Why this downturn is different

by Stephen M. Hardy

Climb off that ledge, come back through the window of your office, and have a seat. (Your office is on the first floor anyway. How much damage did you think you were going to do?) Here—breathe into this paper bag, and calm down.

You somehow managed to survive the Optical Ice Age. Your bottom line had already bottomed out and was bouncing back up; you might even have been profitable. Maybe not as profitable as you expected to be because your margins were still a source of concern to you and your shareholders. But business had definitely rebounded over the past couple of years. You were starting to think you were going to make it.

And then this�this�recession happened.

I know you're thinking that you don't have what it takes to survive another downturn. You're not even sure how you survived the last one. So what's the point? This time there's no doubt about it; we're all doomed.

Well, no, not quite, because this downturn is different.

First and foremost, this one isn't your fault. This time it is unlikely that you owe your employment to over–exuberant investors backing some half–baked business plan that echoes the old Steven Wright line: "I saw this in a cartoon once—I think I can do it." You have not gone from Wall Street flavor of the month to castor oil. (This time, that would be Wall Street itself.) No one is talking about a capacity glut or hunting down who first misrepresented the rate at which Internet traffic is expanding.

Instead, analysts continue to insist that the bandwidth fundamentals that provide the foundation for the optical communications industry remain sound. You can find an example of this within our "Analyst Corner" article (see "Is high–speed networking impervious to the downturn?" on page 29). The opinions I recorded in speaking to Michael Howard are being repeated by others. The amount of capacity currently available is more closely aligned to actual bandwidth demand than in 2001 or 2002. Service providers, regardless of whether they come from a telco or cable–TV background, are straining to differentiate themselves based on the size of the pipe they can provide their customers and the high–bandwidth services those pipes can provide. That requires at least some ongoing investment, say the analysts. And here we hope that another point of differentiation between this dark period and the last one is that the market research that suggests total collapse isn't imminent is correct this time.

The second major difference is that, at the beginning of this century, there were all kinds of speculation about what one could do with the Internet (see Steven Wright line above). Now, we have seen services based on IP and Ethernet become intrinsic parts of our global culture. We like our digital media, gaming, video, and similar traffic–generating pursuits. We're unlikely to give them up easily, even in the face of dwindling economic resources. The CEO of an FTTH networking company once told me that he loved bidding on projects for low–income housing because the take rates would be fantastic. People will pay for at–home entertainment, particularly when they can't afford other options, he said. If this holds true, triple–play (or at least video–based) services should remain popular and provide carriers with at least a modicum of revenue to spend.

Which is not to say that communications in general, and optical communications in particular, is recession–proof. No, this will hurt. And certainly there are some ways in which this downturn is different that aren't positive. This is a general recession that won't go away with the application of a little bit of time and a return to sense within the industry. In some ways, there isn't a lot companies can do in this space; they just have to wait things out.

Hold on—that's not exactly true. The first thing investment brokers tell you in a bear market is to shop for bargains. Invest now at low prices and wait for the inevitable recovery that will help you reap financial rewards. In the same way, companies that expect to be major players when carriers start spending again should seek opportunities to expand their product lines or expertise. Weaker companies that were hanging on over the past few years will be tested in this difficult period. The acquisition price for many of these firms will likely decrease. Therefore, I foresee a new round of consolidation hitting the optical communications space—which, of course, is something that observers have long demanded.

So cheer up. The current downturn isn't at all like the last one, and will likely result in a healthier industry. All you have to do is wait for the recession to recede.

No problem, right?

STEPHEN M. HARDY
Editorial Director & Associate Publisher
stephenh@pennwell.com

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