How Did This Happen?

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Another week, another crop of bad news from the telecoms industry. Bernie Ebbers, the chief executive c WorldCom, has been forced out. The share price of Qwest, another heavily indebted American telecom company, fell to an all-time low, after it had announced a first-quarter loss of $698 million. Siemens, German company, said it would cut 6,500 jobs in its telecoms- infrastructure division, on top of 10,000 lay Omega Replica off already announced. Marconi and JDS Uniphase, two other network-equipment vendors, announced or gave warning of gloomy results, and Telewest , a struggling British cable company, said that it would cut 1 ,500 jobs.

Even as the broader economic climate begins to improve, the carnage in telecoms continues. "No bottom in sight, is how analyst Nikos Theodosopoulos puts it. He notes that, historically, the telecoms sector tends to recover six months later than the economy as a whole. But this time, he says, there is evidence of bigger structural problems in the industry that will not be solved by an economic recovery. That suggests the industry ...
... must undergo painful rationalisation before things start to improve.

How did this happen? Telecoms is an infrastructure-intensive business, and infrastructure takes a long me to build. So telecoms firms have to gamble on the level of future demand. In recent years, however, their 3ts—in both fixed and mobile telecoms—have gone spectacularly wrong.

hi fixed-line telecoms, the problem is overcapacity. During the Internet boom, operators assumed that demand would continue to grow by 100% a year indefinitely. A vast construction programme ensued, fuelled y cheap capital. At its height, says Andrew Heaney of Spectrum, a consultancy, telecoms operators built seven years' worth of capacity in a single year.

The result was a capacity glut, ferocious competition and frantic price-cutting. Traffic growth has not translated into extra revenue. Fixed-line operators have now cut their infrastructure spending to focus on picking up clients rather than expanding their networks. All of this is terrible news for equipment vendors. Two of the biggest, Nortel and Lucent, have cut around 50,000 jobs apiece in the past year or so.

Operators of mobile networks also made what turned out to be an ill-judged bet on future demand. With voice revenues stabilising, the industry hoped that new data services, piped over "third generation" (3G) networks, would provide growth. But consumers in most parts of the world have been far slower to embrace new data services than the operators had hoped. Worse, European operators hobbled themselves with huge debts by overpaying for 3G licences.

Investors now worry that mobile telecoms is merely a low-growth utility, rather than an industry on the verge of a new phase of explosive expansion. The uncertainty has had a knock-on effect on wireless-infrastructure vendors, who were banking on selling vast amounts of 3G equipment. Ericsson and Motorola, for sample, are each laying Omega Speedmaster Replica off more than 40,000 workers.

In short, even though Internet traffic continues to grow and mobile phones remain popular, telecoms firms bet everything on a surge in demand that has so far failed to materialise. Backing out of these bets is proving o be very unpleasant. The carnage will continue for some time yet.