Longer term investing thoughts on the telecomm flameout and it’s effect on the semiconductor business.
Since not much seems to be burning up the thread recently, I thought I briefly share some of my thinking about where we've been, and maybe where we are going.
We've been in a period of frantic investment in telecom assets due to investor's belated realization that all that low-bandwith, switched-circuit hardware hanging off poles all over the world has been suddenly been made obsolete by the IP technologies and the replacement of copper circuits by now much cheaper silicon.
Now by dint of a sustained effort by our central bankers, we've reached a period of "introspection" where investors abruptly realized that perhaps all this IP/silicon productivity isn't going to mean a bigger slice of the GNP is going to go to telecomm bills. Maybe telecomm customers just aren't going to pay anything for legacy networks (anymore than one of us would pay for a Commodore 64), and will demand multiples of performance at less than a legacy price! (See long distance rates over the last couple of years or microprocessor performance in the last couple of decades.)
So, now, investors in telecom, used to government subsidies, and comfortable monopolies, are now in the same boat (cold water) as us "silicon sailors" have been in for decades--how to make money off a market where price/performance declines year after year. And these telecom "investors" are throwing a tantrum. Used to offering the customer the same ole (reliable) service decade after decade, and getting to charge more for it, they are now in our hot seat. (Welcome, pilgrims.)
We know that while the ride in this boat can be wild, it is also profitable over the long run. And now that the conversion to IP/HiBW is on it's way (with those oh so familiar air pocket "gluts" to Si cap equip investors underway in BW/transport), what's a smart investor to do? Get out of technology before it’s too late and go hide under the government bond rock until the storm is over?.
Silicon sailors are very aware that while storms can threaten your financial existence, they also are the source of the really big fish in the portfolio. I’ll wager that if you are only setting sail on the silicon seas during fair weather, you will only be taking risk for little or no profit. But what areas to fish in during the storm, especially a new kind of storm, this one in telecom? Who’s going to win during this storm, as I think we can all agree that the storm is not going to eliminate the telecom business.
I think the initial winners in the aftermath of the telecom storms will be companies that provide the silicon to slurp up all that now cheap bandwidth. Let’s consider some the new BW eating technologies in the pipeline: MS’s webpad, 802.11a,b wireless networking, Bluetooth, LCD/plasma/projection hi-res displays, DVD’s, cable/DSL/wireless + sat. CPE’s, VOIP, Gnutella and per-to-per networks. In VOIP alone, it’s possible to largely defray the switch to wideband by just buying VOIP IP CPE, service from Net2Phone and eliminating the phone company. These things are being introduced now. But they all have one, huge problem.
The problem with silicon now is that in order to capitalize on the inherent complexity of the communications revolution, devices are complex---and really too expensive for consumers. I’d love to have a Bluetooth/802.11a,b enabled webpad to go with my projection hi-res display, but they are too damn expensive to purchase for home use—so far. I expect that the move to smaller linewidths and 300mm to start to solve that problem, and woe to the fab left to compete with 200mm equipment. (Like switched circuit copper…tis basically junk, good enough to make the equivalent of the C-64 but nothing people want to pay for.) Again, price/performance drops like a stone, and the consumer comes onboard all at once. (Woe to the consumer left behind also.)
In the telecom area, the sun will shine again, but I think the safest areas might actually be the providers themselves, not the equipment companies like CSCO. The CLECs and ILECs need to have that surplus taken up before they can embark on another spending spree for bandwith. It may be that last mile providers and the companies that provide the equipment (CPE’s, cable modems, wireless chip makers) will do well as the consumer accesses the glut of long-haul bandwidth at fire sale prices (how else are we going to buy it, eh?). So, as crazy as it sounds, maybe the place to put money in telecom is, after the ships with obvious holes go down, into the GX’s, WCOM’s, SBC’s, and LVLT’s.
I believe that one of the best fishing areas is just where we are fishing…in the semiconductor equipment area, because it’s increasingly clear to me that it’s forward into 300mm to drive those costs down, down, down. Intel has got the religion, building a productivity explosion in the form of 300mm, damn the storm, on a broad range of fronts mostly aimed directly at consumers, and the devil will take the hindmost. The pieces are in place---reminiscent of the technology scene of the late 80’s-early 90’s, (Windows, hardware to support it, and the nascent Internet in the form of something called BBSes) the technology is there, the demand is there, but we need something to start the feeding frenzy.
So, to lay at anchor in the harbor, safe in the knowledge that nothing is going to happen to us---which indeed is also the danger, or to venture into the teeth of the storm? And if not into the storm, then why, and if not into technology, then where, if anywhere. |
