WHERE THE MONEY ISN'T

If network power was considered an afterthought before the industry downturn, it all but disappeared from carriers' radar screens when their capex budgets started shrinking in early 2002. As with most telecom sectors, all the major power equipment suppliers have reported significantly lower sales this year, and many in the industry say it's only a matter of time before the supplier sector sees a rash of bankruptcies and consolidations.

To be sure, power never topped carriers' priority lists, accounting for only about 2% of total carrier capital expenditures, according to Skyline Marketing Group. As long as the phone stayed on when the lights went out, carriers typically spent money on power equipment only as necessary.

“Carriers would much rather grow, stretch and Band-Aid together the existing power rather than buy a new plant,” said Roger Stonecipher, senior manager of business operations for Tyco Electronics Power Systems, which supplies power equipment to a majority of the larger telecom service providers.

According to Stonecipher, most carriers that used to engineer their power plant to around 70% capacity are now stretching that to up to 90%. And while that might mean more immediate savings for providers looking to get more out of their power infrastructure, it also means the carrier market is as tough a nut to crack as ever.

The toughest, of course, are the Bell companies. Marc Durocher, who heads up central office power equipment support for Verizon Communications, said he asks prospective power suppliers two basic questions: Will you significantly improve upon existing infrastructure, and does your solution save money? “If they can't do that then I'm going to stay with who I have right now,” he said.

For most Bell companies, that means staying with the big four power vendors: Tyco, Marconi Communications, Emerson Network Power and Peco II. And even those equipment suppliers are having to rethink their business strategies to adapt to this challenging market. It's not that carriers have stopped buying; it's just that they have adopted the scrutiny of a venture capitalist when it comes to deciding where they should spend their money.

One obvious way for power vendors to stay competitive is to offer lower prices, meaning carriers often hold the upper hand in dictating sales terms. Curtis Ashton, senior technical support engineer for Qwest Communications, put it this way: “The good part about [the economic downturn] is because of the good old laws of supply and demand, we're able to get more favorable prices and more favorable timelines.”

That may be good for the carriers, but vendors that compete solely on price won't last long in this market. So equipment providers have to look beyond price for other viable ways to differentiate themselves against their competitors. One strategy that's gaining traction with the larger power suppliers is offering long-term services contracts. Rather than just selling and installing the equipment, these vendors perform a range of operations, maintenance and repair functions for their carrier customers.

“We think the service relationship is one of the key success factors,” said Troy Dixon, director of marketing for Emerson Network Power Global Services, which offers services contracts as part of the network power package. “If you can come in and be the service organization for carriers that trust you, they're going to come to you for replacement products.”

Outsourcing power services is a compelling business strategy, according John Celentano, president of Skyline Marketing Group. If power vendors can position themselves to influence carriers' operating expenditures as well as capex, that adds appeal for prospective customers. “The real imperatives are capex and opex: How can the vendors play into those as carriers look to drive both of those down?” he said.

Celentano likened the services strategy to the trend of outsourcing IT functions to third-party service companies such as EDS. It's a practice that reduces costs for customers that gladly turn over the operations and maintenance of their networks to the experts.

Every power vendor interviewed for this story has a slightly different definition of what Celentano calls “aftermarket services,” which include services such as equipment maintenance and repair. But in reality, only the big power equipment players can offer truly comprehensive services packages to large service providers. “Right now, only Emerson and Marconi are in the position to do much of that on any scale,” Celentano said.

Marconi, whose services business accounts for one-third of its total power revenue, is very aware of carriers' limited capex budgets. “Our customer base in telecom is having to make some tough decisions,” said Steve McKinney, vice president of sales and marketing for Marconi Power & Outside Plant. “We need to help the service providers stretch their dollars.” With that in mind, the vendor designed its Vortex Legacy Interface product line to provide carriers a migration path to newer technologies without having to rip out legacy infrastructure.

Tyco also places itself in the services category. The company has recently made a significant investment in its Tyco Electronics Installation Services arm, which includes about 430 dedicated employees.

The extent to which outsourced services influence the network power equation largely depends on the carrier. For example, Ashton said that more than two-thirds of what Qwest spends with Marconi is on services. In contrast, Wally Gaines, area manager of the remote terminal power staff for SBC Communications, said the carrier still relies on its own staff to perform most of its remote terminal maintenance and repairs. And Verizon's Durocher estimated that his company outsources only about 20% to 30% of its power networking. “In most areas we're training our employees to do the work,” he said.

However, Durocher also acknowledged that experienced power engineers are getting hard to come by. “Once upon a time, there was a switch man in every office. We don't have that luxury anymore, so you rely more on new innovations.”

Innovation, then, becomes another important way in which power equipment vendors can differentiate themselves. But true innovation is easier said than done — especially in a relatively static sector such as power. Though the footprints have gotten smaller and the solutions more efficient, the overall design of rectifiers, generators and batteries have remained relatively unchanged for years.

“It's very difficult to get a whiz-bang invention for this market. Transistors are transistors,” said Chris Seyer, a power industry veteran who served on the management committee for Intelec 2002. Plus, the power vendor that does manage to introduce a truly innovative product typically has an edge for only about six months or so, Seyer added.

If there is a whiz-bang technology to be had, it will most likely appear in the outside plant. The three Bell companies interviewed for this story said they are focused on finding remote terminal equipment that's smaller and more efficient than the equipment currently available.

“Everybody makes a good rectifier. But battery technology has always been the bane of growth,” Durocher said. “We can't put wet cell batteries in the OSP because they take up too much room.”

Batteries seem to be the bane of most carriers' existence these days. According to SBC's Gaines, who is in charge of remote terminal power for the RBOC's 13-state region, carriers are caught in a vicious cycle when it comes to valve-regulated lead-acid (VRLA) batteries, one of the most common batteries used in OSP environments. VRLA batteries have an average life cycle of only about three to four years, but because they're inexpensive, carriers continually replace them when they run out of juice.

In addition, as carriers continue to ramp up broadband and wireless services, they've become increasingly concerned about the amount of real estate that power infrastructure occupies in the remote terminal. “Next-gen DSL, packet switching — all of these high-end services are pushing us out of the room we have in the OSP environment,” Gaines said. “We're fighting for the same floor space inside these remote terminals.”

These two lightning rods — battery issues and scarce real estate in the remote terminal — help explain why two up-and-coming power vendors are getting considerable attention from the Bell companies. One is Valere Power, a start-up that offers a high-density power platform called, appropriately, the Compact DC Power System. Valere has teamed up with Avestor, which provides a lithium metal polymer battery that lasts significantly longer than traditional VRLA batteries — more than 10 years, according to Celentano — and have a much smaller footprint.

Gaines, for one, is sold on the new technology, saying that SBC is currently in negotiations with both vendors. “Whenever we spend our capital dollars, it's going to be spent in the right place,” he said. “We're not going back to VRLA.”

Qwest also is reportedly in negotiations with Valere.

Valere President and CEO Andy Marsh, who worked for Bell Labs and then Lucent Technologies before founding the start-up, said he saw an opening in the current regime of power companies that focus on power services.

“Do companies want to pay field engineers for days and days to install equipment, or do they want it to just snap together?” he said. “I would suggest that maybe [the services model] is easy to disrupt by designing equipment that is not so complicated.”

Some would argue that the tough times in the power sector are simply the result of a long-overdue correction to an overly inflated telecom industry. The Telecom Act, they say, created a false market, and now carrier spending levels are coming back in line with pre-1996 conditions.

And once the turnaround finally starts, it will be at least a few years before the power sector sees the level of carrier spending it enjoyed through mid-2000 (see top figure on page 30). In the meantime, power vendors must adapt their business strategies — whether by offering services or new technology — or face getting out-maneuvered by the competition.

But the good news is that while carrier spending has slowed and priorities have shifted, there will always be a need for power.“Telecom networks are like electronic toys — batteries not included,” Celentano said.

Nor can carriers afford to neglect power indefinitely. “We have to keep up with the Joneses, so to speak,” Verizon's Durocher said. “If a new CLEC comes up with a system that will take revenue away from us, we have to try to match that.”

THE CARRIERS HAVE SPOKEN: NEBS STILL RULES

Start-up equipment vendors can develop as many innovative products as they want in order to tap into carriers' abbreviated capex budgets, but if they're not NEBS certified, it doesn't much matter: Most carriers won't touch them.

“They just expect that your equipment is going to be compliant,” said APC's Paul O'Rourke, business development manager for the power equipment vendor's access networks group. “And they're getting away with it. What at one time was an afterthought has now got to be included right up front.”

It can be difficult and expensive to attain NEBS certification, which includes rigorous testing in areas such as flammability and seismic reliability. But especially if they intend to break into the RBOC market — for which NEBS is a requirement — it's in the interest of most major power equipment vendors to go through the process.

“When I'm looking at vendors, I'm looking at NEBS,” said Curtis Ashton, senior technical support engineer for Qwest Communications. “One of the reasons we don't go with small players is they [aren't NEBS certified].”

And it's no longer just the Bell companies that require NEBS. “We even see some companies that are not traditional RBOCs saying they want NEBS compliance, too,” said Chris Seyer, a power industry veteran who served on the management committee for Intelec 2002. In addition, because the pool of CLECs has shrunk considerably, so has the number of carriers that are more relaxed about NEBS standards, he said.

Regardless, some of the smaller niche power players simply can't afford to get NEBS certification, said Jim Hall, manager of service marketing for Emerson Network Power Global Services. “It's tough and I'm not saying it's necessarily fair,” he said.

But most vendors tend to view NEBS as a means to an end. “Frankly, it's made our business better,” APC's O'Rourke said.
— Michael Hanley