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IP: more on Telecom Downturn
From: David Farber <dave () farber net>
Date: Mon, 24 Dec 2001 08:38:42 -0500
Date: Mon, 24 Dec 2001 07:24:29 +0000 From: John Nugent <jnugent () texoma net> X-Mailer: Mozilla 4.7 [en]C-CCK-MCD NSCPCD47 (Win98; I) X-Accept-Language: en To: farber () cis upenn edu Subject: Telecom Downturn Dear Dr. Farber: I received an email from the University of Texas at Dallas suggesting we contribute to your site on out thoughts regarding the downturn in the telecom sector. To this end I have attached a letter I wrote that was published in the DFW Tech Biz newspaper regarding this subject and the mitigation or satiation of several key drivers that caused the downturn. Best regards, John Nugent
Rather than send a Word doc to people I have attached a text only . Yell if you want the Word one with charts
The Hilliard Consulting Group, Inc. 2469 CR 855Phone (817) 946-4110 McKinney, TX 75071 Fax (972) 547-4264
John H. Nugent, CEO Email: jnugent () texoma net Karen Britton Nielsen, Editor (kbnielsen () dfwtechbiz com) DFW TechBiz Suite 520 10670 N. Central Expressway Dallas, TX 75231RE: Letter to the Editor concerning August 6-12, 2001 article, "Local Researcher
Forecasts End of Telecom Downturn" by Scott Boyter, page 5. Dear Editor: The recent "downturn" in the telecom market was predictable and should have been seen coming. An examination of the major drivers that created an overriding demand for telecommunication equipment either became satiated or was largely mitigated by other factors. For instance, from 1996 to 2000 there were five primary market drivers that pushed telecom equipment capital expenditures rates to approximately a 26% cumulative annual growth rate (CAGR) for this period. They are: Table 1: Telecom Market Drivers 1996- 2000 Period Driver Demand Status Reason 1996-1999 Y2K Equipment replacement Satisfied Y2K Passed 1996-2000 Telecom Act of 1996 Mostly Mitigated Many new entrants have failed 1997-present Wireless Digital One Rate Plans Mostly Satisfied Largest demand met growing from approximately 30 million to 100 + million users growth slowing significantly 1995- Present Internet Usage Mostly satisfied Largest demand met, growth slowing. Growth will accelerate when broadband is more universally available 1997-Present Circuit to Packet Continuous Transition continues but was slowed by CLEC failure debacle The Drivers: Y2K: Here we see that many entities preferred replacing non-certified Y2K equipment with equipment that was. Deregulation -Telecom Act of 1996: In 1996 Congress enacted The Telecommunications Act of 1996. This act created a more deregulated environment that encouraged many new entities to enter the service provider market. Many of these entities, mostly Competitive Local Exchange Carriers(CLECs), raised significant levels of debt and equity funding that they used to buy infrastructure. Unfortunately, most had flawed business cases resulting in significant financial losses and business failures. In fact in 2000 alone, 225
CLECs ceased to exist.Wireless: During this same time, a brilliant strategist, Dan Hesse, President of
AT&T Wireless at the time and now head of Terabeam, determined that what the wireless user wanted was a simple plan, for a flat rate with no roaming, longdistance, or time of day complications for a fixed number of minutes. Hesse hit
the nail on the head and wireless use exploded in the US as not only AT&T, but also most other wireless service providers, quickly jumped on the bandwagon and offered similar plans and subsidized phone purchases. This drove wirelessutilization of not only the need for CPE (customer premise equipment) equipment
(handsets, accessories), but also the networks to carry the rapidly expandinglevels of traffic. Today, wireless growth has slowed significantly and probably will
not accelerate until the introduction of GPS enabled devices and broadband capabilities.Internet: In the US, Internet usage started growing in 1995 and continues today. But lately, growth has slowed, and it too will likely not accelerate again until
broadband connectivity (the FCC defines broadband as 200 KBPS in both directions) is more universally available. Circuit to Packet: The transition from a circuit to a packet environment will continue, but slower than otherwise would have been the case had the CLEC failures not taken place. Hence, the main drivers that created a voracious demand for telecom equipment have been satiated or mitigated to a large degree. Moreover, the result of the enormous CLEC failures has flooded the marketplace with excess inventories of not used, or hardly used, equipment. This excess ofinventory will further clog up the equipment manufacturers product pipelines until the 3rd quarter of 2002 by our estimates. Even AT&T chose to buy slightly used
equipment when it purchased Northpoint's assets versus paying for new. Contrasting the 26% CAPEX (capital expenditure) CAGR for the 1996 2000 period, we see gross revenue CAGRs in the range of 12-16% overall for the industry. Hence, we experienced a period where the CAPEX CAGR was literally twice that of gross revenue growth. This condition of course could not have continued unabated, and should have made all of us examine the consequences of such a divergence in growth rates early on. Graphically, this is easy to see: The Telecommunications Market A Return to Normalcy CAPEX 30% 26% CAPEX CAGR 25% The Growth Rate Gap 20% 12-16% Gross Revenue CAGR 15%10% 8 to 12% CAPEX CAGR
1996 1997 1998 1999 2000 2001 YEARS Clearly, once inventories begin to clear and cost effective, easy to use broadband is available to a larger segment of the population, growth in the telecom CAPEX will accelerate again.Very truly yours,
John H. NugentDr. John H. Nugent, CPA
Author's Brief Bio: Dr. Nugent is CEO of the Hilliard Consulting Group, Inc. and
is a full-time assistant professor in the Graduate School of Management, University of Dallas where he teaches in the Telecommunications, Strategy, and Entrepreneurship areas. Previously, Dr. Nugent served as president and a Board of Director member of several AT&T subsidiaries where he led in the development of over 100 products. He may be reached at jn ugent () gsm udallas edu. For archives see: http://www.interesting-people.org/archives/interesting-people/
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