Will 2003 see a telecom revival?

2003: Largely a repeat of 2002 – and potentially a bit worse.

Columns written this time of year often have one of three themes: a nostalgic look back – such as the 10 best things to happen in 2002 (unfortunately, the “best” events this year would be “worst” in a good year); wishful Santa-list dreaming – you know, the 10 services we’d like to see launched (realistically, we’re not even likely to get one of them in 2003); or a hopeful look forward.

We’re going to focus on the New Year’s resolutions that might turn the industry around and provide meaningful recovery. But while we hate to play Grinch, we believe 2003 largely is going to be a repeat of 2002 – and potentially a bit worse. Here’s why:

• Many start-ups will fail in 2003. We’ve said before that more than 95% of the telecom firms started in 1999 and 2000 will either shut down or be sold for less than the initial investments, and we still expect that to happen. Furthermore, many survivors will target the same small set of customers. If you add up everyone’s projected market shares within these segments, it totals 10,000% – and the last time we checked, only 100% of market share is available.

• Consolidation hasn’t happened yet. We hope it will in 2003, but it won’t be pretty. There still are too many competitors in virtually every segment of the industry, be it wireless, broadband, long haul or whatever. The trend is for these companies to successfully go through bankruptcy, leaving the competitive environment in its irrational and unsustainable state. The few mergers and acquisitions we’ve seen this year are tiny bets by big players at “fire sale” prices that seem to have almost no effect on the unhealthy market dynamics.

• A number of forces will make 2003 a very painful year for the regional Bell operating companies. The Bells have intensified their regulatory whining, especially over unbundled network element-platform pricing, and seem genuinely scared of WorldCom emerging from bankruptcy. But the real pain might come from more subtle areas. Wireless churn seems to be intensifying and is costly, and substitute data services are going to put tremendous price pressure on core RBOC data offerings. The emergence of freely accessible (or low-cost) Wi-Fi services will stress the high-cost 3G data rate model, and new technologies, such as the extended-reach Vivato antenna, can extend previously enterprise-oriented and short-range technologies from “hot spot” coverage to full metropolitan-area coverage – what we call “metrospots.”

• The telecom industry has surrendered the high-value, networked-entertainment opportunities to the traditional media and consumer industries. The movement of the PC domain into the entertainment center – which will be a major movement of 2003 – is going to cut into the potential revenue-generating services of the telephone companies by eliminating the middleman. Services such as MovieLink go straight to the customer – and the TV set – over a broadband connection. Competition will force bandwidth pricing toward cost, and without a middleman, the five major movie studios certainly have the low-cost position. After all, they don’t need to maintain a network.

  Of course, the year won’t be all bad news. We see data traffic continuing to grow – although pricing will continue to be under pressure. Budgets will be allocated to meet new strategic imperatives – although mostly by taking away from other budget areas to keep Wall Street happy (witness Verizon and its comments on capital spending for its national enterprise data backbone). Home networking to the entertainment center will become more mainstream – although outsiders such as Microsoft and consumer electronics players might capture much of the value. And RBOCs and other major carriers will have an incentive to provide some stability for their most important vendors – although they also will benefit by fostering new competition from Asian vendors.

And there will likely be a few true bright spots: Wireless metrospot products, enterprise security, voice over IP, XML processing equipment and any operational support system that will yield immediate cost-savings will likely enjoy true market success.

Not what we wanted for Christmas, but at least it’s not a lump of coal.