Interesting People mailing list archives

IP: more on hComment on telecom downturn

From: David Farber <dave () farber net>
Date: Sun, 23 Dec 2001 10:14:57 -0500

Date: Sun, 23 Dec 2001 09:07:14 -0600
From: Andrew Odlyzko <odlyzko () dtc umn edu>
To: dave () farber net
Subject: Re: IP: Comment on telecom downturn

Dave,

Here is a comment for the IP list apropos the issue of the telecom downturn.

There are two main parts to the telecom industry, the service providers and

the suppliers. There is no evidence of a downturn in total revenues ofserviceproviders. Some are seeing decreases (long distance consumer voice, forexample),

some are flat (such as some ILECs), and others are booming.  As an example of
the last phenomenon, consider the cellular carriers.  According to the latest
semi-annual report from CTIA, revenues from mobile telephony in the US were
as follows:

   date     total 6-month revenues
             in billions of $
   ----     ----------------------
  Dec 99          20.65
  Jun 00          24.65
  Dec 00          27.82
  Jun 01          30.91


The historical pattern of communication services has been of relatively
steady growth in revenues, so that even recessions had only slight depressing

effects. For example, during the last US recession of 1990-91, ITUstatistics

show growth in total revenues of US telecom service companies of 3.6% from

1989 to 1990, and 2.8% growth the following year. We don't havecomprehensive

data for what is happening now, but all indications are that, as is reported
in the ElectronicNews article mentioned by Dewayne Hendricks,

   <http://article.ElectronicNews.com/UM/T.ASP?A5.11.1591.5.1820698782>,

revenues are continuing to grow, especially vigorously in the industrializing
countries is Asia/Pacific.  Note, though, that the growth rates this article
talks about are on the order of 8% per year, which is faster than the growth
rate of the world economy (again fitting the historical pattern going back
centuries), but not astronomical.

The telecom suppliers are a different story.  They have traditionally been
slightly more volatile than service providers, but not all that much volatile.
What happened in the late 1990s is that demand for their products exploded.
This explosion was powered by competition (unleashed in the US by the

Telecommunications Reform Act of 1996, in other countries by similarlegislative

and administrative moves) and myths of astronomical growth rates for Internet
traffic and of "insatiable demand for bandwidth," with a large dose of Y2K
spending thrown in for good measure.  For a graph showing this explosion (and
the more recent implosion), see

  <http://www.lightreading.com/document.asp?site=lightreading&doc_id=9699>.

This graph shows carrier capital expenditures going from about $35 billion
in 1997 to $83 billion in 2000, for a compound annual growth rate of 33%.

There were huge misallocations of that capital spending (such as inoverbuildingof long distance fiber networks without taking care of the "first mile,"as well

as in not understanding that consumers were willing to spend much more for
narrowband voice than for broadband Internet access).  There will surely be
many detailed analyses of what went wrong.  However, the bottom line is that
the mismatch between service revenue growth rates of 8 to 10% per year and
capital expenditure growth rates of 33% per year could not be maintained for
long.  The precipitating factor for the telecom crash appears to have been
the European 3G spectrum auctions in early 2000.  The huge sums that were
bet there appear to have made investors sit back and do the arithmetic, which
led them to conclude that there was little chance of actually making money
from the telecom investments that were being made in 3G as well as in other
areas.  Capital expenditures got to be about twice as high as fractions of

revenues as they had been historically, and are now on the way down,apparently

to their old historical level, as is shown in the graph mentioned above.
The bloodletting we are seeing at Nortel, Lucent, etc. is the result of the
telecom supplier sector downsizing itself to fit the needs of the telecom
service sector, which is still growing, just not at the astonomical rates
that would be required to justify the large workforces and astronomical stock
market valuations we got used to during the bubble.

Andrew


  -----Please note new address-----

  Andrew Odlyzko
  University of Minnesota
  Digital Technology Center
  1200 Washington Avenue South
  Minneapolis, MN 55415

  odlyzko () umn edu       email
  612-624-9510          voice phone
  612-625-2002          fax

  http://www.dtc.umn.edu/~odlyzko


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IP: more on hComment on telecom downturn David Farber (Dec 23)