Recent instabilities in the high-tech marketplace have not been kind to the telecommunications industry. Major companies such as Lucent Technologies are expecting significant losses for the first quarter 2001.
And smaller companies such as Maverix.net based in Chicago cite "capital marketing conditions affecting the DSL marketplace" as the cause of an 80% cutback of employees in late fall. The company was expected to close its doors by year’s end, not long after entering a variety of Midwest markets, including Milwaukee.
So what’s caused the massive slow-down in the telecom market?
It’s all about venture capital, says Chris Coetzee, a Chicago-based investment banker for Robert W. Baird specializing in the telecommunications market. "I think the market had gotten to the point here where almost anyone who had a business plan and was in one of these attractive sectors was able to attract capital," he says, referring to high-tech, telecom sectors. "And part of the issue was – and this was also dot-com driven and telecom driven – was that management teams were able to put in place a plan that was not fully funded."
In other words, the companies had a continued need for capital – unlike so-called "old economy" companies that typically require only an initial capital funding, then get to the point where they can be cashflow positive. "A lot of these firms couldn’t do that, and they had a continued need to come back to the capital markets. And when the capital markets dried up, their business plans came under severe pressure," says Coetzee.
That was the core reason for the pull-back of the 18-month-old telecom company, Maverix.net. According to a mid-December press release by the firm: "While customer demand for DSL services like those offered by Maverix.net remains quite strong, investors have shown increasing reluctance to fund the continued growth of competitive telecom providers."
Lucent expressed similar conditions in its statement issued by Henry Schacht, chairman and CEO of the company in late December. The lowered expectations reflect "an overall softening in the competitive local-exchange carrier market, slowdown in capital spending by established service providers, lower software sales and a more focused use of vendor financing."
What that will mean for the industry, according to Coetzee, is a gradual return to more attractive market conditions, despite the recent shake-up. "But unless companies have good management teams and have good, well-thought-out strategies, they’re going to be a lot more challenged to get both private equity and public equity capital," he says.
What about DSL?
DSL – or digital subscriber line – has been just one of the technologies feeling the stress of the current market conditions. Although the technology offers high-speed service from 128Kbps to 7Mbps through existing telephone lines, the technology is hindered primarily by its consumer accessibility.
"Although you’re starting to see close to two million DSL subscribers out there, it’s slow and it’s getting held up primarily because of the provisioning issues," says Coetzee. "It’s just taking the existing (telecommunications) companies a lot longer to deploy. And part of it is real provision issues with some of the major companies – they just don’t have the manpower.
"You need a salesforce," he continues. "You need to have people making actual connections and that all requires capital. So they went the route of putting these big national networks in place, and now they have to be able to deliver the product to the end user."
So what does the future hold for DSL – will it adapt or become extinct?
"I think it’s going to adapt," says Coetzee. "It’s a technology that allows the existing infrastructure to provide significantly more bandwidth. … So DSL may have a very different form 15 years from now, 10 years from now – but in the interim, cable modems and DSL are going to be the two major ways to enhance broadband."
Other telecom variances that are available have seen increasing consumer popularity as well. "We’re seeing broadband wireless Internet, for instance, the awesome wireless services that are being offered," says Coetzee. "But there again, it’s rather slow."
Telecom in 2001
The upheaval in the high-tech and telecom industries will primarily serve to flush out the weaker competition, therefore balancing the market, according to Coetzee. "I don’t envision that the financing environment is going to be as curtailed in the next six months as it is today," he says. "What’s going to happen is, it’s going to be much more of a focus on quality players and the separation between the real quality companies in each of these sectors and the ones that are fringe opportunities. The quality companies are going to continue to have access to capital. And there’s going to be consolidation as well."
Referring to the upheaval as a transition phase, Coetzee says a lot of the private-equity firms are having to rethink their investments and ascertain which of those they’re prepared to put more capital into and which of those they’re going to write off.
"There’s still a lot of private equity out there to be invested. And we have been seeing a lot of people sitting on their hands and waiting until the new year," Coetzee says.
A gradual return to more normal conditions is what most in the investment realm are anticipating for the new year. The significant ramp in the markets that were witnessed in early 2000 will most likely not be seen again in the industry any time soon.
"If you think of Amazon.com and how far out you have to go until that cashflow is positive, well, that’s part of the issue now," says Coetzee. "The analysts on Wall Street are saying that model is going to be under severe pressure unless they can continue to fund it. Well, the same is true for a number of the telecom situations, particularly service providers, and in some cases the actual equipment providers who for two or three years have had an ongoing need for capital to fund the business. And it’s only going to be the real strong management teams that can continue to do that."
