If you are one of the residents of North Eastern United States, you can already feel the slight nip in the air. The anticipation of a mother of all battles, i.e. Boston Sox versus New York Yankees, is a sign of what’s next: winter. However, if you are a telecom guy, you know things have been downright chilly for past few years. Sure there have been some sunshine, but that doesn’t mean its spring time yet. When I recently chatted with Juniper Networks CEO Scott Kriens about the state of affairs at his company, he cryptically added, “it’s sunny here in a partly cloudy industry.”
Never before has this been more true than today, especially on the heels of another disastrous bit of news from Nortel Networks. Like the boy who cried wolf, Nortel has been saying all is good and things have been cleaned up and now it will be business as usual. Well that’s not the case, and today the company announced that it is going to have lower than expected third quarter sales, and the numbers might actually be lower than the second quarter 2004. Wobbly accounting might be a Nortel problem, but slower than expected sales are the harsh reality of telecom business.
As Mark Evans points out in his aptly titled post, Telecom’s Tough Times “things are are extremely tough out there for most suppliers.” He points that like Nortel, Ciena is having problems as well . Connecting the dots, Evans adds that Celestica’s woes – third-quarter revenue will be $200-million to $205-million below expectations.
Celestica’s customers include Cisco, Lucent and HP – making it an industry bellweather of sorts. Even sales in the much-hyped Internet telephony market have been less than impressive. According to consulting firm Dell’Oro, second-quarter sales of equipment such as softswitches and media gateways climbed just 3% from the first quarter. So what’s happening out there? It appears many carriers continue have continued to adopt a cautious approach to spending. At the same time, prices are under attack as low-cost suppliers such as China’s Huawei battle for market share. More and more, the telecom equipment market looks like a sector in dire need of consolidation. Perhaps it won’t be on the scale of Cisco buying Nortel, but there are too many players fighting for a shrinking piece of the pie.
As Dan points out in his well worded op-ed, The End of Telecom,
“The telephone incumbents find themselves in a bind not unlike the railroads with the arrival of the automobile or the mainframe with the arrival of minicomputers/PC’s. The much noted convergence of data and voice networks really amounts to a hostile takeover of communication by the information technology sector. The Internet did not get invented to displace the PSTN, but continuous improvement makes this outcome inevitable. “
In any of those scenarios, the industry suppliers were the worst hit, and so were the profits. In my own piece I have argued that we are still in the middle of a death spiral of telecom, and new technologies like VoIP are only going to accelerate the race to the bottom.