At the beginning of 2009, global financial markets remain unsteady following the reaction of credit markets to problems in the U.S. mortgage industry and lending worldwide grounding to a halt during 2008.

Because U.S. business and private investors got too complacent about risk, the amount of mortgages that were sold by banks to investment banks and then sold as U.S.-mortgage-related securities to investors grew from approximately $67 billion in 1996 to $773 billion in 2006.

According to Insight Research(1), this is one of the key reasons that set off the current lending crisis and created serious concern about the health of the global economy. Another precipitating factor in the current credit squeeze was the legalization of credit default swaps in 2000 which allowed investors to “bet” that the mortgage market would fail.

Financial institutions such as Lehman Brothers failed in part due to the inability to cover these credit default swaps. In October of 2008, it was necessary for the federal government to introduce a $700 billion bailout plan for the economy so that things would not worsen, and other governments worldwide followed suit with their own plans to spur lending.

The Impact to Telecom
Even amidst so much economic uncertainty, the fact remains that telecommunications is a key input factor in economic growth. Telecommunications is a facilitator of socio-economic advancement, and is a critical utility for economic development, much like water and energy. This fact is reflected in its growing share of world output and of household spending. The World Bank estimates global telecommunications spending as a share of global GDP to have been 2.5 percent in 1990. Insight Research estimates that in 2006 it had grown to 4.8 percent, which the firm forecasts to grow to 5.9 percent by 2013 - even in the face of the current credit crisis. It is on this basis, that telecommunications is a linchpin in the recovery, that Insight Research projects carrier revenue by geographic region in Figure I-1.

Worldwide revenues are predicted to grow from under $1.7 trillion in 2008 to over $2.7 trillion in 2013. While the overall CAGR is 10.3 percent, there are notable regional differences. The Europe/Middle East/Africa (EMEA) region has the slowest growth rate at 5.2 percent annually. With wireless subscribers near saturation, especially in the larger European economies, broadband and the uptake of 3G wireless services are driving revenues. As the most mature market overall worldwide with respect to telecom services, North America’s growth in service revenue is most dependent on new services as opposed to subscriber growth. The faster-growing regions are Latin America/Caribbean (LAC) and Asia/Pacific (AP). LAC is dominated by the fast-growing economies of Mexico and Brazil. Many of the countries in the LAC region have a combination of a rapidly expanding middle class and increased privatization of key industries.

The resulting pent-up demand for telecommun-ications services, much of which is satisfied by wireless services, is reflected in its high CAGR relative to the worldwide composite. The AP region is experiencing the highest 5-year growth overall at 15.5 percent.

The LAC region is next with a growth of 12.0 percent. The AP region will become the largest telecommuni-cations revenue producer, and is expected to overtake EMEA in 2009 due to the sheer size of its underserved populations.

China and India will experience revenue increases due to its generally higher GDP growth rates combined with more developed countries such as Japan, South Korea, and Taiwan whose economies rely heavily on high-tech industries, is fueling this growth.

Turning to macro trends, within the broadband segment in particular, Table I-1 shows the stark contrast between broadband and narrowband wireline and wireless services worldwide. Broadband wireline revenues are growing at a 6.7 percent CAGR over the forecast period, while narrowband wireline services revenues are essentially flat at 0.4 percent over the same period.

An important worldwide trend is the much higher growth rate of wireless service in comparison to wireline service. Wireless revenues grow from 60.3 percent of all telecommunications services revenues in 2008 to 72.3 percent in 2013. Wireless services revenues are growing at 14.4 percent over the forecast period, while wireline services, which includes both broadband and narrowband services, grows much more modestly at 2.6 percent.

Worldwide, broadband service providers of all stripes continue to try to create viable business models in order to deliver high-speed broadband, leveraging Internet protocol (IP) packet delivery and management to create and deliver new services. Overseas carriers are rolling out broadband on a mass scale, targeting consumers and small businesses, and bundling new premium services such as Voice over IP (VoIP), virtual private network (VPN), video, games, and entertainment.

This worldwide IP-based applications services market is beginning to take off. The network architecture and market for next-generation enhanced services is also beginning to take shape. Traditional carriers see IP application platforms as a means to beginning their slow migration to fully convergent IP-based networks and services. Some view the highly personalized services enabled by IP as the ultimate sticky applications that will stem the tide of customer churn. Other carriers desire new, affordable service applications that will bring additional revenue streams. Every carrier is looking for new ways to enhance their service suites, which are rapidly becoming commoditized.

Interestingly, wireless carriers seem to be making headway when it comes to the adoption of new architectural and service paradigms. Fundamentally, wireless operators have had more experience with and greater control over the content in their networks, and have solid billing platforms, both of which assure content providers of reliable and stable revenues from content provided to wireless subscribers. Content providers are, therefore, more comfortable with the wireless domain.

Wireline carriers also expect operational and infrastructure savings from deploying new IP-based services. Many incumbent carriers are choosing to initially implement IP-based services on an overlay network. Taking this approach, carriers do not have to replace circuit-switched network elements, which represent sunk costs and have minimal ongoing operational expenses. In an overlay network scenario, the packet-switched network is isolated from the circuit switched network, and the two are connected via a gateway. Web-based applications can control the public switched telephone network (PSTN) through this gateway. This architecture preserves the wireline carrier’s investment while reducing risk as new opportunities are explored and implemented.

So What?
How does this impact the infrastructure segment of the telecom business? It creates an interesting dilemma for telecom companies both domestically and internationally. Service providers must continue to combat the cable companies’ attempts to dominate the digital home. That means shoring up the mixed architectures of the core (copper) and the fiber network that can support hungry bandwidth multimedia applications being developed day in and day out.

Providers must also decrease their CapEx investments and find operational efficiencies across their network organizations. And many of them must lay-off employees to keep their balance sheet in line. As recently as early December 2008, AT&T announced 12,000 layoffs in their wireline organization.

How can a reduction in head count be reconciled with the commitment to deploy advanced services such as VoD and IPTV? The numbers and scope of work simply don’t add up. Providers are stuck between a rock and a hard place. They must construct and engineer advanced networks that can support high bandwidth applications with their hands tied behind their backs. Indeed, it isn’t an easy situation.

The Government Impact
New on the scene is President Obama, an advocate for broadband deployment. It is interesting that even before he took office, the federal government announced in December 2008 an economic stimulus package that will include investment in broadband Internet infrastructure as well as designate funds to upgrade and repair the national power grid.

At press time, details of the package were still being determined. According to major media outlets, the overall size of the package, including an income tax cut for the majority of working Americans, could be around $500 billion. Just how much of the package will be devoted to technology investments and how such funding would be allocated are part of the specifics yet to be announced.

These proposed investments in technology infra-structure would help President Obama meet his goal to create universal broadband Internet coverage. But, it’s not going to help providers beat the cable competition.

Interestingly, compared to other traditional forms of infrastructure spending, the backbone to the Internet has been financed by private companies in the U.S. Perhaps, more federal involvement will help providers make it through this particularly difficult economic Gordian knot.

There are several options to finance this proposed program. According to a Fierce Telecom report by Dan O’Shea(2), Congress could provide hefty tax credits to the phone and cable companies who have been responsible for the rollout of broadband Internet access. Or lawmakers could opt to expand existing subsidies to the companies to offset the costs of providing high-speed Internet service in rural, underpopulated parts of the country. A third option O’Shea speaks to is increasing aid to states, which are likely to have a better idea where Internet service isn’t currently available.

How does this look for those working in the telecommunications field? According to Communications Workers of America President Larry Cohen, 100,000 jobs could be created by immediately investing in more high-speed Internet networks across the country. “Jobs is the best single stimulus,” he recently commented in the FierceTelecom report.

The peripheral affect of this proposed federal funding is also far reaching. Cohen purported than another two million jobs could be created by the demand for services created by broadband Internet access.

Reporters from Dow Jones Newswires, Corey Boles and Fawn Johnson, also shared that many of the major technology and communications companies support this effort.(3) Google Inc. (GOOG), AT&T Inc. (T), Verizon Communications Inc. (VZ), Alcatel-Lucent (ALU), and Cisco Systems Inc. (CSCO) have joined forces with unions, state governments, and advocacy groups to press the case for the inclusion of Internet build-out incentives in the stimulus package. More than 50 companies combined efforts to send a powerful message about this Internet policy to the new administration. These providers, vendors, and advocacy groups have the greater good in mind, and they are serious about making universal access to high-speed Internet a top priority for the country.

If indeed this stimulus and job creation moves forward, the telecom construction section could be rejuvenated. Contractors, technicians, and installers ousted from their jobs due to downsizing could once again have a place to call work. Only time will tell.

Endnotes:
(1) “The 2009 Telecommunications Industry Review: An Anthology of Market Facts and Forecasts” by Insight Research. www.insight-corp.com.
(2) FierceTelecom is a publication of FierceMarkets. www.fiercemarkets.com.
(3) Corey Boles and Fawn Johnson, Dow Jones Newswires. www.dowjones.com.

For more information about Communications Workers of America (CWA), visit www.cwa-union.org.

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