Frogs at the Bottom of Wells

Inevitably, all of us are paying quite close attention to all things economic these days. Just as inevitably, we journalists and bloggers cannot resist writing about it, and what it means for all manner of things, ranging from penetration rates of various devices, services and applications to levels of industry spending.

Crowd sourcing, as valuable as it is, also can be dangerous, though. The reason is the well known tendency people, and therefore markets, have to overshoot on both the upward and downward sides of any trend.

So one easily can take a poll of industry participants (largely on the sell side) and find dire opinions about the state of service provider spending (and therefore buying). Keep in mind an analogy: the frog sitting at the bottom of a well, and asked to describe "the sky."

By definition, all of us have limited visibility. None of us can see the whole sky.

And our view is obscured in several obvious ways. The overwhelming amount of spending in any country or market is dictated by just a few buyers. Some types of products are needed more, some are needed less. Big capital projects are needed, but end at some point.

Sure, most providers have some base level of maintenance-related capital spending that doesn't change much from year to year. But there tend to be waves of investment in the global communications business that ebb and flow.

There are times, such as 1998 to 2000, when spending, in absolute volume, climbs, and periods such as 2001 to 2003, when the percentage falls. Capital spending fluctuates, for all sorts of logical reasons.

Then there are the other obvious visibility-limiting issues, based on which customer segments and which product lines one sells. Some segments do better, some worse. Some products are necessities, others can be postponed.

All of us will have a tendency to attribute virtually any shifts to the downside as caused by the economy. That isn't always true. Nor is it true that service provider revenue actually is falling. Through 14 months of recession, service provider revenue has grown virtually across the board, for every segment, though there are market share shifts and secular changes in demand.

Executives are being prudent, to be sure. Investors and investor advocates demand that. But we all have the visibility of frogs, who think the sky is a relatively small blue circle. So we will overshoot, as we always do.

Without dismissing in any way the obvious issues the industry confronts, do not mistake your own view for the whole picture. And do not make the mistake of believing that any present trend can be extrapolated into the future on a linear basis. By definition, there are turning points. The year 2000 was a turning point. So was 2003. It appears 2008 will mark a turning point. Another is coming.

If your business will last more than several years, you have to spend some time looking for the next turning point. It is hard to do. But it is coming.

Global communications infrastructure spending has a "float" level, generally a percentage of revenue, to which the industry is trending after a buildup leading to 2000, a brief lull, then a wave of infrastructure spending largely driven by broadband. At the moment spending is drifting back to "maintenance" levels.

Another wave is coming though, based largely on the fact that broadband multimedia networks must spend much more discretionary capital on consumer premises equipment. As more services are turned up, there is more spending on CPE. That's a secular change strictly driven by revenue opportunities.

Also, Internet-delivered video, at some point, is going to drive more revenue for service providers, as opposed simply to application providers. As that happens, more investment in access networks will have to be made. The precise timing will depend on end user uptake and therefore new revenues.

But tier one service provider performance in 2008 suggests the process has moved significantly further than even many tier one executives had expected in 2006, for example. To cite but one example, where many had expected new data revenues only to offset voice revenue losses, many carriers now find data revenue growth is outstripping mere replacement of lost voice revenues.

Look for the next turning point, even as you manage for the present circumstances.