Nov, 2001 : Shosteck Study Predicts Telecom Industry Turnaround

📅 November 19, 2001 - Today, with a few exceptions, the global telecommunications industry is wallowing in despair. But such despair is as unrealistic as was the expectation of easy fortune prior to the bursting of the speculative bubble, according to a new Shosteck Group (shosteck.com) study entitled Strategic Implications of the Telecoms Collapse: Unseen Profit Opportunities.

"Armageddon is not here," stated Dr. Herschel Shosteck, president & chairmanof Shosteck Group, an international telecommunications consultancy based inWheaton, Maryland. "Notwithstanding recession and terrorism, the future willcontinue to center on high technology and, especially, telecommunications."
The 150 page study analyzes when the telecoms industry will turn around andwhat it will take to move it forward. It concludes that sequential saleswill begin to climb in Q1, 2002.
"A global economic slowdown has taken hold but the situation will turnaround," states Jane Zweig, CEO of Shosteck Group. "However, this does notmean that things will go back to the way they were prior to the slowdown.Companies who were at the top prior to this slowdown may no longer be there.After the recovery, this opens opportunities for innovative companies whowill fill many of the gaps left by the majors. Additionally, the rules whichgoverned the market prior to the slowdown may no longer apply," shecontinued.
The study points out that despite the excess infrastructure spending of thepast two years, the increase in telecommunications subscribers and use -both landline and mobile - continues. These increases will force networkoperators to resume construction.
"Notwithstanding the over-investment of the past two years and the announcedplans of network operators to reduce investment, the sale oftelecommunications equipment has likely reached the depth of its recession,"stated Dr. Shosteck. "From the First Quarter of 2002, vendors oftelecommunications equipment can expect increasing revenues. This will beespecially the case for the wireless segments. Based on our analysis of sixcase study vendors, we anticipate that during 2002, industry sales willrecover by 4.5 percent to 11.2 percent above those of 2001. During 2003,they will expand to approximately ten percent above those of 2002."
The study provides an analysis of the impact of the events of Sept. 11 onthe telecommunications industry, concluding that the long-term effects willbe to add traffic to both landline and mobile networks. It points to, atleast, five outcomes in the mobile world. The most important of these,already taking place, is the stimulation of more subscribers to conventionalmobile services and the expansion and upgrades of private two-way radiothroughout the public safety realm. With the massive layoffs in theindustry, firms will face significant challenges in rebuilding. An oftenunrecognized outcome of the personnel slashing is the loss of "corporatememory." For corporations to downsize successfully, they must be sensitiveto this loss and the impact it will have long-term.
"In terms of engineering, losses of corporate memory include the painfullyacquired experience regarding which processes and methods work in real worldapplications and which don't," stated Ms. Zweig. "Within the wireless worldone of the greatest benefits of corporate memory centers on the recognitionof how long it takes for new radio technologies to mature - a period thattypically lasts for five years. In this regard, an experienced engineer maybe worth a dozen neophytes and successful companies will spend the moneynecessary to reinstate the needed competencies that they may haveinadvertently discarded," she continued.
"During 2001 mobile networks likely added the same number of subscribers asin 2000, and possibly more. Yet, sales of mobile equipment have declined,albeit not as much as sales of non-mobile equipment. This presents aparadox," said Dr. Shosteck. "How can mobile network operators servesubscribers who are increasing in numbers to the same extent or more thanthe year before, without purchasing an equal amount of equipment? Whilesubscribers and network traffic are increasing, operator investment innetwork capacity is not keeping pace. Under these circumstances, operatorsare quickly using up any slack in network capacity. This points to animpending and unavoidable capacity crisis," he continued.
The Shosteck Group concludes that during Q1 2002, new orders from mobileoperators may be "abrupt and substantial." However, firms all along thevalue chain have reduced their inventories to bare minimums. This isconstraining the extent to which vendors of mobile equipment can expandproduction. Should orders spurt, vendors may not have sufficient inventoriesto meet the demand. Those vendors that act now to secure a sufficient supplyof components will gain competitive advantage. The study points out that inlight of losses and negative cash flows, the major vendors no longer havethe money to support R&D projects of marginal commercial relevance. Vendorshave little option other than to focus R&D onto their redefined corecompetencies and within those core competencies, to direct their R&D towardprojects that have high and near term commercial relevance.
"This refocusing of major vendors onto core competencies is leaving a R&Dvoid. This is opening more opportunities for independent companies -start-ups - able to fill that void," said Ms. Zweig.
During 2000 and 2001, venture capital firms suffered enormous losses. Thisis leading to a new investment model - longer time frames for return oninvestment and "milestone based funding." This latter will require morecareful accounting from new ventures that centers on meeting explicittechnology and commercial milestones, by specific dates, or risk the loss ofcontinued funding. Previously, start-ups may have been required to meettechnology milestones. What is new is that they will now be required to meetcommercial milestones as well. "It is critical that start-ups continue to befunded. Without sufficient funding, they will die. Without the innovationsof start-ups, offerings of operators and vendors will be more limited. Endusers will find less value and spend less - to the detriment of themselves,the operators, and the major vendors of infrastructure," Ms. Zweig said.