The telecom industry's recession is no secret. We have seen some of the largest players in the industry brought to the brink of bankruptcy. There had been numerous negative impacts on the telecommunications market since late 2000. Then came the attack on the US of September 11, 2001 - certainly one of the most traumatic events in the history of this country. There is no doubt that these attacks caused a significant paralysis of the US and world economies.

With the realization that we have actually gone down the slope of telecom recession, many ask: When will it be over and when will we get back to prosperity?

Causes of the Recession
There are many causes of the downturn, but the underlying factor has been an over-response to the growth of the Internet. There were also multiple adverse forces that hit the networking economy at about the same time.

First there was the general softening of the economy that started in late 2000 and continued to the end of 2001.

Then there was the failure of a number of the dot-coms that were pushed over the edge by the slowing economy. As the dot-coms went into trouble, the financial community (particularly the venture capital firms) withdrew from the telecommunications market.

In addition, the major networking suppliers (Cisco, Lucent, Nortel, etc.) were caught in a bind of having just increased capacity and production to meet the high demand that preceded the slowdown. A few major vendors were also in an over-inventory position due to their attempts to sell legacy equipment to a market that was demanding the latest technologies.

Finally, the killing stroke was the failure of almost all of the data competitive local exchange carriers (CLECs) at virtually the same time.

These were some of the general problems with the telecommunications economy. However, the proximate cause of the slowdown is simpler than any of these. It is just a case of over-exuberance on the part of the carriers and vendors in responding to the rapid growth of the Internet.

In reaction to the fantastic growth of the Internet in the last few years, carriers over-expanded their network capabilities, resulting in a large installed inventory. Vendors over-expanded their production capacity and over-produced, resulting in extensive shelf inventory, and many new entrants were brought into the telecommunications economy that would not have otherwise entered. All of this was in response to the near hysteria of the time regarding the growth of the Internet. Some normally credible sources suggested that the Internet was growing at a rate of 400 percent a year.

However, the truth was that the Internet was never expanding at more than 200 percent a year, and a growth rate of 100 percent a year seems to be a much more appropriate estimate for Internet growth.

The Good News: A New Boom
The good news is the inventories will be worked down. Also, the underpinning demand for high-speed services and other Internet services is still there.

After their recent experience, it is expected that the carriers will be much more cautious, so future xDSL line additions will likely be smaller. However, there will be a series of additions by various carriers, and those will likely be followed by other additions in only a few months.

These line additions will be reflected in all segments of the networks, resulting in what should be network-wide sustainable growth based on frequent small network additions.

If growth continues, and no other unforeseen shock occurs, the additions will become larger (for longer intervals) and this will result in a mini-boom about mid-2004. The new boom will be much smaller than the previous experience, but it should be sustainable. It will really be of the nature of many small growth spurts relatively close together.

Several factors will contribute to the continuation of this new prosperity:

• The carriers will be much more cautious to avoid over-expansion, and thus will keep network capacity and capabilities close to market drivers.
• The vendors may be somewhat less top-line driven and more consciousness of the bottom line, and thus will likely to be cautious as to sales policies.
• The vendors have written off a great deal of inventory. Any of this inventory that can now be sold (even at low prices) will give the vendors a start back toward profitability. Because these written off inventories are carried at near zero on the books, any sale will produce high profit margins.
• While the layoffs have been punishing to many individuals, they will result in leaner, more appropriately staffed companies.
• In addition, the sudden availability of experienced, talented personnel will give the small start-ups access to personnel that they did not have before. This could result in, at least selectively, more innovative developments from the surviving start-ups.

Timeline for the New Boom
What will the timeline be for this return to prosperity? We have predicted a demand cycle that will cause a new series of equipment orders impacting all areas of the network. take note that the network will not be monolithic, and that various parts of the network will improve at different speeds.

The answer appears to be that the next boom will likely be more of a "boomlet," and it will be realized in 2003. The reasons for this being more modest than previous recoveries are the severe impact the industry has suffered, and the lessons that impact taught.

The mad rush to achieve top-line results at any price will no longer be tolerated. This will be a much more orderly market, perhaps somewhat less innovative, but certainly much more soundly based.

Innovations that can offer operational savings, or real service advantages, will still be sought after, but there will be an air of much greater caution.

While this has been a long downturn, it should not be viewed as a completely bleak forecast. The data suggests that xDSL demand began to turn back up in the third quarter of 2001, and continued to accelerate through the first quarter of 2002. However, there still is an issue of catch-up for the slower than anticipated growth from the downturn and from the impacts of the 9-11 attacks.

Consolidations and Mergers
There are likely to be even more consolidations of vendors, particularly the smaller, but relatively successful ones. In these cases there will be an attempt to bring complementary product lines together to give the new company broader market coverage, and to provide a one-stop-shop for significant network areas. The recent Ciena/ONI merger is an example of this kind of activity.

In addition, it is likely that we will see a consolidation of a few of the largest vendors. These mergers will be largely desperation moves, trying to assure survival.

As the new boomlet starts, we are also likely to see a need for some of the largest vendors to fill out their product lines or bring them up to date to stay competitive. In some cases, they are likely to do this via acquisition of smaller vendors with the needed technology. These acquisitions will be in lieu of internally developing the technologies, which may not now be possible due to previous layoffs of needed personnel.

The long distance carriers are all possible acquisition targets due to their low stock prices. But there are several questions: Is there anybody able to buy them? Does anybody want them? And will the government allow the consolidation of substantial local service holdings with a national network?

Bell South stands as an anomaly in that they have not made a major acquisition. They could become a player in this atmosphere, or decide that they have thus far made a good decision and stay out of the fray. There are likely to be several financially engineered mergers and acquisitions. An example of this would be a company buying another company to take advantage of the purchased company's revenue stream. This type of activity could, for example, be important to meet loan covenants, or similar commitments, based on revenue.

New Business Drivers
The telcos are faced with a revenue substitution problem that will become more critical in this time frame. Their customers are converting from legacy services to IP and other similar new technology services. The new services cost less to implement and are priced correspondingly lower. The result is a negative impact on revenue with a concomitant need to invest in the new technologies, while still needing to earn on the old technology investments. The telcos need to recognize this as an inevitable future, and begin to realistically plan for it, both in terms of technology planning, and in terms of financial planning.

The carriers (and many customers) will turn a new focus of attention to network survival techniques, technologies, and designs. Much of this focus has been lost in recent times, with a rush toward the latest and greatest technology. The 9-11 attacks reminded us all of the value of network security.

Wireless technologies and the Internet both functioned extremely well in the face of the disaster. Both should continue to experience a relative boom situation in terms of disaster planning. UW