Positive signposts ahead for 2003

In mid-November, we had the opportunity to attend market researcher RHK's STARTRAX Conference, a worthwhile event for many reasons, but most important, we came away with a number of cues that signals 2003 is likely to prove to be the year for recovery. As we enter the new year, we still face hefty year-to-year declines in spending through the first half; however, the comparisons to the second half of 2002 grow easier after midyear and should turn positive for North American business in the third or fourth quarter of 2003. Even if the next four quarters tally to negative growth, the return to positive figures is apt to prove favorable for the shares of many of the companies that participate in the market.

Many questions remain as to just how good it can get, and there were few answers emanating from discussions at the RHK conference. But there was a greater spirit of cooperation and sharing of experiences and ideas that typifies human behavior when we collectively go through tough times and often produce solutions to problems or at least a base to build on. Something else that was prevalent and struck us as being more than just lip service was a return to focusing on the customer. That theme resonated all the way from carriers to components suppliers.

More important than either of those takeaways is that we clearly heard more of a sense of optimism from many of the participants, because the "inventory overhang" among customers is beginning to show signs of abating and there are requests for proposal in the market that have tangible business attached to them. In addition, we came away feeling the debacle that beset the industry for so long and cut so deep has shredded a decade of bad habits and practices at places like Lucent Technologies and Nortel Networks.

For the past two months, we have harped on the idea of splitting today's service providers into a business of providing networks and another of selling service. We took up that topic with a few of the carrier representatives attending the conference, and not surprisingly, they all seem to believe they can do it more inexpensively themselves. We are undeterred though and heard other ideas that encouraged us.

Along those lines, we met with John Heindel, president of Lucent's services business, an area the company hopes will account for more than 30% of sales during the next three to four years. We wanted to explore what things the company believes carriers might be willing to turn over to Lucent that are currently part of the carrier's operating expenses. The first thing that rolled off Heindel's lips is inventory management. There's an idea. We've only spent the last two years fighting our way out from under an avalanche of excess inventory. This inventory grew not only from normal carrier practices of sparing and a capacity safety net for unanticipated requirements, but also a fear of not being able to procure equipment due to shortages back in the industry's heyday.

It would be tough to argue that any carrier got that job done right and it is easier for us to conceive that the supplier that has sold a lot of the equipment in the market might be in a better position to manage that inventory because of that company's broader view of the market. We can imagine the thoughts of readers who supplied Lucent while the company lived through its own inability to track inventory over the past few years. An early slide into the telecommunications abyss, however, has given Lucent a head start over many of its customers in dealing with this problem.

The second area we explored with Heindel was the outsourcing of certain facilities management. That may not be so far removed from the inventory issue, but think about it along these lines: Lucent has shipped something on the order of 80,000 CDMA base stations. That number is split among many customers who spend a lot of time and money monitoring the base stations and surrounding equipment. A couple of powerful network management tools developed and deployed by Lucent to monitor the gear would potentially reduce the associated labor, along with the investment being amortized over a much larger base of equipment. We believe there are probably many examples out there of operational activities that if offloaded to a third party, might produce significant cost savings to the carriers if they would only open up to some of the ideas.

The third subject discussed was the outsourcing of new network deployments, including equipment from third-party hardware vendors. In the "good old days," this service activity was often given away as part of the deal, but those days are gone. For many emerging equipment suppliers, the lack of significant funding from venture backers will leave outsourcing as their only option and maybe not such a bad option. Beyond the idea that this group would be deploying other people's hardware, the goal is to take expertise supported by carriers' internal service organizations as well as certain vendors, and drive it in the vendor direction. On the carriers' books, it is a cost of service; for Lucent, it would be a business unit with cost savings goals promised to the customer and profit goals projected to management. Take a cost center and turn it into a profit center and more often than not better ways are found to get things done.

Kevin Slocum is a managing director and head of communications research at SoundView Technology Group (Greenwich, CT). He has more than 20 years of financial industry experience, including institutional equity research sales and analysis, and has been named to the Wall Street Journal's prestigious "Home Run Hitter" list two consecutive years. He can be reached at 203-321-7200 or [email protected].