, I don't understand peoples' efforts to discredit Kalla and BlueStone Capital. What did she say that was wrong or offensive? The slowdown is in evidence everywhere. The remarks she made about gorillas (eg., Cisco) taking business away from niche suppliers (ie., Juniper) in this kind of market are almost identical to ones made by Cisco's John Chambers and EMC's Mike Ruettgers. These viewpoints are arguable, but they make some sense. So where's the beef?
Let's take Ms. Kalla's comments, one by one:
Kalla: When I surveyed vendors on how much they thought they would sell for the year, I always got total projections somewhere between 125% and 150%. But when I surveyed the buyers -- who are never going to be biased on the high side -- they always gave more conservative numbers. And the reality is usually closer to what the buyers say. At least that's what 10 years of experience has shown me.
"Always?" From what I've read, carriers estimate on the low side and come in much higher by the end of their calendar years.
TSC: I'll cut to the chase: What are the buyers saying?
Kalla: Half of their budgets are already committed to nondiscretionary spending -- the long-term large-scale projects like conversion to optical from electronic devices. Those numbers are set usually three years in advance. It's the discretionary budget that's still up in the air. That's smaller projects. The service providers are pausing. They haven't released their budgets yet. To me, that's a bad sign. They could be deciding to cut some of the budget or lengthen contracts to conserve cash.
Why is it a bad sign carriers haven't released their numbers yet? It could just as easily be a good sign. As for "conversion to optical from electronic devices. . . those numbers are set usually three years in advance," how could these numbers be in stone when the industry is changing almost by the hour?
TSC: What patterns develop when carriers have less money to spend?
Kalla: A lot depends on the economy. When the economy is good and money is flowing freely, they'll buy the best thing. But when money tightens up, they will consolidate their purchases with one supplier so they can exercise greater power and get better discounts. At this point we are likely to see a consolidation with big vendors rather than trying to support 10 or 15 niche players. Cisco (CSCO:Nasdaq - news), Nortel (NT:NYSE - news) and Lucent (LU:NYSE - news) are the big players, and the niche players would be Ciena, Sycamore, ONI (ONIS:Nasdaq - news) and Juniper (JNPR:Nasdaq - news).
Far from focusing on single vendors, carriers are moving more and more to best-of-breed solutions. When she suggests Lucent is strong and Ciena weak, do you agree with her? How about Cisco versus Juniper?
TSC: As Cisco and other equipmentmakers have said repeatedly, if the economy starts to turn around in the first two quarters, the second half of the year will turn up rosy . Is that a little optimistic?
Kalla: You can't turn the spending on and off that quickly. Once you cut a project, you have to get board approval to get it going again. It takes more than two quarters for it to come back; it takes more like a year to come back. I don't think we'll see a dramatic upswing in the second half of the year if the first half is soft. Spending decision are on a six-month to two-year cycle. Once projects are gone, in my view, they're gone for a long time.
Beyond board approval, which could be a matter of a conference call, what could prevent spending increasing immediately? If there are major projects on the drawing boards, then you simply resume where you had earlier slowed down.
TSC: What ails the carriers?
Kalla: Kamikaze pricing by the dozen or so new companies caused a disruption among the existing carriers. The Worldcoms (WCOM:Nasdaq - news) and AT&Ts (T:NYSE - news) were forced to drop prices and upgrade their networks to stay competitive. There were so many new players that pricing became irrational.
Europe is about a year ahead of where we are now. There are about 20 pan-European networks going after the same markets, and with that competition, they were cutting prices about 60% a year. Very few players can sustain those price declines and as soon as that pattern starts you see the bond holders and stock holders run.
Kalla is right about pricing, but she's drawn the wrong conclusion. Because the industry is so competitive, only the most advanced fiber optics's networks allow carriers the efficiencies needed to stay in business. It's a matter of upgrade or die.
TSC: So what is the outlook?
Kalla: From what I can see, it gets worse from here in the U.S. market. Telecom is a cyclical business. After consolidation in the industry there will be fewer stronger players. Then the prices will stabilize and we'll start all over again.
Consolidation will bring fewer players but they will be stronger, not weaker.
TSC: How long are telecom's cycles?
Kalla: Cycles are usually seven years, and we are probably one year into the downturn. So that will probably last for another year or year-and-a-half. It will be probably late 2002 when we start to see the upturn. Telecom is always a boom and bust. And there's no end of the entrepreneurs that are willing to innovate new services.
This is where Kalla's credibility breaks down completely. If she's suggesting telecommunications is at the beginning of a 7-year down cycle, she's smoking controlled substances. I suggest she read RHK's most recent reports.
TSC: [Cisco CEO] John Chambers likes to say that with the advent of the Internet, all these cycles are getting shorter. Is that just Chambers trying to sell more Internet gear, or is there a faster cycle?
Kalla: The cycles used to be 15 years. So, yes, there is a compression of the cycles. And the communications cycles are always higher than the economic cycles. But even if the economy goes negative, you never have negative telecom growth and I've looked back as far as the late '60s.
Interesting conclusion, wouldn't you say? That there's never been negative telecom growth? So what was all the other stuff about? Syllables to fill the page.
Pat |
