State of communications industry: fear, uncertainty and doubt

During the past several months, I have been called on to be a “notable quotable” on the state of the communications industry. It seems that in the public media’s opinion, customer negativism abounds, and behind every vendor quarterly announcement lurks an economic disaster. We live in an age in which perception is reality, and right now, the communications industry is perceived to be in an ever-decreasing spiral of economic decline. The reality is just the opposite.

The first issue always is the dot-com implosion and its impact on the Internet. The dot-com problem is associated with business-to-consumer usage and the failure of the business-to-consumer companies to achieve profitability. Too much venture capital was placed into “if we build it, they will come” companies. Now those investors are seeing the effects of flawed business models that used expensive media advertising to entice potential customers into a new buying experience, but offered little more than a way for people to do comparative shopping before going to a physical store to buy a service or a product.

Venture capital money is now directed almost exclusively to business-to-business, corporate-oriented dot-com investments. This changeover to Web-based business processes for large and small corporations is now a global phenomenon, not just a U.S. innovation. Increased productivity and cost savings are economic factors that are driving business-to-business dot-com financial success, not the perceived consumer experience as in the business-to-consumer world.

The second issue is the downfall of the competitive local exchange carriers (CLECs) and the entire state of the communications service provider industry. If a few rotten apples could spoil the entire barrel, then that describes the CLEC perception problem. The pure data CLEC has a problem if its business model focused on Tier 1 cities with heavy competition, and if it used price as a way of attracting the consumer DSL buyer. The costs of consumer marketing, installation and support destroyed profit margins. The consumer only wanted connectivity, not additional services; therefore, value-added revenue sources became nonexistent for the data CLECs.

However, not all CLECs are focused solely on Tier 1 cities and consumers. There are well-funded and economically sound CLECs that have business plans built around a multiservice structure (voice, data and even video), are focused on business users and have only the local exchange carrier (LEC) as a competitor in their target geography.

This is a winning strategy for economic success. As an example, a voice CLEC sells DSL services that combine voice and data access using a single DSL line instead of a LEC access line for each telephone, fax and data connection. There are immediate cost savings to the buyer and quick profitability for the seller. Value-added services such as universal mailboxes and IP multiple domain names/e-mail addresses are also recurring revenue/profit generators.

The third issue is the reduction in capital expenditures by the communications service providers. This reduced spending portends doom for vendors that sell to service providers. Again, negativism by the media vs. reality creates fear, uncertainty and doubt. The reduction in long-distance, per-minute costs is causing grief to the likes of WorldCom and AT&T, but not to the regional Bell operating companies and international or next-generation carriers. Vendors of Class 4 and 5 circuit switches have an income problem, but not IP router, ATM switch or optical transport equipment vendors. Remember that Internet is doubling each quarter and therefore must be accommodated by capacity-growth capital expenditures within all service providers.

The situation is more critical outside the U.S. Competition, in addition to capacity growth, is driving telecom capital expenditures in Europe and Asia. If the post, telegraph and telephone administrations do not spend to build new optical/IP networks, their competition in a deregulated environment will destroy them in the marketplace. Communications equipment vendor forecasts for 2001 have verified this fact at every analyst conference I have attended in the past quarter.

The state of the communications industry is healthy and growing. For some people, change is difficult to understand when it is occurring at Internet speed rather than calendar speed. Technology is even harder to comprehend when it is simultaneously shifting from circuits to packets to photons. Least understood are operations changes within service providers and their equipment vendors to Web-based computer systems to maximize productivity and profits, and to “function globally yet act locally.”

Change is healthy and necessary for industry growth, whereas fear, uncertainty and doubt are panic responses to change. What clears the air is a set of business constants that we all must take into consideration every business day, even in the Internet Age – revenue, profit margin and net profit.

Dzubeck is president of Communications Network Architects, an industry analysis firm in Washington.

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