Re: Overview of Last Mile Infrastructure Investing
Thread- I've been meaning to post this piece by Channel Commercial for awhile. I hesitated because I didn't want it to appear as if I was pushing CHNL as an investment idea. I'm not. CHNL over the last few years, has been a lackluster performer. Maybe through no fault of their own because microcaps are so out of favor? I don't know. Or maybe because their PR department needs an overhaul. I could barely find this piece after spending about 20 minutes looking for it on their relatively small website!
The complete piece is at:
channellcomm.com
I do know that this piece was quite a good summary of what I personally believe the future of access infrastructure spending will look like. So after some heavy duty, time consuming editing to take out all the pure references to CHNL(best I could), and converting all the ? to ' it ends up being a very good overview of the Last Mile game.
I hope those new to this sector take the time to read it and try not to focus on the references to CHNL in particular. Because IMO, it hits the nail right on the head about where we are heading in access spending for all companies in the game. -MikeM(From Florida)
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Overview
Channell Commercial Corporation is a global telecommunications equipment manufacturer of network access equipment for the local loop or "last mile" of both telephone and cable television networks. Channell's enclosures, connectors and sealing solutions are required by telecommunications companies ("telecoms") to meet the rapidly growing demand for greater bandwidth needed to deliver data, voice and video services to their customers.
Telecoms are investing massive amounts of capital to upgrade their local loop networks including the access equipment that connects the local loop telephone and cable main lines to the branch lines serving each residence and business. As a leading innovator of access solutions, Channell is positioned to expand market share regardless of which new technologies dominate the bandwidth race and which service providers prevail in the convergence of the telephone and cable television industries.
The telecommunications industry is rapidly upgrading its distribution infrastructure to satisfy the exploding demand for Internet, email, fax, video and voice traffic. A large share of telecom's network upgrade investment is allocated to Channell's market focus: the local loop segment that provides access to the customers. The $20 billion U.S. local loop equipment market is expected to grow approximately 10%-15% annually over the next 5 years.
Telecom Equipment Market Growth
The U.S. telecommunications equipment market grew by 13% from 1996 to 1998, reaching a total market size of $106.4 billion. In the year 2000, telecom equipment spending is expected to rise to $128.1 billion, up 14.7% on a compound annual basis from 1996. The primary causes of market growth are: the exploding demand for greater bandwidth fueled by increasing use of the Internet for e-commerce and entertainment as well as by increasing video, voice and fax traffic, and the growing convergence of the telephone and cable television industries, facilitated by the Telecommunications Act of 1996 which deregulated the U.S. communications industry.
The Local Loop's "Last Mile"
Channell's enclosure and connector product line is focused on the local loop distribution portion of the telecom network in both telephone and cable television networks. The $20 billion local loop equipment market is expected to grow approximately 10%-15% annually over the next 5 years. The portion of the signal delivery system from the local telephone or cable office to the end-customer is known as the "local loop", and it is in the "last mile" of the local loop that the majority of Channell's products are located.
Channell's thermoplastic or metal enclosures, placed either above or below ground along the utility right of way (typically along the street or other ease-ment), provide maintenance and service personnel with access to an assortment of copper wires, coaxial cables or fiber optic cables that transmit voice, video and data. It is at these access points that the main lines or cables from the local telephone or cable television office are connected to the individual lines branching out to each residence or business.
Channell's active electronics enclosure systems and data capable cable/wire connector devices are used at these access points to house advanced transmission electronics and to protect and manage cables required for the delivery of high bandwidth, or "broadband," services. In addition to providing network access and connecting each customer to the local loop lines or cables, Channell offers a proprietary line of passive RF (radio frequency) electronic equipment housed inside its enclosures. RF electronics distribute, split and/or filter the transmitted signals.
The existing local loop telephone network equipment was intended to carry voice-only traffic, employing two twisted pairs of copper wire to connect the local telephone company's central office switch to the business or residential customer. Cable television's coaxial cable has also provided the originally intended service: one-way transmission of the television signal from the cable company's headend office to the residential customer.
With the proliferation of data communications such as Internet, email, fax and interactive services, conventional copper wire and one-way cable television networks are bandwidth bottle-necks because they can not accommodate the surging demand for greater network speeds and capacity.
While it is not yet clear which combinations of new technologies the service providers will choose to upgrade their local loop infrastructure, it is apparent that both the telephone and cable television industries will have to invest massive amounts of capital to upgrade the local loop infrastructure. It is the local loop that provides access to the customer and it is the local loop, the least modernized portion of the telecom network, that is a bottleneck in the race for greater bandwidth.
Channell Should Benefit Regardless of Which New Technologies Dominate the Bandwidth Race
Based upon cost and time to market requirements, fiber optic technologies will over time be deployed as close to the end-customer locations as possible. Technologies such as telephone Digital Loop Carrier ("DLC") systems enable fiber optic facilities to service from several hundred to several thousand customers. Next generation "Fiber-To-The-Curb" ("FTTC") systems dedicate fiber optic facilities to customer groups of less than 20, while "Fiber-To-The-Home" ("FTTH") goes one step further by providing each customer site with its own dedicated fibers. In FTTH, the optical-to-electrical (copper wire) conversion occurs at the customer site rather than elsewhere in the local loop.
Several advanced transmission platforms permit telephone companies to utilize their existing copper network facilities to deliver broadband services. By using various DSL (Digital Subscriber Line) technologies, network operators can provide their customers with broadband services while prolonging the useful life of the existing copper wire lines. ADSL (Asynchronous Digital Subscriber Line) allows the telephone network operator to provide high speed Internet access to the residential market. Channell's data capable connectors and its enclosure systems are used in the installation of DSL-based services.
The introduction of the cable Internet modem has given the cable television industry a new source of revenues and facilitates its entry into the business user market. In order to offer a highspeed cable modem, cable companies must upgrade their existing one-way coaxial cable to two-way, usually Hybrid Fiber Coax ("HFC") cable. The cable modem offers full-time on-line service with fast downloading times.
There are numerous technology choices available to the telecom industry as it upgrades its network infrastructure. The adoption of almost any of the new broadband technologies requires an upgrade of the access equipment in the local loop portion of the telecom network. any existing equipment enclosures and main line/customer line connectors, while perfectly satisfactory for yesterday's needs, must be replaced to meet the needs for greater bandwidth. Because Channell's product line facilitates the new telecom technologies, Channell should benefit from telecom equipment upgrade expenditures.
Equally important, Channell's revenues are not dependent on any one technology or combination of technologies being chosen by the telecom industry, so Channell should benefit regardless of which mix of technologies dominate the bandwidth race.
Industry Convergence Increases Competition and Competition Increases Equipment Upgrades
A second driver of telecom equipment market growth is the increasing convergence of the telephone and cable television industries as these two industries leverage their traditional service roles into full-service communications providers. One example is cable television operators providing telephone service. Similarly, telephone service providers are developing broadband networks that offer digital Internet and video transmissions along with the traditional telephone service. Convergence began before the Telecommunications Act of 1996 deregulated the telecom industry, but the passage of the 1996 Act and the new telecom technologies have accelerated the pace. Another factor has been the emergence of non-traditional telephone service providers such as the Competitive Local Exchange Carriers (CLEC's) that utilize mostly fiber-optic networks in major metropolitan areas to offer telephone service to large businesses.
A large number of the CLEC's are owned or backed by cable television companies, which see CLEC's as a relatively inexpensive entry into both the telephone and business markets. In addition, satellite television and wireless service providers are expanding their networks and service menus. Full-service menus and new service providers stimulate competition which translates into potentially more telecom equipment expenditures. Because Channell?s equipment provides access to the customers of service providers, Channell should benefit from the expansion in service provider competition.
For example, Channell supplies both telephone and cable television service providers with new state-of-the-art copper wire connectors that minimize installation and maintenance labor costs which are highest in the local loop portion of the telecom network. Also, Channell's recent major contract win from a regional Bell for a new line of above-ground thermoplastic enclosures suggests that telephone companies will increasingly look to thermoplastic enclosures for their upgrade solutions as they build their broadband networks.
Global Privatization Spurs Equipment Spending
The third major trend expanding telecom equipment spending is the growth of the international market. In 1997, the fifth consecutive year in which U.S. exports of telecom equipment exceeded imports, the World Trade Organization produced a new telecommunications agreement that has stimulated worldwide privatization of government-owned telecommunications entities. According to a World Bank report, investment in new plant and equipment increased 44% after privatization occurred. In addition to the global privatization trend increasing telecom equipment spending, another international trend is the growing competition within once monopolistic markets.
Worldwide demand for all types of telecom services ranging from basic voice service to broadband Internet access is exploding. Growth rates in many major markets are expected to exceed 25% annually for the next three to five years. With global manufacturing capabilities in four continents and five countries and its worldwide customer base in more than 80 countries, Channell is well-positioned to serve the expanding international market, which has substantially higher projected long-term growth rates than the U.S. market.
Two New Priority Markets
The continuing deregulation of the U.S. power utility industry has motivated power utility companies to develop new revenue sources. A number of power utility companies have decided to take advantage of their existing customer base and power line right-of-way by offering telecom services either directly or through partnerships with telephone and/or cable operators. It is estimated that power utilities invested $3 billion in 1998 for telecom equipment for their own use and/or to provide telecom services to their customers. Channell has developed a new line of enclosures for the power utility industry and has created a dedicated marketing group to address this growing market.
Channell's new telephone enclosure and connector products have created numerous opportunities to increase penetration of the OEM market. Several prominent OEM's have adopted Channell's new copper wire connector product. In addition, companies such as Lucent, AFC, Next Level and Alcatel/DSC have accepted Channells thermoplastic enclosures for fiber-to-the-curb applications.
Increase revenues from U.S. telephone service providers
Channell plans to expand market share in the U.S. telephone service provider equipment market by meeting the market's growing needs for new local loop access equipment designed to handle bandwidth upgrades....This permits faster installation and maintenance work and requires less training, thereby reducing labor costs, an important consideration for service providers whose labor costs are higher in the local loop than in any other portion of the network.
Another new opportunity in the U.S. telco market is in the thermoplastic enclosure line. The upgrade of the telco's local loop access equipment has resulted in the emergence of Channells thermoplastic enclosures as an attractive solution to the telco?s needs for larger enclosures than they have traditionally used. Channell's market leadership in thermoplastic enclosures positions it to develop a major share of this new application. Telco's will also require metal enclosures for those upgrade applications that involve complex access installations. Channell's Rhino metal enclosure revenues in 2000 should benefit from a new, dedicated sales and service organization. In addition to offering telco's the new products they require, Channell can offer a complete package of enclosures, connectors and heat shrink products.
Increase international telecom equipment market share
Channell expects to increase its market share in Europe and Asia in the year 2000 and in Latin America after 2000. In Europe, opportunities for Channell's new copper connector products are strong due to equipment upgrading required to meet EU standards. Channell's multiple product capabilities should be particularly successful in Europe where more service providers are consolidating their supplier relationships. While the Asian market in general is expected to continue its relatively slow growth path, Australia should exceed the region?s pace by a significant margin and Channell anticipates strong Australian business in 2000.
In order to accelerate its growth in the Asian market, Channell has opened sales offices in Hong Kong, Malaysia and New Zealand. Latin America beyond the year 2000 should be a significant market for Channell. It is estimated that over the next three years, ten million new service lines will be installed in Mexico and 30 million lines will be installed in Brazil. In 2000, Channell plans to initiate a new marketing / sales organization focused on the Latin American opportunity.
Increase revenues from OEM network equipment suppliers
The rapidly increasing pace, complexity and magnitude of tele-com's network upgrade programs have created new opportunities for Channell to expand its OEM business. Channell's complete package of access products enables OEMs to deal with one source and at the same time incorporate Channell's leading-edge products in their bid proposals. Channell's new 600 SPH enclosure series has been approved by a number of leading OEMs to house fiber optic/copper wire conversion electronics that enable telcos to extend fiber optic lines into the local loop. Channell expects to receive additional OEM approvals on other enclosure products in 2000.
In addition, Channell's Mini-Rocker Category 5 data capable copper connectors have been approved by several major OEM's for copper wire management solutions in the OEM's latest network designs.
Generate increased electronic and copper connector revenues from cable television operators
Channell has developed several new passive RF electronic connector products to facilitate deployment of cable modem and digital video services. DigiTap, Channell's new patented cable splitter, filters out interference that distorts the television screen when someone in the same or nearby residence uses the cable modem to upload data to the Internet. DigiTap offers not only a customer problem-avoidance solution to the cable operator but also a solution at a fraction of the cost of dispatching a technician to customer sites. In 1999, Channell successfully introduced DigiTap in Europe. There are promising opportunities in the North American and Asian markets in 2000 and beyond.
The Mini-Rocker, Channell's leading-edge copper wire connector, is expected to be well received by cable television companies in 2000. In order to add telephone service to their service menu, cable companies must install new copper connectors to bridge the existing copper wire to the cable telephony electronics. The Mini-Rocker permits field personnel to accomplish the task in less time without using tools, resulting in lower labor costs.
Generate incremental revenues from new markets
Channell expects to penetrate several new markets in the year 2000 and anticipates tangible revenues from these new markets in 2001 and beyond. The power utility industry is estimated to invest up to $8 billion annually in telecom equipment by the year 2003. Channell has created a power utility sales group and several new enclosure products for the industry (new connector products and heat shrink products are planned to be introduced in 2000). Another new market is comprised of wireless service operators and their OEMs. The rapid expansion of mobile and fixed wireless systems has resulted in an emerging need for enclosure and connector solutions. Particularly in the fixed wireless systems, the end user's branch lines must be connected to the signal source, usually a dish or antenna. Channell has developed an enclosure designed to handle the special requirements of the wireless service provider. |
