The Collapse of the Telco

• The markets have lost faith completely in the network service-provider space; corruption, fraud, the massive amount of debt, bankruptcies and inept business plans have dragged down all sectors,IXCs, incumbents, mobile operators, ISP networks and cable TV.
• The vendors that have traditionally provided the telecom gear have been savaged because the big telcos have cut back since mobile has hit a wall and as these vendors' "new" IP and optical business units have been devastated with the collapse of the CLECs.
• The computer and IP vendors, while showing signs of severe pain, have had two worlds to sell into: carriers and enterprises. While buying patterns at both are down,and down substantially,the markets expect these vendors to benefit if and when spending resumes.
• Looking Ahead
  We can draw two conclusions from this:
• First, the future of telecom vendors is limited. We expect several to be taken over or dissolve (break into smaller entities as Lucent/Avaya/Agere did). While it is hard to decide which ones may exit the market, it is likely that at least one major telecom vendor will be taken over by one of the major computer/IP vendors.
• Second, that dynamic sets up a major conflict in networking. The major carriers left standing may very well be those most likely to have business plans, networking plans and purchasing strategies that conflict with the computer/IP industry. The computer industry's imperatives helped wreck many smaller carriers with the bunk that came from those vendors about Moore's Law in networks, rapid expansion, nonstandardized approaches and so on. The computer industry's network experience is the LAN, and its approach to carriers is the extension of the LAN and the mentality that drives the LAN. The big telcos haven't bought equipment or built networks that way,and they won't. Hence, there will be battles about standards, architectures and core technology, pricing models for services, depreciation schedules, the time frame for network evolution, and just about everything else.
• The major vendors have been in a long-term decline, led by such once-high-flyers as Nortel, EMC and Nokia. The collapse of WorldCom and Qwest are the most recent and glaring examples of the problems in the carrier sector. With carrier cuts in capital expenditures, enterprise reductions in IT spending and deep price cuts offered by vendors, the vendor community is in deep disarray. Though some are still strong, such as Microsoft, others are on life support, including Nortel and Marconi.

• Nine vendors have now lost more than 90 percent of their market cap from their peaks: ADC Telecommunications, Alcatel, EMC, Ericsson, Juniper, Lucent, Marconi, Nortel and Sun Microsystems.
• Price/earnings ratios have likewise fallen. The group of traditional telecom vendors (telco, wireless) includes ADC, Alcatel, Ericsson, Lucent, Marconi, Nokia, Nortel and Siemens. Of these, only Alcatel and Nokia have a current P/E ratio; the others have had write-offs and negative income, thus no earnings. Alcatel's long-term debt has been downgraded to one cut above junk, and Nokia's growth has stalled.
• Within the IP and computer-industry group,vendors with the "technology of the future",P/E ratios have likewise
• fallen, but, so far, not as drastically as for telecom vendors. Cisco's is down from 217.5 to 52.5; Microsoft dropped from 77.8 to 34.1; Juniper has reentered the atmosphere, falling from an untenable 764 to a mere 49.8. Only EMC and Sun had no earnings in the second quarter.
• The fall of WorldCom and Qwest came on top of bankruptcies from almost a dozen U.S. carriers and many more from European and global carriers. Included in this larger list are Energis, FLAG, KPNQwest, NTL, 360networks and others. The remaining carriers, largely incumbents, are substantially weaker, with the U.S. regional Bell operating companies, for now, the strongest of all incumbents. Deutsche Telekom, France Telecom, KPN, NTT and Swisscom are resistant to competition and so are slow to modernize. With competition collapsing in areas including local enterprise metro networks, the DSL sector and long-distance voice, the construction budgets of the incumbents would shrink anyway; now with their own market caps declining, incumbents are even more loath to spend. For that reason, it's the wise VAR who brands correctly, who knows the market and who knows where to call the shots.
• Allan Tumolillo ([email protected]) is COO at Probe Research, a market research firm for telecommunications and Internet-services companies worldwide.