Front page summary from the Robertson Stephens Next Generation Networks report:
October 3, 2000
Key Points:
· We agree that the current debate over capital spending by carriers in 2001 and beyond is a healthy activity. However, the recent view expressed by several analysts that spending is about to head into a tailspin is wrong, in our opinion.
· Despite the convincing argument that the level of carrier spending is at an all time high, suggesting that the growth in spending will have to be moderate next year, and we believe that the future will shape up differently.
· With all of the new services beginning to emerge, carriers will have no choice but to continue to invest in their networks. At the end of the day, carriers must pay to play.
· It should be of no surprise that carriers are being forced to redefine their strategies, their value proposition, and, in many times, their business models. All of the carriers are frantically searching for those new “killer apps” that are expected to drive unit volume, revenue growth, extend the rapidly eroding competitive advantage, and find areas to compete away from the herd in masses of the other telecommunications vendors. Is it no wonder that capital spending has accelerated. Old services are delivered off of old platforms; new services are delivered off of new platforms. The direct result of this growing level of competition is accelerating spending on network and telecommunications equipment. Unless, somehow, these competitive pressures are expected to abate in 2001, the spending spree will continue. In our view, until the
new applications are discovered, the new killer apps are released, competitive pressures abate, or all of the carriers go out of business (suggested by one of our competitors), carriers will have absolutely no option but the continued deployment of new equipment.
[Further in the report the authors include an analogy that pin-points the carriers' dilemma:]
The current situation is the telecommunications carrier market is essentially a prisoner’s dilemma. If every carrier elects to slow down capital spending (ignoring customer requests for new services, by the way), then all of the carriers will be better off than the current hyper competitive environment.
However, if even a single carrier breaks rank, all hell breaks loose. If that single carrier gets the drop on either deploying new services before its competitors, or possibly begins to deploy a lower cost network than its competitors, that carrier will greatly enhance its competitive position. Customers will come in droves. Because of the large potential for economies of scale in the market for carrier services, there is a rich benefit for the first mover advantage. As a direct result, all carriers are forced to continue on the capital spending treadmill. If any of them blink, it could be all over for that carrier.
Interestingly, none of the analysts raising concerns for the outlook for capital spending have offered a satisfactory explaination as to why capital spending accelerated in 2000. Without a reasonable causation, how can anyone predict shifts in spending in the future. . . .
[One more quote towards the end:]
A leading example of accelerating capital spending may be SBC Project Pronto. Whereby, they intend to spend six billion dollars over the next three years to offer broadband service to 77 million Americans in 13 states. We believe this may be just the tip of the iceberg!
The evidence of continued strong capital spending is compelling. Spending will be at a record level in
2000. The growth rates across the board are impressive as the table shows. With the possible exception of Lucent (LU, $30 5/8, BUY), all of the leading vendors are recording record revenues with no change expected on the horizon. Among the next generation vendors, business has never been
better. . . . |
