A Bleak Future for Telecom

26 Comments

The future of the telecom industry is looking rather bleak these days. The news out this week alone is enough to paint a particularly stark picture:

  • Alcatel-Lucent (s ALU) is cutting jobs, which might not be enough. As one Wall Street analyst quipped, pruning isn’t enough when you need a hacksaw.
  • Nortel (s NT) is teetering on the verge of bankruptcy.
  • Ciena (S CIEN) recently informed investors of a slow 2009 because its customers, among them AT&T, are holding on to their cash

Of course, we’ve been talking about this for some time already (With AT&T Job Cuts, Telco Recession is Official;Trouble Returns to the Land of Telecom; Bad Times Ahead for Broadband). Essentially the credit crunch is preventing phone companies from borrowing money with which to spend on capital expenditures, such as upgrading their networks. Instead they have to focus on paying off debt.

Avian Securities in a recent research note pointed out that their sources were seeing delays of 6-9 months in spending on projects including “IPTV and next-generation build outs at AT&T (s T), Verizon (s VZ), and BT (s bt).” Of course, the credit crunch has also been a problem for equipment suppliers, which send their gear to big-spending telecom giants such as Vodafone (s vod) and France Telecom (s fte).

The problems are extending to handset makers, too, as we have seen in the slowing sales at companies like Nokia (s NOK). Handset manufacturers will suffer from lower demand in high-end devices and extended replacement cycles, even despite growth in emerging markets, according to research group Wireless Intelligence.

26 Comments

Jason

Also, I just want to add to the comments about ALU – they have the largest IMS deployments out there, and are thigh deep in the WiMax… They are in a very good position..for a crocodile type dinosaur.

Jason

Om…I disagree with your assessment that telecom is BLEAK. Seriously, what does telecom even mean anymore? Therein lies the issue at hand, ATT is cutting legacy jobs and bloat, it probably needed to shed since the 80s. ALU is also cutting its legacy jobs, for products that dont make sense anymore. Nortel made the mistake of trying to leverage its legacy equipment for far too long, I could have called it 10 years ago when the first softswitches started being deployed. The CS2K is a joke! So where innovation has stifled, its bleak, but we are innovating in telecom. ATT and ALU are both adding jobs where they are innovating.

Telecom is not voice in a can anymore. Telecom the word might be headed for dead, maybe we should call it UltraCommunications – or UltraCom – many of us (big and small companies alike) are working to merge and seamlessly manage all the different ways people communicate through the various networks that are available to us. We also dont just communicate with other people anymore, we communicate with applications also!

mjgraves

Those who offer traditional services will surely suffer as the value of those services is in decline, and the subscriber numbers are dropping. Bye bye land lines, and the profits they provided.

What have these companies done to provide innovative new services? Most wouldn’t offer anything that undercut their traditional revenue streams. So they did effectively nothing. Catch 22.

The risk averse are ultimately rewarded appropriately.

Screen Sleuth

David H.: Exactly. New ideas will actually be heard now, because large companies can’t drown them out by buying them over or saturating venues with advertising, like they’re used to doing. It could be one of most innovative times in history for tech and ideas, potentially.

David H. Deans

An unprecedented opportunity. While the vast majority of legacy companies will be in a panic, given their inability to innovate (or merely keep the lights on), this is a wonderful time for meaningful creativity.

Ideas that don’t require a lot of capital can be brought to market with a level playing field, and minimal noise from usual competitors. I say celebrate the meltdown. Bring on the rebirth. Finally, something different and exciting.

Jonathan Katz

I would what will happen to the telecom industry once the FCC rules on federally subsidized broadband. Will more government control of the infrastructure develop result in more investment in the industry, or will it be bogged down in bureaucracy and broadband bridges to nowhere????

Gadget Sleuth

A.B. Dada actually has the right idea, which is weird for me. Companies have been spending stupidly for years, and now they’re paying the price (i’d say the same for the Ford/GM/Chrysler situation). Let natural market forces filter out the poorly run businesses and let the strong business people stay around. The way its always been in the end throughout history really.

Parkite

Alcatel-Lucent and Nortel are dinosaurs that have no one to blame but themselves. They are out of touch and unresponsive to their customers. They are like the GM and Chrysler of telco equipment. Cisco is taking share left and right from both at the carrier and enterprise level. I don’t think either Alcatel-Lucent or Nortel is a good proxy for the telco industry.

John

Alcawho? How is it that Alcatel-Lucent have even lasted this long. I am surprised they have lasted this long… Not a single customer of mine has mentioned them in the last half-dozen years…

Telco Aware

The Telecom industry had begun to pick up in the last couple of years from the meltdown earlier this decade. There were three factors that drove the resurgence. Devices with a new user experience – iPhone and Blackberries. Secondly, easing the overcapacity glut that had formed in the infrastructure and finally growth in the emerging markets for both devices and infrastructure. Due to the economic slowdown, consumer spending has plumetted globally. Consequently carriers are gun-shy of making any big investments as raising capital is not easy at this stage. So most projects are stalling based on the economic revival and improvement in consumer spending. This trickles down all the way to the equipment vendors and component providers. Obviously the behemoths (Incidentally you missed Motorola) are under sever constraints to reorganize and realigin to survive. It is imminent that there is a bleak time ahead. Is it a bleak future is still debatable? If global consumer spending can be revived within the next six months, the industry will pick up within the next year, else the malaise will continue. However, dont single out Telecom – apply this to every industry out there and mention which one is immune to these recessionary factors. The only solace is that Deflation, which will hit other industries hard may only have a subdued effect on Telecom

A.B. Dada

I’m excited about this so-called “credit crunch,” even though one of my businesses is theoretically in the telco field.

Easy credit means malinvestment and over-expansion. When my customers spend too much money because of easy credit, it causes my competitors to expand to meet the false demand. This makes me have to work EXTRA hard to try to analyze where my industry is going in 1-5 years.

When the dotcom boom happened, I stepped back. We prioritized our business spending as capital SAVING, not investment. When my competitors went bankrupt, we had cash assets to buy their hard assets for far less than we’d imagined.

During this past boom, we did the same. We saved. Now, we can pick up prime assets, including employees, at a discount. Again, it is ridiculously low interest rates that destroy jobs, that destroy capital, that destroy businesses and lives.

So this bust is a huge opportunity for those with money, and those who understand business efficiency, to recapitalize by buying cheap assets, businesses, and infrastructure. That means good things ahead for the industry: if you’re good at your job, if you’re willing to learn, if you saved instead of spent and can handle a slight pay cut for a short time, etc.

This is a good thing. Let the overspenders go away. Let us efficient and smart business owners prosper, as once was the case.

anonymous

om, i suppose avian securites is also suggesting that people invest in pigeons.

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