The telecommunication industry is cyclical and it operates like a roller coaster. The TIA has announced that it will be seeing the broadband equipment market shrink 36% over the next 3 years.
During the 2001 telecom/Internet meltdown we saw carriers failing and the ones that did not shut their doors started spending less. As late as mid-2002, carriers were refusing to ay they were going to spend less Cap Ex. As I recall, then suddenly in mid to late 2002, all of the biggest carriers in the world announced that their upcoming 2003 Cap Ex budgets were being slashed and they all showed less Cap Ex spending.
Soon thereafter, many of the small to big telecom vendors suddenly announced drops in projected revenue.
In June 2001, I made two short appearances on CNN. I was working for a very large accounting firm. I had been one of the practice leaders in the firm and was asked by the firm to speak on CNN about the recession. What I had basically said was that the telecom industry could be economically described like a roller coaster. At the head of the roller coaster are the consumers in one car then followed by the carriers then followed by the vendors. As the consumers enter the valley of the roller coaster, you can liken that to entering a recession. The consumer ends up pulling the carriers and vendors along with them. The consumer will end up exiting the recession first, typically exemplified by jobs growth. With job growth consumers have cash. Telecom will be among the last basic necessities the consumer will spend cash on – food and shelter will be among the first necessities for consumers to spend cash on. It’s a cycle. This is why telecom vendors should expect the market to shrink over the next 3 years. By the time the vendors have felt the consumer exiting the recession it will be 3 years before the trickle down effect of growth is felt by the vendors. This does not mean the recession will last 3 years – people need to understand that recessions do not end in an instant. In 2001, I had said that the telecom/Internet economy would exit the recession by mid-2004 at the latest. It did. Vendors started seeing new business at about that time; focusing on media on the Internet and mobile media.
We are seeing the same thing today.
The stimulus program will have an impact on the telecom economy but it will not stop the slide down into the valley. The broadband stimulus money will lessen the adverse impact on the industry.
The broadband stimulus money will be focused on rural and underserved markets. Basically the broadband stimulus money will be directed towards markets that need broadband access but are not necessarily high revenue generating markets for carriers. So the stimulus money will generate jobs but not high revenues for the carriers.
As for whether or not the drop off in spending on fiber-to-the-premises (FTTP) is causing the drop in the broadband market I would say it is a factor. However, FTTP cannot be found in every single Verizon market or for that matter in every community. Verizon’s FTTP spending is based on their market deployment plans. I believe the drop off is based on the current economic environment. Current spending by the carriers has to be completed this year and early next year since you cannot leave half installed systems. Once these systems have been completed, Verizon needs to sit and watch what happens in the marketplace, hence, no more new spending. Verizon has planted the seeds for growth and now needs to sit and watch what happens.
However, what needs to be discussed is: what new spending is in the works for 2011? Reduction in cap ex plans for this year (2009) and next year (2010) are typically reductions in plans already laid out by the carrier. The year 2011 has not been finalized by any carriers.
However, as time passes and we emerge from the recession consumers w