My former employer Nortel was the first big supplier of telecom infrastructure to go bust, but it won't be the last. None of the others is healthy. Although Cisco is profitable, its stock price has gone sideways for fourteen years -- an eternity in high tech.
Question: Why? Answer: We've arrived at global market saturation for Internet access and mobile phones. The telecom industry has nothing new to sell. No one has been able to identify a product or service that will stimulate a new tier of consumer spend. All that's keeping the infrastructure suppliers afloat at present is trickle-down revenue when mobile carriers sell data plans to people who are still buying smartphones for the first time. Those revenues are about to plateau.
On the enterprise side of the telecom business, the story is the same. There are some technology replacement cycles underway -- for example, replacements of old TDM PBXs with VoIP products -- but replacement cycles are seldom exciting, and they rarely drive top-line growth.
Meanwhile, competition from Huawei and ZTE has hurt the traditional players. Don't recognize those names? They're Chinese. About 10 years ago they came out of nowhere to win a lot of market share in Latin America, Africa, and the lesser-developed countries in Asia. Price was a major factor in their success. Five years ago they began taking market share in North America and Europe. Last week it was announced that Huawei has replaced Ericsson as the top supplier of telecoms infrastructure worldwide. That's astonishing, and it explains why all the other companies are having problems with their gross margins.
Even Huawei and ZTE, however, face stagnant sales. The high-flying companies these days are the handset sellers, primarily Apple and Samsung. That's one reason why intellectual property has become a hot topic. Apple and Samsung spent almost none of their own R&D to develop 2G, 3G, and 4G technology. Infrastructure suppliers have traditionally borne most of that R&D cost. But if infrastructure suppliers can't make an adequate profit from either IP licensing or equipment sales, they won't be able to afford the R&D for the next technology cycle. Will Apple and Samsung pay to develop 5G? I doubt it, and I don't know who will.
