Telecommunications are a vital infrastructure underlying society, and hence the present downturn is a serious matter.

Overall telecom capital spending is down by two-thirds since 2000. For the new entrants it fell from 61% of revenues in :1998 to 14% in 2002, while their market capitalization dropped by 98%. Incumbent wireline revenues declined for the first time since the Great Depression. Debt loads, both in the US and Europe, are enormously high. Equipment firms' business has all but evaporated: Lucent's revenues fell by 42% from 2001 to 2002, and Nortel's by 39%. Even Cisco dropped 15%. Job declines in 2003 alone were over 6,ooo in February, 2,500 in March, and 11,000 in April Across the sector, stock market valuations have dropped dramatically. Performance has been poor across such a large number of companies and countries that one cannot simply blame specific management teams or regulators.

And the worst may be still ahead of us:

* The debt bomb is ticking. Some European companies must earn $10 million a day for debt service

* Telecom firms face costlier access to financial markets, as investors adjust their perception of risk

* Equipment firms face bankruptcy unless investment picks up

* Job losses will increase as off shore outsourcing is used

* R&D and innovation slow down, with long-term implications

* Inefficient mergers of the go-go years are coming apart

* Cellular reaches saturation, white 3G lags behind projections

* Long distance prices face continuing commoditization and price deflation

* Investment slowdown and cast cutting leads to decline in service quality

* In broadband in the US, cable TV networks are forcing local telecom companies to costly fiber upgrades while they lack the content of cable.

Learned from mistakes

In the short run, the present downturn is temporary and the industry will recover, though not at the hyper level of the bubble years. That, however, is not the real problem for the industry. It is not a one-time recovery from a one-time boom and bust. The main problem of the telecom industry is that it has entered a chronic pattern of volatility, with boom bust patterns becoming a common occurrence rather than an aberration. The telecommunications network environment is leaving the linearity of a utility business, and is entering not just competitive riskiness (which was expected) but chronic instability.

Yet many participants and observers of the industry believe that the present downturn is merely a one-time accident, that things will return to their past stability because they have learned from past mistakes. This view is one of denial. If we analyze the drivers of the recent volatility we must conclude that they will be with us into the foreseeable future.

To analyze causes and recommend responses, the Columbia Institute for Tele-Information initiated a research project on the industry downturn and its implications, in collaboration with various stakeholders from industry, government and the non-profit sector. The project is in progress, and will result in conferences at Columbia in New York City (October 3) and in Geneva at the ITU's Telecom 2003 on October 17.

Causes of the downturn

This is an important question, since if we do not know why things have gone wrong we cannot fashion remedies or prevent the next crisis.

Was the macro-economy the cause? To some extent, the general economic weakness took the network industries down with it, but the decline of telecom was much greater than the historic relation of telecom to general economic activity.

Was inadequate demand the cause? It is true that recent demand growth, while high, was lower than expected. But demand has remained strong in real terms. The usage of long-distance minutes, data communications, and wireless and broadband (partly a substitute for regular wirelines) have all been rising. Its problems are prices, not user demand.

Was corporate malfeasance the cause of the downturn? It is true that several firms' cooking of their books has increased perceived risk and affected the entire industry. But financial misreporting is partly an effect of the crisis rather than its cause. European countries experienced a telecom crisis without known incidents of misreporting.

Was it lags in adjustment? Where there are adjustment lags, unanticipated shifts in desired capacity can generate cycles of investment spending. The lumpiness of investments in telecommunications coupled with an even slower regulatory and court system makes the feedback loop very slow, and generate oscillations.

Was it over-capacity? The various network companies overoptimistically projected long distance market shared that added up to over twice the actual market. Everybody built capacity to overwhelm competitors and gain scale. Capital expenditures grew by an annual rate of 29% from 1996-2001. The incremental cost of bandwidth fell by about 54% annually. Yet demand did not grow at the same rate.

When of these and other factors coincided they create a scenario of the perfect storm. Such a confluence might not return soon.