Open Season on the Market

Re-opening after the terrorist attacks on Sept. 17, the stock market plunged. Although not as large of a drop as the crash of 1987, the Dow Jones Industrial Average slid 7.1%. Questions linger: What, if any, effect will the terrorist attacks have on an already-flagging telecom industry?

Unlike other immediate outcomes of the attacks, wireless carriers knew of at least one upside. In the weeks following the hijackings, the wireless phone vaulted to a venerable symbol for all communications. Early reports revealed that phone sales around the country were brisk. Could the unprecedented stature and bump in subscribership be enough to break wireless' vicious circle?

Equipment providers were sucking for air following the dot-com bombs and the deepening economic crisis. Simultaneously, carriers sharply curtailed capital expenditures, thus adding to equipment providers' pain. Could more subscribers inspire carriers to begin spending again?

A host of indicators provide hints, but it's yet unclear if all of the clues add up to a turnaround.

Wireless phone stores detected welcomed increases in sales activity during the weeks following the incident. As one Verizon representative noted, increased traffic, many of the shoppers first-time subscribers, kept his sales agents hopping throughout September. Early quarterly figures don't reveal tangible increases.

In its third-quarter news, Verizon Wireless reported solid, but not extraordinary, growth. It added 752,000 new customers, an increase of 12.3% over the third quarter last year. According to Nancy Stark, Verizon spokesperson, the increased interest in phones in September represented a “temporary uptick but was not material to the quarter.”

If not in response to the perceived need for security, what accounted for the double-digit increase? Analysts agree that autumn has been an increasingly strong sales period because it coincides with the beginning of school and is increasingly supported by the emerging youth market.

New subscribers mean more phone sales. Added phone sales mean more network usage. Increased usage requires improvements in network infrastructure. Under normal circumstances, a sudden growth spurt such as what was experienced in September would translate into more spending on the networks, analysts agree. However, most carriers are reporting flat to reduced capital expenditure spending for 2001.

Verizon Wireless will spend about the same as it did last year — roughly $4 billion on network equipment. Nextel Communications, which recently announced the Motorola software upgrade of its iDEN technology, will double its voice capacity in 2003. However, it plans to spend $2.5 billion on its network this year, down from $3 billion last year.

The incredible thing that has happened in the second half of 2001 is that carriers — wireless and wireline — have stopped all capital spending. Although the events of this autumn are likely to push carriers to paralysis, according to one long-time telecom executive, it can't go on indefinitely. The influx of new subscribers and demand for voice services alone will force carriers to feed the networks and infrastructures so they can support the demands of their customers.

Another factor to consider for telecom's recovery is consumer confidence. Already analysts had detected a waver. The waver was the presage to the recession. But what happened to consumer confidence after the tragedy? What would happen as retaliation escalated to a quantifiable war?

In 1973's oil crisis, consumer confidence plunged 53.4 points. The 1987 stock-market crash accounted for a 35-point drop. The 1990 Gulf conflict measured a 47-point drop. According to the Consumer Research Center, consumer confidence, which had declined in August, plummeted in September, its largest drop since 1990. Survey results conducted before and after the terrorist attacks differed only slightly.

Although consumer confidence is shaky, ironically, the stock performance of many infrastructure bellwethers such as Ericsson, Lucent, Motorola, Nokia and Qualcomm are showing a renaissance. For the entirety of the year, these companies seemed helpless on their slippery slopes. Nothing seemed to stem the slide — not layoffs, not reorganizations, not division sell-offs. However, through October, probably in reaction to their earlier “fixes” as opposed to Sept. 11, the stocks began to turn the corner.

As for carriers, performance was solid, but not rosy. Immediately following the incidents, Verizon Wireless shares rose 6%; AT&T Wireless shares increased 9.4%. Both Nextel and Sprint PCS experienced some gains as well, posting 4.7% and 4.3%, respectively.

It appears 2002 provided time for vendors to reorganize following the failure of their Internet-related ventures and bring their focus back to what they do best. If these vendors can sustain their autumnal improvements in the market and rebuild investor confidence, they will be in stronger stead when wireless carriers begin spending again. Unfortunately, that could be a long time in coming. Analysts universally agree that carriers' 2002 capital expenditures likely will mimic those of this year.

Past recessions generally have been precipitated by shocks to the economy such as the oil crisis or the Gulf War. Would terrorist activity and the Afghan conflict send comparable shock waves that would further disrupt the economy and telecom spending?

Allan Tumolillo, Probe Research COO, has studied the catastrophe theory, discontinuities in telecom and the ability of organizations to respond to unexpected change. He indicates that there's no question that there are significant disruptions.

“The importance of shocks is that they change both the rules and the environment for network and service evolution,” Tumolillo said. The terror attacks and their aftermath “will likely have exaggerated effects on … legislation and regulation, industry structure, the importance of security considerations, where network assets are located, the role of wireless, how the Internet develops and the fortunes of specific vendor companies.”