NETWORK TEST:COMEBACK MOST ELUSIVE FOR HARDEST HIT

But opportunity still exists for test vendors able to adapt

The telecom meltdown hit test and measurement vendors with a quadruple whammy. Wireline carriers responded to falling revenues and, in the case of the Bell companies, acute erosion of their core businesses by sharply reducing their capital expenditure budgets. Wireless carriers responded similarly to thinning margins caused by the hyper competitiveness of the sector.

In addition, technology adoption by carriers—which typically fuels test and measurement equipment sales—slowed as money got tighter. And if that isn't enough, carriers are under extreme pressure from investors to get more out of what they already have, which doesn't bode well for new purchases.

“It's a tough time in test and measurement,” said Russ Byrd, Vice President of North American Operations for wireless test vendor WillTek. “The biggest reason is the market's insistence that the carriers make more money, or in some cases, to start making money.”

However, all isn't lost in test and measurement. Byrd believes opportunity still exists for vendors willing to change their perspectives, and their approaches to business.

INDUSTRY RESOURCES

“This has just forced us to listen to our customers even more closely, and find the solutions that enable them to make more money,” Byrd said.

Industry Snapshot Financial metrics of selected publicly traded test and measurement companies show that while the group as a whole has struggled to turn a profit over the past year, current share values remain near their 52-week high. COMPANY MARKET CAP* GROSS REVENUE PAST 4 QTRS.* NET INCOME PAST 4 QTRS.* SHARE VALUE 52-WEEK RANGE Agilent 12,420 6100 -2300 25.6 11.33 - 26.48 Inet Technologies 517.8 101.6 11 13.34 4.15 - 16.00 Radcom 13.7 10.7 -7 1.3 0.64 - 1.79 Radvision 221.5 48.5 2.3 11.91 4.95 - 2.12 Sunrise Telecom 217.1 53.1 -4.7 4.65 1.70 - 5.02 Tektronix 2190 786.2 15.4 25.87 15.65 - 27.07 Total 15,580.1 7100.1 -2283 * Figures are in thousands ▪ Source: Yahoo Finance

The faster a carrier can realize a return on its investment, the better, said Greg Quiggle, executive vice president of marketing for wireline test vendor Tollgrade, who claimed carriers are now expecting payback inside of 12 months. Consequently, return on investment is perhaps the most important value proposition in any sales pitch.

“In those instances where there is a good return, and you can prove it—it's not just PowerPoint or paper—we found there's money to be had,” Quiggle said. “There's not enough money to go around, so it's the cream of the crop that ends up getting funded.”

Byrd agreed. “You have to be able to prove the leap of faith,” he said. “It has to pay for itself and if you can't show payback within a year, you'd better find a way to lower the cost of your solution. People are interested in payback now.”

There are other ways the vendor/client relationship has changed, creating new challenges. In the wireless sector, for example, handset manufacturers aren't as vertically integrated as they once were, said Mark Wallace, marketing manager for the wireless business unit of Agilent Technologies. “In the past, you would work with their various engineering groups and solve problems internally, almost holistically,” he said. “Now you have a whole variety of companies participating in the development of chipsets or software. The challenge is to make sure all of the technologies and products work together well.”

Many service providers are beginning to favor pre-integrated solutions over a best-of-breed approach, said Karl Traberg of multi-platform test vendor NetTest.

“We're seeing increasing interest in combining a monitoring system with things like billing and service assurance verification,” he said. “The key is to reduce operational expenditure. The best-of-breed approach, where you shop for multiple solutions and integrate them yourself, tends to require more skills and resources.”

Saving service providers time is as important as saving them money, said Rick Pearson, marketing manager for Agilent's communications network solutions business unit.

“That's become pretty big for us,” he said. “We've integrated different measurements together in a way that has given us in some cases a 100-fold time savings. When somebody tries to measure something and it takes them hours and hours, and if we can get that down to minutes or seconds, that may fundamentally change what they do.”

Though technology adoption has slowed over the past two years, there are pockets of opportunity. For instance, the still nascent but fast developing voice-over-IP platform should drive “banner years” in 2004 and 2005 for vendors serving that sector, said Steve Gladstone, vice president and general manager for Empirix. “VoIP is becoming real, across both the enterprise and within carriers,” he said.

However, Gladstone said VoIP still suffers from an inferior service quality reputation that will have to be addressed by providers if they want to achieve premium-pricing levels. “Ultimately, quality is going to win. In order to provide quality, you have to make sure it works,” he said.

Unfortunately, many VoIP providers have yet to see the light. “Test usually doesn't get installed or thought about until problems are found,” Gladstone said. “The old telephone world understood test very well. You had well defined test standards that came out of Bellcore [now Telcordia Technologies] or normal standards bodies, and none of that really exists in the new domain.”

But while the legacy providers might better understand the need for test and measurement, they have become more prone in the current economic environment to cutting corners and jury-rigging solutions, said Pearson. “They can do that until the point where they can't meet a standard. That's what forces people to buy new test equipment.”

Another challenge in the VoIP space that should provide opportunity for test and measurement vendors concerns the integration of next-generation systems with legacy networks, which is especially problematic for enterprises, Gladstone said.

“Many of these enterprises over the past three or four years have merged two or three times, so they probably have switches from [multiple vendors],” he said. “So how do you deal with that? It's a fairly complex scenario that requires a lot of work and routine.”

INDUSTRY RESOURCES Institute for Electrical and Electronics Engineering www.ieee.org The International Organization for Standardization www.iso.ch/iso/en/ISOOnline.frontpage American National Standards Institute www.ansi.org/ NIST www.nist.gov