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Covering The Telecom Recovery
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 12th, 2002


By Brent Holliday
Greenstone Venture Partners

 

“Well, we’re scared but we ain’t shakin’

Kinda bent, but we ain’t breakin’…

Who can go the distance?

We’ll find out,

In the long run” - The Eagles, Long Run

 

We live in a confusing, unpredictable time.  Last week, the jobs numbers released by Statistics Canada showed that 88,000 new jobs were created in Canada in March.  It was the single largest increase in jobs in any month since 1987.  It was also, in absolute terms, bigger than the increase in jobs in the US (58,000) and they are 10x our population.  Great news?  Yes, if you don’t work in technology.  The tech sector is still moribund for jobs.  The stock markets are in continuing doldrums, despite the positive economic news (perhaps because of the fear of interest rate increases or perhaps because profits still suck, across the board). 

 

Where are we going?  Is this really the bottom of the technology market?  With seemingly contradictory data on recovery or further problems in various markets, what are we to believe?  Making good decisions about your business, whether to start your business, whether to sell or wind up your business or whether to start a new job requires good information.  In today’s column, I will focus on one big sector of the industry, telecommunications.  Next time, I will look at another big sector, information technology.

 

A warning about what you read out there.  In my 4 years as a writer for T-Net (www.bctechnology.com),  I have learned that it is far easier to rant than to write positively.  It is so easy to be a cynic.  To dump on someone or something seems like more fun and less disputable.  This is an extension of gossip, really.  Isn’t it more fun to tell someone about someone else’s misfortune?  Isn’t it easier to believe someone’s story if it is bad or, even better, salacious?  Don’t bother checking the facts when you are ready to crap all over someone, because the audience is more ready to believe.  It is very hard to write an upbeat article, because you have to do far more research to get people to believe you.  Why is it that good news is not really as good as bad news? But I digress…

 

The Telecommunications Sector Recovery

 

Let’s talk about the most pessimistic of all sectors, shall we?  Who wants to dump on telecom?  Everyone, it appears.  I rely on three sources of information to judge what is going on in telecom: Investment bank analysts, independent researchers and actual live, breathing, in-the-flesh telecom managers.  I also read daily news feeds on optical telecom, wireless and networking, but they tend to regurgitate company news releases, which are the least reliable source of what is actually happening.  For your own decisions, find the sources that back up their conclusions with more than anecdotal information.  Ask around and see who listens to whom in your sector.

 

Starting at the very end of the telecom value chain and working back, customers of telecom and datacom services are consumers and enterprise.  Consumers are looking for secure, reliable, fast data services and enhanced voice services, all for lower costs.  While we are increasingly wary of paying “menu style” for more features (call ID, voice mail, for example), hands up all you consumers that are paying over $250 a month for voice (Wireless, wireline, with all features and long distance) and data (Internet access, personal firewall, anti-virus).  Add it up.  You are paying a hell of a lot more than you did six years ago, before wireless phones, before Internet access and before enhanced phone features.  In a country where real income per household has not grown faster than inflation for the past 10 years, how much more will we shell out for this stuff, and at the expense of what?

 

The enterprise seems to have figured out a few things in this recent age of cost cutting.  First, the phone is still the primary conduit of business.  Second, e-mail has come out of nowhere to be close in importance to the phone.  Third, their spending on software automation of their business has reaped some increases in productivity and profitability. But, fourth, for now, the enterprise can stretch the life of their existing systems and solutions and not suffer in the market.  Bottom line is that telecom spending by the enterprise is not growing and that replacement cycles have stretched.

 

Next back in line are the carriers.  The most important thing to note here is that there are far less of them around now than there were two years ago.  The competitive carrier market has combusted.  But existing carriers are not the anti-competitive titans that have vanquished their upstart foes.  No, these stalwarts are saddled with debt which affects their ability to purchase equipment.  There is a long story here about why this happened, but the bottom line is that I was shocked to learn just how sick this industry really is.  In an excellent analysis of the health of the industry, the independent analysts at Optical Oracle concluded last month that, of the 14 leading carriers in the US, five have the ability to survive.  The rest are sinking fast.  Some big names are sinking like Qwest, Level 3 and Time Warner Telecom.  One of the survivors is Verizon, a massive carrier with a market cap of $113B.  It also has debt outstanding of $64B.  With a B.

 

If some of your customers (the ones buying all of your fancy new gear) have gone bankrupt, still more are teetering on the edge and your stalwarts have massive debt and lower capital spending, you have a dismal business right now.  Nortel at 7 year lows in its stock price is explainable.  Ditto for those that supply Nortel, Lucent and Alcatel (JDS Uniphase, PMC-Sierra, etc.).

 

I have searched my sources for a prediction of when the telecom sector improves.  No one wants to venture a guess right now.  The party line goes something like, “Inventory levels are low now and all the used equipment auctions from failed or downsized businesses seem to have ceased, so the bottom appears to be now.  But 2002 capital spending budgets can only be revised down, not up.  So spending will not increase until 2003 at the earliest.”  Look for no growth in 2002 and slow growth in 2003 and 2004.  Until demand is steady, the shell-shocked sector won’t try the new, new thing either.  So start-ups are wise to focus on efficiency and cost savings if they want to sell anything in the next two years.

 

The bright spot in telecommunications is wireless.  The growth in wireless spending by consumers and enterprise continues.  This is why you hear rumours about Nortel buying Motorola’s wireless systems group.  Nortel’s only way out of the current mess is to find growth markets and rally around them.  1xrtt and GPRS are the buzznames de rigeur as these higher speed wireless data networks are rolling out around the world.  With data speeds of 56K to 120K, these networks, their handsets/PDAs and the applications that can take advantage of the speeds will proliferate.

 

The wireless industry appears to be shifting gears.  New improvements in the building blocks of a wireless system are creating dramatic shifts in performance and cost.  It takes a dramatic improvement to give the beleaguered carriers a good reason to swap out old technology and invest in new gear.  This appears to be happening.  Also, the wireless applications industry is in its infancy.  It seems obvious that messaging is the first killer app and Research in Motion has capitalized on that in a slow data world.  Now that the aforementioned new networks support 5 – 10x the speed of the first generation of packet data networks, more functionality is possible.

 

This is not a hype driven world.  Breathless predictions don’t work anymore.  But conversely I don’t think all the news in the world is bad.  We are in a business cycle low that is amplified in the technology sector.  We had a higher high two years ago and we are in a lower low now.  For many of you in the telecom sector, this column may just be reinforcing what you are already seeing yourself.  I hope so.  If you are seeing something different, don’t take my word for it.  Look for other sources to validate what you are seeing… and let me know.

 

Letters From Last Time –

 

Brent,

 

A point of advice I try to make to the new entrepreneur is, "don't underestimate the sheer volume of things to be handled as a business emerges". The volume is the same in either "success" or "failure", just a different set if items for each.

 

This volume is tough enough to handle if you "know what to do". If you are new and have to stop and think too much, you can eventually drown in stuff not done. To try and make a list would be tedious, and no one would read it. This advice just needs to be accepted.

 

Tom O’Flaherty

 

Tom, thanks for the additional advice.  Said another way, “The start-up is about things that should get done, not getting done.  The corporation is about finding things to do to keep yourself relevant.  Very different motivations and very different types of stress…”

 

Hi Brent

 

Very good column and I hope that everyone has recovered from Disneyland.

 

One thing that you may want to bring up in a future column is the importance of having a good board. A good board has only one person from inside the company, has invested at least some money in the company themselves, and has the will to fire the CEO if necessary.

Steven Forth

 

Steven – I did write once about the importance of a good Board (see Grab Your Boards… www.bctechnology.com/statics/bh-jul2701.html),  but I received follow-up requests to talk about the actual operations of a good Board.  I’ll get to that soon.  Thanks for the request.

 

Hi Brent,

 

I like your analogy about Canada Tax cuts (10 customers at a restaurant) comparing the rich and the poor. It puts things in perspective.

 

I then went on to reading your previous articles .. most interesting. However, I really wish you (or T-Net) has a 'Search' function where I can search your articles with certain keywords. Anyway, just a thought.

 

Like any unemployed IT worker looking for a job, I am unsure of BC's future. My friends from Toronto, Ottawa and Montreal are screaming at me to look for jobs in their province. Montreal for example, my friend is boosting about a mega multimedia center that they are promoting. As you indicated, Ottawa and Toronto attract more investments. Most people out in the east (my friends anyway), all thinks Vancouver is not a real 'commerce' city like Toronto or New York. We get a reputation for having a relax life-style, but not a business mecca. 

 

Don't get me wrong, I love living in Vancouver. But having the highest real-estate/rents, higher taxes, glooming lumber sector and guaranteed union strikes each year (if not nurses, then teachers). There are so many things hampering BC’s success. While our minimum wage is the highest across Canada, survey best cities to live in and our universities ranking top spots, it did little for the economy. I won't delve into how many Asian immigrants went back to Asia just because our taxes are so high.

 

And this gets me thinking, should I move out to the east? I would love more than anything to contribute back to the very province that give me a degree in Computer Science. But when faced with unemployment and just the fact that there are more job postings in Toronto/Ottawa area compare to Vancouver (by a factor of 7 to 3), how long can I stay here?

 

Chris Chong

 

Chris – You are not alone in your grief over not getting a job.  My advice to you is to find work where you can.  Don’t stay here just because you feel responsible or beholden to BC.  As for your comments about the gloom in BC, I think you speak of the overall depression in the tech sector here.  But don’t be fooled by there being more job listings in Ottawa/Montreal/Toronto as an indicator of the health of their tech sector.  They simply have more companies.  They are getting in the teeth just as much as we are, even with our additional economic stress of softwood lumber duties and a tight fisted provincial government.  There is ALWAYS a grass is greener feeling when times are tough.  But they are tough all over.  For now, Vancouver is a smaller version of those other cities.  In the future, I feel that this area’s technology industry will grow faster than those areas. If you do go, keep in touch with Vancouver, because it will get better.

 

Brent,

 

I enjoyed your article on the pitfalls of startups.

Very close to the metal! 

 

I felt otherwise, though, about the Salmon Arm article that seems to have found a life of its own (I've received it 5 times from different sources). It is factually incorrect. 

 

Here is the reality (for 2000):

 

Top 3 income deciles in Canada earned 59% of the income and paid 66% of the taxes (not 89%...)

 

Bottom 3 deciles earned 8% of the income and paid 4% of tax (not 0%).  Source:  those renowned socialists... the Fraser Institute  :). www.fraserinstitute.ca/shared/readmore.asp?

The reality is our tax system is not nearly as progressive as he suggests.

 

Cheers..

Gordon Janzen

 

Gordon – Good for you to go and get the real deal on taxes.  The spirit of the parable remains the same, though.  That, with corrections to the dollar amounts, is the story that needs to be told.  The fair thing to do is reduce everyone proportionately.  The unfair thing to do is shout about how rich people get all the benefits of tax cuts, when in fact, the rich people pay their fair share of the tax base and get the same proportionate reduction.  The left wing voices are not dumb.  They are hoping the rest of the public is, in fact, too dumb to notice the flaw in their argument.


What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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