Good vibrations

The telecom power sector still has ample opportunities, even in a slower economic climate

Like so many market segments, the U.S. telecom power business exploded in 2000. The market reached an estimated $2.4 billion, up a solid 50% from the 1999 level.

Simultaneous network expansion on multiple fronts—local wireline, long distance, broadband and wireless—drove the business. Suppliers reveled in newfound business, realizing revenue surges that ranged from 25% to more than 100% in some cases.

Today a much more somber mood hangs over the industry. With stock prices down and market caps depleted, network infrastructure investment has slowed. As a follow-on application, power equipment demand is buffeted by the purchase delays of switching, transmission and wireless systems. The big question is: What will the telecom power market look like in 2001 and beyond?

Market drivers

Capital expenditure levels reached unprecedented heights in the past two years. U.S. public network infrastructure spending broke through the $100 billion threshold for the first time in 2000. The nearly $122 billion invested in wireline and wireless networks in 2000 represented a 42% increase over the $86 billion spent in 1999. That figure itself represented a 44% jump over the 1998 spending level. Since 1998, public network capex has grown at a 43% compounded average annual rate (Figure 1).

By contrast, the outlook for 2001 is quite subdued. Skyline Marketing Group estimates that cumulative public network investment will decline about 5% in 2001 to $116 billion. The incumbent local exchange carriers (ILECs), interexchange carriers (IXCs) and wireless carriers are the big spenders, collectively accounting for 77% of the total. Competitive local exchange carriers (CLECs) and cable companies split the balance. Aggregate CLEC spending is off 36% and could decline further before the end of the year, even as a few established CLECs perform well.

The good news is that, despite a small decline, capital spending is not contracting appreciably. Moreover, Skyline expects that the telecom power business will garner revenues at a rate that exceeds the overall level of capital spending pace.

The good news is that, despite a small decline, capital spending is not contracting appreciably. Moreover, Skyline expects that the telecom power business will garner revenues at a rate that exceeds the overall level of capital spending pace.

Several power equipment suppliers report that orders are being delayed but not canceled. Nor is the slowdown uniform. On the contrary, there are pockets of above-average growth that power equipment vendors can exploit.

These growth pockets include the following:

• Steady investment in broadband access facilities, mainly for high-speed local loops
• Sustaining demand for Web hosting sites, telecom hotels and server farms
• Expansion of wireless networks to serve a growing subscriber base that is increasing its usage
• Increasing critical need for telecom power in the face of persistent, and likely, more frequent utility power disruptions and shortages
• The consequential need to maintain and service a proliferating base of power plants and batteries in central offices and remote sites alike as power knowledge among incumbent and emerging carriers diminishes.

The ILECs, particularly RBOCs, continue upgrading their local loop plant with digital loop carrier (DLC) systems, and high-speed asymmetrical DSL (ADSL) for residential and small business customers.

DLC penetration is expected to increase from about one-third to more than 50% of total access lines by 2004. This deployment requires a lot of remote terminals, each one with a small power plant. Deployment snags aside, demand for ADSL remains strong with installations expected to triple from 2 million to 6 million lines by the end of 2001, and growing to nearly 20 million lines by 2004.

Both SBC Communications and Verizon have been touting ambitious ADSL roll-out plans for 2001. Each ADSL line draws roughly 4 watts of DC power compared with 2 watts for voice lines. As the ADSL installed base grows, so will the need for DC power plant expansions.

IXCs as a group are completing a major construction round by laying fiber cable. That activity drove huge demand for large 10,000 A power plants at hubs and junctions. With the initial phase finished, IXC capital spending has dropped for now.

Skyline expects that IXC spending will be 8% below last year’s level. Companies such as Level 3 Communications and WorldCom recently deferred orders for new large DC power systems. IXCs are now focusing on selling network capacity.

Much of the current spending is to add optical networking gear at each end of the dark fiber. Another important development is the establishment of Web hosting sites that connect to their network. IXCs are either building their own, or cutting deals working in conjunction with Web hosting companies and real estate developers that connect to the IXC network.

Sprint long distance is making a major commitment in this area this year. These so-called telecom hotels, server farms and data centers house computers and other electronics for companies that use the Internet. These sites are huge power guzzlers typically requiring multimegawatts of utility power. Inside, various combinations of uninterruptible power systems (UPSs) and very large DC configurations ensure 24/7 uptime.

Wireless network expansion continues at a steady pace with capital budgets among the top 20 carriers up 7% over 2000. That level is down from the 65% run-up achieved in 2000. Nonetheless, there is still work to be done in extending the wireless operating footprint and filling pockets in high-demand areas as the subscriber base and subsequent minutes of use keep increasing.

...the leading wireless carriers, including Verizon, Cingular, Sprint PCS and AT&T Wireless, have signaled their commitment to 3G migration over the next three to four years.

More important, the leading wireless carriers, including Verizon, Cingular, Sprint PCS and AT&T Wireless, have signaled their commitment to 3G migration over the next three to four years. At year-end 2000, there were an estimated 104 million U.S. wireless subscribers in the U.S.; that is expected to grow to 164 million subscribers by 2004. Moreover, minutes of use trends show steady usage increases in the 400 to 500 minutes a month range in that timeframe—much of this increased usage will include message and wireless data-oriented services.

The combination of more subscribers and more minutes of use will drive the need for more cell sites. Wireless carriers are adding nearly 5000 towers and more than 15,000 cell sites each year with a small power plant at each cell site.

An important lesson to be learned from the ongoing California energy crisis is that abundant, reliable and affordable utility power is no longer assured.

Skyline expects that through the hot summer months when energy demand is at its highest, most California telecom networks will be running on batteries as the region experiences rolling blackouts and brownouts. Frequent and deep discharge/recharge cycles certainly will test the condition of the DC plants in those networks.

Power equipment suppliers have an opportunity to step up to the plate with people and product support for all the wireline and wireless carriers operating in the region.

Although the California situation may be extreme, the load on the grid is increasing faster than generation and transmission capacity is coming online. In some cases, new Web hosting sites cannot get the needed utility power until new infrastructure is built. Skyline expects similar situations to occur across the country in the not-too-distant future.

All power systems require maintenance. The problem is that the level of power knowledge and field staff with power expertise that is resident among the carriers is diminishing. A lot of ILEC employees with power experience are retiring. At the same time, new carriers are not staffing power expertise. So there is an increasing shift to contract maintenance services among carriers for all types. This is an opportunity for equipment manufacturers and service contractors alike.

Several independent power service organizations report that their business is up “20% to 30%” this year, compared with single-digit sales growth prospects among some equipment manufacturers.

Steady outlook

The U.S. DC telecom power equipment market in 2000 reached an estimated $2.44 billion. Skyline predicts that the market will grow at a 13% to 14% compounded average annual growth rate reaching $4.1 billion by 2004 (Figure 2).

The power equipment portion, excluding batteries, auxiliary power equipment, and engineering and installation, will grow at more than 14% a year to $2.4 billion in the same timeframe.

While the five-year view is up from last year’s forecast, the outlook for 2001 is more modest. Skyline estimates that the U.S. market will reach $2.53 billion, up 4% from 2000.

It is interesting that these growth rates represent a return to historical patterns. The past two years were the exception. “Steady as she goes” applies for the near-term.

Pricing is an important variable that could affect the overall market value. Prices have held relatively stable until now. Demand was high and time-to-market was more important than price.

In a soft market...vendors may be inclined to cut prices--either to win orders or to take market share from weaker competitors. Vendors would be ill-advised, however, to engage in aggressive pricing tactics simply to prop up their top line.

In a soft market like this, however, vendors may be inclined to cut prices--either to win orders or to take market share from weaker competitors. Vendors would be ill-advised, however, to engage in aggressive pricing tactics simply to prop up their top line. Whereas customers are pushing for price concessions, vendors should offer more service and support as a wrapper to equipment sales. Vendors must look for ways to lower the overall cost of power ownership rather than just dropping upfront prices. Positioning as a value-added supplier will likely gain long-term profitable business when the market picks up even if it means foregoing short-term, marginal sales.

Pricing pressures are more likely with low-end, commodity-like power systems. For instance, equipment-only prices on a 600 A plant equipped with rectifiers for 500 A output, A/B distribution and requiring little engineering and installation could drop another 10% below street-level prices.

On the other hand, selling a large 10,000 A plant that requires a lot of engineering and installation offers the vendor an opportunity to buffer equipment prices with high-margin, value-added services.

Figure 3 shows a relative comparison on a dollar per watt basis of single phase, -48 VDC switch mode rectifier prices in 1500, 2500 and 5000 watt ranges. List prices range $1.43 per watt for 30 A models, $1.18 per watt for 50 A units and 78 (cents) per watt for 100 A sizes. Street prices range 72% to 78% of list prices. On selected bids, some vendors are quoting as low as 60¢ per watt.

Be the first on your block…

Innovation is alive and well in telecom power. New developments are taking place in three key areas: power density, packaging and system control.

New rectifier modules are available in 55 A and 70 A sizes in the same space as conventional 50 A units. Complete -48 VDC power plants with rectifiers, control and distribution can be configured up to 1200 A on a single 7-foot rack. Higher densities mean occupying a smaller footprint, especially in sites where floor space is at a premium.

Highly modular, compact designs are becoming the norm for both power plants and batteries and their associated framework. In addition to minimizing floor space, a plug-and-play approach lends itself to ease of installation and maintenance, thereby reducing both engineering and installation costs.

The “power plant-on-a-shelf” concept is popular in many small wireless cell sites where the radio equipment, power system and batteries can be mounted on the same frame.

System controllers are becoming more intelligent and intuitive to operate. With browser-like interfaces, programmable features and IP connections, monitoring the plant status and executing commands is no more difficult than surfing the Internet. Ease of use and interpretation is necessary in an environment where both network managers and field technicians may not have a lot of power experience.

It is noteworthy that alternate energy sources such as fuel cells, microturbines, and flywheels are all in the early stages of making inroads into telecom applications.

Global perspectives

The outlook for the global telecom DC power systems market is healthy and positive for the next three to five years. DC power systems support the rapid development of telecom infrastructure around the world and ensure that both wireline and wireless networks deliver reliable, uninterrupted service.

Today, people and businesses all over the world want a telecom system that works. Indeed, the future growth and prosperity of many countries is dependent upon efficient, modern telecommunications.

The primary imperative for telecommunications infrastructure expansion is economic development. Simply, the economic viability of a country and a region correlates directly with the efficiency and reliability of its telecom network. Today, people and businesses all over the world want a telecom system that works. Indeed, the future growth and prosperity of many countries is dependent upon efficient, modern telecommunications.

Consequently, global telecom network construction and modernization will continue at double-digit rates for the foreseeable future. Worldwide capital spending for telecommunications network expansion reached over $300 billion in 2000. That figure is projected to more than double to nearly $700 billion by 2005.

Skyline forecasts that the global DC power equipment-only demand will grow from $4.3 billion in 2000 to $12.6 billion by 2005, at a 24% compounded annual growth rate. This data excludes batteries, and engineering and installation services.

Several factors are driving this expansion:

• Growing worldwide voice and data traffic volumes
• The need for faster Internet access
• New wireline and wireless Internet-based services that require greater bandwidth per subscriber
• Introduction of wireless global roaming service
• The falling cost of information enabled by advances in communications and computing technologies

These factors have significant implications for DC power on a world scale.

Demand for DC power systems is growing faster than the overall telecom equipment market because these products are pervasive throughout the telecom network and are required in every type of wireline and wireless application. Moreover, the long-term trend is towards high-volume deployments of distributed small power plants, and away from large, centralized units.

Different regional markets are growing at different rates, however. The big North American market accounts for about 35% of the world market but grows at a slower-than-average 17% a year over the forecast.

Europe, Middle East and Africa—dominated by Europe though not as big as the North American market—grows at 21% per annum. This growth has been spurred by deregulation, fiber optic networks capacity adds and GSM wireless networks evolution to 3G.

High-population Asia-Pacific markets are growing at a 30% annual average as the regional economies strengthen, and a solid middle class emerges.

Caribbean and Latin America—led by Brazil—continues with wireline and wireless network privatization and modernization and grows with the overall market.

At 36% a year, China exhibits the fastest growth with its “300 networks” and a population base of over 1 billion that is just discovering the appeal of modern communications.

Today, there are several dozen telecom DC power system manufacturers worldwide. Suppliers fall into several key categories:

• stand-alone DC power specialists such as Peco II and Eltek/PCP;
• diversified power companies such as Emerson, Invensys and Power-One;
• vertically integrated companies including Marconi Communications, Alcatel and Huawei Technologies; and
• conglomerates such as Tyco Electronics.

Only a few of these suppliers play on a global basis to any degree—Emerson Energy Systems, Invensys, Tyco Electronics Power Systems and Eltek/PCP. The remainder comprises a mix of large and small regional vendors (Figure 4).

Supplier restructuring and alignments likely will continue. Several dynamics are at play here. First, there is ongoing interest in telecom power from other power industries such as OEM power supplies, and UPS systems. Second, smaller telecom power outfits that are having difficulty going it alone could merge or be acquired by bigger players. At the same time, large telecom OEMs are divesting their vertically integrated DC power operations to focus on their core businesses. Finally, established DC power systems suppliers are getting bigger by acquiring competitors.

Strategic considerations

Power equipment vendors face a host of challenges to sustain and grow their business in a down market. As a systems business, there is ample opportunity to create customer value. This means, however, that vendors should reconsider their strategies in light of current market conditions.

Customers want to work with vendors that are, first and foremost, responsive to their needs. In most cases, rapid delivery is still important to meet growing service demands. They often need a lot of hand-holding. One example is that an IXC network manager might see power vendor needed three times the field force and twice the time to commission its systems in the IXC’s large Web hosting sites, even though the vendor offers reliable products and competitive prices.

Customers want vendors that are easy to do business with. This means simplified ordering and fulfillment such as a single order code for a complete plant. They want power systems that are easy to install, operate and maintain. They also expect the vendor to perform services that customers used to do themselves. More and more, vendors must find ways to help customers with the financial aspects of the deal. This does not necessarily mean vendor financing, but rather, attractive terms and conditions. Vendors must be proactive in helping customers understand how they can reduce the cost of power systems ownership.

Customers ultimately want power to be transparent to their operations. “It just has to work” is still an important operating criterion. Problems or outages must be resolved quickly. Though attempted without much success in the past, new consideration should be given to outsourcing power operations to manufacturers or third parties that are willing to manage parts of the network for the customer. Now might be an ideal time to revive the “DC utility” concept where the vendor assumes full responsibility for planning, building and operating the customer’s DC power systems. In the end, customers want vendors that support their business priorities, a type of business partner rather than just a supplier.
John M. Celentano is President of Skyline Marketing Group in Owings Mills, Md. His e-mail address is john@skymarketing.com.

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