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Peter Cochrane's Uncommon Sense: Don't make life harder than it already is
A lesson for everyone - especially debt-laden telcos...
In his second column for silicon.com, Dr Peter Cochrane looks at what he thinks is the common nonsense the telecoms industry - from vendors to analysts - is pinning its future on. Could it be the principal players have misread a world increasingly making use of simple, DIY solutions...
As a child I had considerable problems gaining an education. Not that anyone denied me the opportunity - no one tried to stop me, I just didn't seem to fit. Or rather my brain didn't. It was hard for me not to think and always ask 'Why?'. But the system demanded a blind acceptance of fact and function - just learn all this stuff because that's the way it is.
My struggle with education continued throughout my time at university. Always asking why, digging deeper and trying to understand always seemed a necessity to me. Even during my decades in R&D I seemed to solve problems by thinking differently rather than blindly turning handles. And in my later years in industry my solutions always seemed different to the norm and not straight out of any textbook.
When asked to join a large team and build my initial R&D budget I watched my fellow managers counting the rubber bands and paperclips, pencils and paper, people and equipment, spending days building the numbers a line at a time, bottom up. To their disconcert I went to the Fortune 500 and looked at the total earnings per company, number of employees, amount of R&D budget. I then calculated the average earnings and expenditure per employee and estimated the standard deviation.
Interestingly, when all the numbers were in from all the managers, they were all in the same ballpark. But in my case I had spent my spare days working on the detail of my program and the recruiting of staff. My rationale said that creating an R&D budget has been done thousands of times by thousands of managers - and perhaps I could ride on their wisdom and efforts. Well, it worked!
More recently I was looking at the recovery forecasts and rhetoric being put forward by leaders and managers in the telecoms sector. From fixed line to mobile there is a good deal of positive spin that I find hard to support. I don't think broadband and/or 3G will save them. Quite the contrary.
While the analysts and gurus present their deep and complex models for this sector, in my mind it goes something like this: Take a large sample of the leading telcos and add up their current debts. It is easy to get to $500bn. Then add up the post tax, pre-crash profits for the same group and the number comes out around $100bn. Then look at the declared pre- and post-crash capital expenditure (capex) of each company and it averages much less than 50 per cent. Next, take a look at profitability, and that is way down too.
What can we gather from these numbers? First, there is no way this group of companies can recover their position in less than five years - dividing $500bn by $100bn gives us that figure straight away.
Second, the fall in profits and capex says their expansion into broadband, 3G and all the associated money making services being put forward as the next big thing are going to be severely limited.
Inside the companies themselves, and away from the public eye, the word is hunker down, sweat the assets, run down service levels, talk up the value, project a positive face and talk recovery. But in the boardrooms the talk is of merger and consolidation, of cost reduction and staffing levels. Tough times indeed.
My forecast is for a 7-10 year recovery with a massive reduction in the number of companies and people, with little investment in appropriate infrastructure that would actually make a long-term difference. I suspect we will see the quiet abandonment of broadband and 3G, or at least an accelerated slow down, across a broad front.
In the same way food, automotive and electronics production have made one-way transitions before, I don't expect the telecoms sector to recover its former gloss and profitability. The recent damage done by the dot-com bust, economic downturn and WorldCom scandal, has not only tarnished telcos' image, it has seen an important transition to a sector of narrow margins and oblique competition. The economy of this planet cannot afford hundreds of network companies. It can only support a handful.
So where will the new growth come from? I was in Fry's Electronics (Palo Alto) last week and saw 80GB hard drives for $79 and the price of PCs and laptops seemingly around 70 per cent of 12 months ago. I also saw mountains of WiFi (IEEE 802.11) wireless networking equipment being sold for home and office use at prices spanning $75-350. The rate of sale was awesome!
I suspect the pent-up demand for wideband (not broadband) is growing and isn't going away. And if the network companies cannot supply I think the population at large will engineer and supply it themselves. We've seen similar examples of users going it alone in the past 50 years. It could be that DIY nets are GO! So much for the traditional operators.
This column was typed on an Apple G4 laptop on Virgin Atlantic Flight 020 between San Francisco and London, and sent from the BA Lounge at Heathrow over a dial-up line