Continuing Weakness in Public Infrastructure Markets

Transcription

1 Research Brief Continuing Weakness in Public Infrastructure Markets Abstract: The markets for public infrastructure equipment will remain weak until 2004 because of scaled-back carrier capital spending, sporadic overcapacity, and uncertain regulatory and competitive initiatives. By Tim Smith Strategic Market Statements 2003 will be another difficult year for telecommunications infrastructure equipment markets; continued downward pressure on CAPEX plans will keep most equipment markets in negative growth. Next-generation network deployment will continue to be stagnant in 2003 as service providers concentrate on dragging the last bits of life from the infrastructure they already have before upgrading. Continued growth in traffic will consume spotty excess capacity; this, combined with two years of dramatic CAPEX reductions, will lead to sporadic service issues in 2003, setting the stage for additional investment in Revenue-generation from services based on technology investment will replace CAPEX reduction as the primary infrastructure planning issue for service providers. Multiservice switches will regain market appeal as a way for service providers to protect investments while moving toward next-generation capabilities. Service provider routers, optical transport and integrated access will continue to form the basis for additional services and next-generation infrastructure; as such, they will be the first markets to recover from the telecommunications slump. Support system investments will be critical to service providers efforts to optimize other investments; therefore, support system spending will prove more resilient than other areas and tend to moderate downturns in infrastructure spending. Publication Date: December 6, 2002

2 2 Continuing Weakness in Public Infrastructure Markets A Market in Turmoil The Bright Spots This year has seen one of the most dramatic reductions in spending for public infrastructure equipment in history. Truly the "irrational exuberance" of the late '90s has given way to "irrational pessimism" this year. The most dramatic swings in demand have happened in North America, in which the surge in growth/expansion was most pronounced. Other regions have been less exaggerated, but every region has seen slowing growth to some degree. Dramatic slowdowns in capital spending have had a devastating impact on most vendors of infrastructure technology. The environment is one in which only the strongest, most resilient companies with the most solid business strategy and channel partners will survive. Even the survival of large, traditionally strong companies such as Lucent Technologies and Nortel Networks is often questioned. Clearly, this has resulted in additional industry consolidation with many vendors going out of business (for example, Ennovate Networks, Advanced Switching Communications, Tachion and Jetstream) and several important acquisitions occurring (for example, Juniper acquiring Unisphere Networks). The following factors have contributed to this situation: Traffic growth that did not meet inflated revenue predictions/expectations Supply/demand imbalance (for example, excess bandwidth capacity and equipment inventory in some areas) The lack of creation of compelling services The failure of public policy in some markets (for example, the United States) Poor fundamental business plans of startup service providers General economic conditions Bright spots amid the gloom of the telecommunications environment are hard to find. The most encouraging aspect of the infrastructure scenario is the ongoing growth in traffic demand. Communications is continuing to grow in importance in the operation of enterprises (of all sizes) and in how we live our lives as individuals. We expect this trend to continue. This results in an expectation of continuing strong traffic growth. Gartner Dataquest forecasts show worldwide fixed telecommunications services revenue growth of 6.6 percent this year and 7.6 percent in Total traffic is growing at a significantly faster pace.

3 3 Ongoing Challenges Other bright spots include the following: Traffic from failed service providers will return to the networks of the more established players. This will help to consume sporadic excess capacity. Metro optical and Ethernet technology will benefit from service providers' need to reach high-value customers. These deployments will help to consume excess capacity in backbone transport. IP backbones must continue to grow to support growth in demand for basic and enhanced Internet and IP services such as , instant messaging, Web hosting and content distribution. Service opportunities, such as virtual private networks (VPNs), IP Centrex and unified messaging, must play an increasingly important role in decisions to invest in technology. Service providers are paying far too little attention to this dimension of technology deployment. The availability of "almost-new" equipment (remanufactured, surplus or both) as well as technology suppliers' aggressive discounts and costcutting mean that service providers will get more equipment for their capital expenditure (CAPEX). It is truly a buyer's market. Spending for systems support infrastructure by carriers looking to extract additional value from infrastructure investment appears stronger than in the general market. Two ongoing challenges must be faced: traffic growth does not lead to revenue/earnings growth and general economic conditions. Traffic Growth Does Not Lead to Revenue/Earnings Growth The key issue in the infrastructure scenario is that traffic growth is not translating directly to revenue and earnings growth. This will continue to be an inhibiting factor in the infrastructure development/growth scenario. This issue is particularly acute for data-oriented traffic. Data traffic accounts for at least half of the traffic carried on public networks, and the growth rate of data traffic far exceeds the growth rate of voice traffic. Voice services will still generate 67 percent of revenue this year. While it is true that this percentage is declining over time (it will be 59 percent in 2005), voice revenue in 2006 will still be 33 percent greater than data revenue, even though data traffic volume will have grown considerably larger than voice during the same period. As a result, we reach two separate but related conclusions. The first is that data services are not yet delivering revenue commensurate with their usage of the network. The second is that data services are not yet delivering revenue that is commensurate with their value. To illustrate this point, simply consider that one can get the equivalent of a college education by browsing the Internet for US$20 per month (this probably doesn't even cover the ISP's

4 4 Continuing Weakness in Public Infrastructure Markets cost for maintaining the subscriber). Not only is revenue performance not commensurate, data services are woefully underperforming as a source of revenue. This trend is exacerbated by the ongoing shift of voice traffic from traditional long-distance services to lower-revenue, lower-margin mobile and Voice over IP services, resulting in a dangerously unbalanced revenue situation. Unless this is addressed, funds will not be made availabletodeveloptheinfrastructuretocarrytheadditionaltraffic. General Economic Conditions General economic conditions are a contributing factor to the behavior of the infrastructure market. General economic conditions impact the infrastructure scenario in the following ways: The availability of capital to fund promising areas of technology The willingness of service providers to invest in service offerings with differing revenue streams The willingness of enterprises to move to different business models that emphasizecommunicationsasameanstogainmorebusinessandlower the cost of conducting business The outlook for the general economic climate is, at best, uncertain. The socalled economic recovery is tenuous, with a significant probability of a "double-dip." This outlook establishes a negative bias for investment in telecommunications infrastructure. In addition, the struggles of companies such as WorldCom, Global Crossing, Adelphia, AOL Time Warner and Qwest have further undermined consumer and investor confidence. Discontinuities Forecasts Another important fact to consider in the assessment of the infrastructure scenario is the discontinuity between traffic and infrastructure growth. As noted earlier, traffic continues to grow at a healthy pace. However, infrastructure investments (as evidenced by service provider CAPEX plans) have declined to a minimal level. Assuming that the revenuegeneration issue discussed above can and will be solved, the discontinuity between traffic growth and infrastructure investment cannot continue for long. Gartner Dataquest forecasts reflect this conclusion. Based on the trends and issues discussed, Gartner Dataquest has developed forecasts for the infrastructure market, as shown in Tables 1 and 2. Driven by the significant uncertainty that exists in the market, Table 3 provides a best, worst and most likely case scenario. Our assessment is that the most likely case carries a 0.5 probability, the worst case carries a 0.4 probability and the best case carries a 0.1 probability.

5 5 Table 1 Total Infrastructure Revenue by Region, (Billions of U.S. Dollars) Region CAGR (%) Asia/Pacific Central and Eastern Europe Latin America Middle East and Africa North America Western Europe Worldwide CAGR = compound annual growth rate Source: Gartner Dataquest (December 2002) Table 2 Total Infrastructure Revenue by Technology, (Billions of U.S. Dollars) Technology CAGR (%) Signaling Access Transport Switching Mobile Support Total Source: Gartner Dataquest (December 2002) Table 3 Forecast Scenarios: Worldwide Public Infrastructure Equipment Market, (Billions of U.S. Dollars) Scenario Best Case Growth (%) NA Most Likely Case Growth (%) NA Worst Case Growth (%) NA NA = not applicable Source: Gartner Dataquest (December 2002) Gartner Dataquest Perspective The scenario for public infrastructure equipment will remain difficult through Difficulties at WorldCom, Global Crossing and Qwest as well as continuing downward adjustments to service provider CAPEX plans suggest that troubled times may continue in Against this gloomy backdrop, however, some bright spots can be found. The positive aspects of the scenario are driven by the continuing robust growth in

6 6 Continuing Weakness in Public Infrastructure Markets traffic carried by the communications infrastructure. The following issues must be resolved to create opportunity in the infrastructure market: An environment in which traffic growth translates appropriately to revenue/earnings growth must be established. Excess supply (of installed bandwidth, switching capacity or both) and inventory (of equipment available to increase capacity) must be eliminated so that services/traffic growth again tracks with infrastructure growth. Effective public policy that encourages and enables open competition must be established in every market. Recommendations We recommend the following: Service providers must begin placing a much greater emphasis on revenue-generation and the potential for creating services from technology investment. Service providers must develop a revenue model that more closely aligns revenue-generation with value delivered. The telecommunications industry has traditionally set prices based on cost, not value. Recently, the industry has moved to below-cost pricing in some cases. Telecommunications must stop underselling the value of services. Technology suppliers must carefully choose from among a few bright spots to generate revenue and growth. High-potential short-term markets include metro optical/ethernet, IP Centrex and advanced IP services such as multiprotocol label switching VPNs. A spending draft is likely to occur during the next 18 months, caused by a few carriers breaking out of the drought. Participants looking to be competitive should prepare a response plan. Equipment vendors should become more politically active to ensure that meaningful competitive environments become a reality. This would help stimulate demand for their technology. Equipment vendors should cooperate with each other to ensure that they have interoperable, deployable solutions to position themselves for a public network rebound. Until then, advanced enterprise broadband networks offer a potentially attractive proving ground for advanced products to support SANs, network-attached storage and Gigabit Ethernet applications. Key Issue How will the evolution of the Internet, e-commerce and other applications affect network deployments?

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