Trouble ahead, trouble behind

As the country feels itself slipping into the fog of a potentially lasting economic downturn, those in the telecom industry can name the sensation more precisely: déjà vu. It wasn't that long ago that the industry braced for its own long winter. Cave-ins amid the housing and financial (or even auto) industries can't be nearly as damaging to telecom as the devastation it has already seen in its own backyard earlier this decade.

That's not to say there isn't reason for concern about 2009. Debt is perhaps as crucial to the telecom service provider business as fiber or copper. In particular, strapped debt markets make it harder for Tier 2 and 3 carriers to merge or make acquisitions, thus denying them the kind of scale that, in tough times, they need more than ever to turn a profit. In October, AT&T's CEO complained of difficulty selling the company's short-term debt. Doubts also began to rise about Verizon Wireless' ability to close its acquisition of Alltel in this climate.

Still, this is not 2002. Telecom companies are not saddled with excess network capacity. Bandwidth demand is rising, and some carriers are loading their networks more heavily than they normally would prefer. The industry is less crowded with competitors than it was six years ago. Plus, a lot of churn, and hence cost, in the telecom services game comes from people moving; in today's housing market, there's likely to be less of that.

“[Consumers] may pull back and not buy as many premium services,” said Ivan Seidenberg, CEO of Verizon, at an October investment conference. “But the question is: Will they pull back their spending on what we sell? Our view is that we will weather this. We sell the most indispensable device that consumers have: the mobile phone.”

For a lot of folks in telecom, the contrast between the quivering macroeconomy and the seemingly solid fundamentals of the telecom value proposition are a little bit like the moment in a horror flick when the mirror shows you the monster creeping up behind, but when you turn around, it's not there. Which view do you trust?

For telecom equipment vendors, however, the monster is much more real — a fact that was perhaps never more clear than when Nortel Networks put its fast-growing carrier Ethernet and optical business up for sale, despite the pressing capital constraints among prospective buyers. It will be interesting to see if vendors can use the darkening economy to their advantage, convincing carriers that they can improve their own economies by breaking from tradition and handing over more control of their network operations, for a fee. As Seidenberg pointed out, everyone's goal in these troubled times is to be indispensable to someone else.

Source: M:Metrics Inc.