Will the Market Meltdown Impact Telecom?

Industry Should Brace for Hit in 6-9 Months, Analysts Warn

Beyond the Credit Crunch

Credit’s not the only concern for the communications sector. As the months chug along – Goldstein doesn’t expect a turnaround to begin until at least next summer – consumers and businesses will pore over their expenses and slash any area they deem even somewhat indulgent.

“You’re already seeing churn at the low end from customers, and that will start working its way up to the midsize and larger customers,” said Donna Jaegers, vice president and senior research analyst for D.A. Davidson & Co., a financial services holding company.

That’s already happening, said Ovum’s Kline. When large accounts such as Lehman Brothers and Bear Stearns hit the skids, some provider loses because the services either are cut or combined with another firm’s network. “The downturn is not without its consequences here,” he said.

Jaegers agreed, adding that service providers won’t be able to accurately measure the impact of this week’s market meltdown for another six or nine months. It can take that long for accounting departments to process revenue numbers and for quarterly earnings to filter through the system. “Even if the economy bottomed out tomorrow, you’d still see six months’ lag with business under pressure,” Jaegers said. Yet it’s clear telecom spending will slow, which means providers should act now to mitigate the damage.

“One tactic they can take to offset that churn is to start to get more aggressive in rolling out Ethernet services,” Jaegers said. “That’s a secular area where IT managers need more bandwidth but want to cut telecom spend. Ethernet’s an answer.”

Potential Ethernet users will seek out suppliers with solid balance sheets, steady leadership and reliable, extensive networks. The Bells claim about 75 percent of the enterprise Ethernet market, Jaegers said. “CLECs can pick up share if they’re a leader in Ethernet,” she said.

Dot-Com Dreams?

More than one long-time telecom professional probably is wheezing into a paper bag this week, trying to cope with flashbacks to the late ‘90s and early 2000s. But this mess doesn’t parallel previous collapses or recessions, analysts said.

“These are uncharted waters. We’ve never seen this before,” Goldstein said.

That’s largely because the Bush Administration over the past eight years undid more financial services regulation than any other presidential regime. Investors then devised the “creative financing” schemes that underpinned the subprime mortgage market. Now the questions are, what’s next and are we in a recession? Even the experts aren’t sure.

“We still haven’t seen a negative GDP yet, but my fear is that with all that’s happened in the last two days, it could get there now,” said Kline. Economists define a recession as comprising two quarters of consecutive decline in the gross domestic product.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines