Time for a telecoms turnaround?

Could telecoms be about to grow again? Peter Judge thinks so, and there's even one analyst out there who thinks the slump never happened at all.

For the last couple of years, the telecoms sector has rightly suffered the consequences of hubris. New service providers took out debt to build out infrastructure -- and then found out it was all duplicated, and there weren't enough customers to go round.

Long-distance bandwidth prices went into free-fall. So did revenues. And telecoms share prices. There was no more money from investors for building networks. And that was all before WorldCom happened.

At the same time, service providers were stiffed for as much money as possible for 3G bandwidth, and -- to varying degrees -- fumbled the broadband roll-out. BT was humiliated into selling off assets, and streamlining itself in a very humbling way. But it was far luckier than the start-ups, many -- or most -- of whom are simply not around any more. Some of them, like KPNQwest, found that even their assets were not worth anything. Networks that cost billions to build were unloaded for tens of millions.

Some analysts estimate that 40 to 50 percent of the people who used to work at telcos no longer do so. And we wonder what they are doing instead? The ones without families will have spent the first few months of their freedom somewhere foreign (we already hear of ex-execs of once-stellar start-ups bumping into each other on a beach in Thailand). After that, who knows?

If there is an upturn in telecoms, it won't absorb all these people again -- because the sector is still contracting in terms of headcount. BT is still shedding people, and when people talk about "good" news in the sector, what they mean is service providers returning to profitability by continuing to cut staff.

That is partly what is behind the recent "new deal" BT announced with suppliers. For BT to please its shareholders, and reduce its debt, it has to spend less on staff and infrastructure, so it is asking vendors to help it.

But what are the signs of an upturn? BT's deal is one -- it's the kind of offer that people make when they expect their business, and their suppliers, to have a solid future. There were a few other indicators at the Financial Times World Telecommunications conference in London this week.

Charles McGregor, chief executive of Fibernet, a UK-based service provider, says he has seen turnover rise for four months running. He is cautious (Fibernet survived the bubble by not taking on any debt or rolling out anything too ambitious) but he says that is a good sign. Others felt that developments such as Genuity's assets going to Level 3, represent progress towards final consolidation.

Bill O'Shea, president of Lucent's Bell Labs, said that "corporate demand has been rock solid," and this has got the vendors through the time when service providers stopped buying.

Analysts are starting to come off the fence. "There are some rays of light," said Richard Webb, European market analyst of Infonetics. "OSS (telecoms management software) and billing systems feed the reduction in costs, and the metro Ethernet market is very interesting."

There's still strong demand for routers, at the edge of the networks, Webb reckons -- especially ones that let service providers cut costs and lay people off. Infonetics looked at the demand for equipment, and it believes that will take off in 2004.

Meanwhile, prices for end users are stabilising, said Justin Neville-Smith, analyst at the Yankee Group: "Users are starting to realise that prices can't keep falling by 40 percent every quarter." He sees the new realism starting in the US.

This sounds like reasonable, muted optimism. But some analysts go further and suggest that -- in all honesty -- there never really was a telecoms slump. It's revisionist claptrap of course, but there is a point they are trying to make.

"There never was a slump," said Tony Lock, senior analyst at Bloor Research. "Service providers talked it up for their own political ends." He doesn't deny that start-ups have burnt up many billions of dollars of stupid venture money, or that many thousands are out of work. That doesn't count, he says, because the boom wasn't "real" in the first place. "Telcos have a guaranteed revenue stream," he said. "There hasn't been a downturn in that."

Lock is referring to the way BT and the other big service providers, which were never really at risk, have been moaning too much about how much their 3G licences cost. They have been doing this, in order to persuade the EU to relax its rules, and let them cooperate on building the networks. Now the rules are relaxed, they will suddenly start to make more positive noises about their balance sheets. That is chutzpah.

I couldn't help noticing that Lock made his comment in a booth at Lightspeed Europe, the optical network show. If there wasn't a slump, I wondered, why was that show a fraction of its former size? It seems to me that Lock was lucky he did make his remarks in such a quiet setting, and not, for instance, in front of an audience of dispossessed telecoms engineers.

He's fortunate he wasn't on that beach in Thailand. Or in the job centres the engineers are coming home to.

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