan?"


Think long, think hard, and when you finally figure it out, you'll probably want to move to a lonely shack in Montana, and send out little "packages" to corporate executives.
willywilson
willywilson
12/4/2012 | 9:07:24 PM
re: 2002 Top Ten: Forecasting Follies
No. 8: Merrill Lynch and others on free-space optics

Free-space optics (FSO), a wireless technology that uses lasers to connect buildings to fiber at high data rates, was the basis of big reports and forecasts from several analysts up until mid 2002. At that point, it was clear the market opportunity for FSO had gone down the drain with many CLECs, which were supposed to be the key buyers. Among the bullish were IGI Group Inc., Merrill Lynch & Co. Inc., and The Strategis Group. GǣAs an analyst, I take some of the blame for this," admitted IGI senior analyst Tony Carmona. "But sometimes we all get caught up in what looks like really cool technology. But IGve come to realize that a lot of this stuff is baloney. Carriers just arenGt buying it.Gǥ

-------

Something went unmentioned here. Merrill was a major venture investor in FSO, including Terabeam, one of the emptier hype jobs of all time. When Merrill's analysts were pounding the drum for this stuff, they were doing so with deep conflicts of interest.

How far did the hype go? In the week after Sept. 11th, Merrill went so far as to team up with Terabeam to announce to the world that Terabeam had gotten its internet connections up and running by shooting laser beams across the Hudson. Who knows, maybe it was true. Maybe pigs will fly.

grapsfan
grapsfan
12/4/2012 | 9:07:18 PM
re: 2002 Top Ten: Forecasting Follies
Nice to see that LR called out RHK's Larry Goldman (their lead OSS analyst) and the rest of their crew for obviously having learned NOTHING. Their equipment analysts were the last ones to change their growth curves from exponential to flat over the next five years...and they're missing the boat there too. By 2004-2005, there will be slight growth, IMO in the 4-6% range.

Now, despite most of the CLECs (the only people buying greenfield OSS applications) dropping by the wayside, or limping along on what they have, RHK says that OSS growth will continue along. Really? Who's buying? In North America, the RBOCs have Telcordia, which is expensive but not that expensive. Sprint, WCom, and AT&T all have their own billing & operations systems. Costs are incremental, not greenfield. I don't know Europe or Asia nearly as well, but I'll bet the big carriers & competitors are in the same hold-or-fold model as the U.S. So WTF was Goldman thinking?

LR, I don't agree with your whole list (see my next post), but I love this nomination.
grapsfan
grapsfan
12/4/2012 | 9:07:17 PM
re: 2002 Top Ten: Forecasting Follies
Now, for the nomination that I don't understand....

I don't think that Ciena nor Tellabs have switched a majority of their focus to Europe, by any stretch of the imagination. It's not like either of these companies are going out of their way to be Alcatel or Marconi. Especially in the case of Tellabs, which was almost purely a N.A. provider for most of its life, EMEA & AsiaPac was an afterthought. The rest-of-world may not be booming, but it's still over half of the world's CapEx. It's a good market to go for if you're getting there without breaking the bank and/or starting from scratch (and both companies already have products for that market).

BTW, every analyst mentioned in the quoted Tellabs "follow this link to read more" article thought this was the right move. That was 3 1/2 months ago. LR, if Steve Levy was this far off three months ago, can we expect not to see him used as a source for quotes & information anymore? After all, he must be a friggin' moron, right, for missing the boat so terribly only 108 days ago.

And the Ciena article was 99% about their push for RBOCs...almost nothing at all to do with the international market. If they made such a huge focus change that they deserved to be put on the Follies list, couldn't you have found an article that actually talked about it?

So, LR, what's the dilly? Can this article be nominated for one of the early follies for 2003?
Mary Jander
Mary Jander
12/4/2012 | 9:07:13 PM
re: 2002 Top Ten: Forecasting Follies
We missed one:

http://www.lightreading.com/do...

Back in January 2002, Electronicast predicted a 57.8% INCREASE in AWG sales this year
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