The Bangkok Post
November 6, 2002
By Geoff Long
Lately I've been thinking quite a lot about the plight of telecom equipment vendors, particularly the big ones like Alcatel, Lucent, Ericsson, Motorola Nortel, Siemens and so on. It was the best of times, it was the worst of times certainly sums up their situation in the past three years, and obviously they're now having the worst of times _ probably worse than all of the rest of the technology industry.
Just take Nortel and Lucent as examples _ there was talk that if their situation didn't improve they might be de-listed from the main stock exchanges in the US. How could these companies sink so low, both valued at under $1 per share, which is next to nothing? Lucent has shed half its workforce and it's still laying off. The rest of them aren't faring too much better. So is there any hope that things will improve?
Actually, not much. In fact, I believe that not all of them will survive, with some sort of rationalisation and selling off of business units likely. I think there's probably two key reasons that this will happen: the changing nature of the technology and the changing nature of the competition.
Let's take the technology first.
No matter how much the traditional vendors boast of their Internet capabilities, most of these companies' core products are still based on proprietary telecom gear that the whole industry is moving away from. Sure, it's still being bought and sold, but if you were building a new network today, voice or data, you wouldn't build it based on the circuit-switched networks of old.
I think this was summed up best by Intel CEO Craig Barrett on his visit to Bangkok a few months back. He spoke of the telecommunications sector moving to standard building blocks, much like the PC industry did years ago. However, the telecom sector's transition will be more disruptive _ and we're certainly seeing that now. A lot of these so-called building blocks will be in the form of middleware software.
Many of the functions of the old telephone exchanges can now be done by software, and that software is not coming from the traditional vendors. It will come from innovative Internet firms and software vendors from the PC world that are used to this sort of model.
It's probably no surprise that both Microsoft and IBM are right now making major forays into the telecommunications space. At the forthcoming ITU Asia event in Hong Kong in December, probably the year's biggest telecom event, IBM is set to have one of the largest presences. It has a platform called the Service Provider Delivery Environment that provides the sort of middleware that will be used in the next generation of communication networks.
Microsoft already has significant telecom software out there including operating systems for mobile phones and PDAs, which we've mentioned in this column in the past. Its servers are also being installed by some of the big telecom operators in the mobile world. No matter what you think of Microsoft, there's no question that they'll be able to increase their presence and leverage from existing installations in corporate networks.
Then there's the whole world of voice over IP, where IP is the medium for not only voice calls but a whole range of value-added services. All of the building blocks for this are coming from the Internet world rather than the traditional telecom players. And while it's true there are few high-profile operators making money off such services, there are a number of significant players offering VoIP on a wholesale basis that are growing rapidly _ nearly every major operator on the planet makes use of them.
In the broadband space, too, we can see that alternative carriers and alternative technologies are making major inroads. Ethernet-based services to businesses and wireless LAN networks (again, based on Ethernet) are two that spring to mind. Yet when it comes to Ethernet, those traditional telecom vendors are going to find there's an enormous amount of competition out there that can do the gear well and do it cheaply.
So let's move on to the second reason why things are looking grim for some of the telecom players _ new competition.
As we've mentioned, the new technology brings in a bunch of new players who have been cutting their teeth in the Internet world for some time. But even in the traditional telecoms space there's a whole new crop of largely Asian players making a name for themselves.
Take mobile handsets, for example. I remember a time when Ericsson phones were quite hip _ not any longer. While Nokia is obviously still the benchmark, my seriously-hip teenage sources say that the brand to be seen with today is Samsung. But expect to see more competition coming from vendors in Japan, Taiwan and even China.
Samsung is also doing well in broadband infrastructure for its DSL networking gear, thanks to massive sales in its home market of South Korea. Another vendor doing well in its home market is Huawei, based in Shenzhen, China. It's one of the world's biggest suppliers of optical networking equipment but also has a full portfolio of products. It's even sold intelligent networking (IN) boxes and mobile switches here in Thailand.
China has many other homegrown players as well, such as Huawei rival ZTE. So while Asia remains a relatively bright spot for telecoms, the traditional vendors are going to be faced with competition not only from alternative technologies that have their own specialists, but a new breed of Asian manufacturer that is adept at taking a product and refining the manufacturing process to bring about cheaper goods.
This is an issue I've been thinking about for some time, but it just so happens that last week I got an email from a regular mailing list that basically said don't cry for the traditional telecom players. They were talking about the operators in the US, but it probably applies to vendors as well.
Basically the email pointed to an open letter sent from a bunch of influential Internet analysts and business people to the US Federal Communications Commission, which is conducting a hearing into the telecoms sector. In it, they argue that Internet technology is superceding telecom technology, and that this isn't such a bad thing.
The letter states: ``We hold that the primary cause of current telecom troubles is that Internet-based end-to-end data networking has subsumed (and will subsume) the value that was formerly embodied in other communications networks. This, in turn, is causing the immediate obsolescence of the vertically integrated, circuit-based telephony industry of 127 years vintage.''
It goes on to add: ``The telecom debacle is not a cyclical phenomenon. The telephone network's technological base, and the business model under which this old technology thrived, are obsolete. Recovery is not an option. We can only move forward; how far and how fast will be determined by our continued freedom to innovate. Let the United States learn by not duplicating the Japanese banking experience in the telecom arena.
``We need to see the current situation not as a disaster, but as a natural event; part of a revolution in productivity and human benefit as big as the agricultural and industrial revolutions.''
In other words, let the disruption continue. I'm not suggesting that all of the traditional telecom vendors won't recover _ some will come out stronger than others _ but even at $1 per share, I don't think I'll be rushing out to buy stock either.
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Date last modified: 6 November 2002