IP: more on Telecom Downturn

[David Farber <dave () farber net>]

> 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 855
Phone (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 75231

RE: 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, long
distance, 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 wireless
utilization of not only the need for CPE (customer premise equipment) 
equipment
(handsets, accessories), but also the networks to carry the rapidly expanding
levels 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 of
inventory 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. Nugent

                                                                  Dr. 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.

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