Tested by an Earthquake and a Flood in 2011, the Industry Is Ready to Take on Macroeconomic Uncertainty in 2012–2015

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As the industry closes 2011, a year that started with an earthquake and ended with a flood, it becomes clear that we all have a harder time dealing with uncertainty about the future of the economy than natural disasters. While unpredictable, floods and earthquakes happened in the past, and future events will have similar outcomes—unless the climate does change dramatically. Economic transitions, such as those caused by industrial revolution in the nineteenth century or technological advances and information revolution in the last century, are not only unpredictable but have outcomes that create a whole new set of issues that have not existed before.

Global macroeconomic uncertainty dominated headlines in 2011. Whether in Europe or the United States, China or India, Latin America, the Middle East, or Africa—the problems seem to be everywhere, and most of them do not have easy solutions. Although these problems are not new, we certainly became much more aware of them. Ignorance may not be a blessing, but it is certainly taking us a while to learn how to live in this brave, new, well-informed world entangled in a set of complex issues that may take years, if not decades, to unravel. Companies, just like individuals, will have to learn to deal with uncertainly without being too distracted by issues that are out of their control. Focusing on tangible tasks, like making businesses more efficient or customers happier with products, is a much more constructive way of dealing with uncertain, uncontrollable future events.

The world is a much more complex system now than it has ever been, and networking technology is one of its most critical elements. Any incremental improvement to communication systems is a much-needed step toward creating the future that we are all looking forward to.

Focusing on positive stories that are often hidden behind the negative ones (since bad news always sells better) can also help businesses navigating through a period of uncertainty. There was plenty of good news in 2011 for the communications industry. To start with, total revenues of top 12 service providers increased by 7.5% in 2011, after two years of stagnation in 2009 and 2010. Mobile broadband services and cloud computing are driving this growth. While carriers are seeing improvement in their top lines, they are still being cautious about capital expenditures (CapEx) given the market uncertainty.

Over the long term, for a mature market, CapEx should grow in line with revenue growth. In the short term, CapEx can rise and fall as individual technology programs are implemented and the policies of company managers change. As economic conditions improve, companies typically increase CapEx investments faster than revenue increases, to position themselves to capitalize on rising sales. If not for the macroeconomic uncertainty in 2011, CapEx of top 12 carriers should have been up by more than 7.5%, but the actual numbers suggest only 5% increase in CapEx for the year. To be fair, the CapEx did increase by 3% in 2010, while sales were stagnating.

However, carriers see continued strong growth in bandwidth demand and are increasingly weighting their CapEx budget to network infrastructure investments to support this growth, resulting in a steady cash flow for the networking industry supply chain. Sales of networking equipment are up by more than 10% in 2011 and suppliers of optical transceivers are looking at an 8% increase in 2011 sales, after a 36% jump in 2010 and despite all the disruptions caused by the earthquake in Japan and the flood in Thailand. What is the market outlook for 2012–2015?

According to AT&T CEO Randall Stephenson, the next four to five years will be a period of chaos in telecom networks. No longer will networks grow in a deliberate manner as carriers methodically plan, deploy bandwidth, and introduce new services. With widespread fixed and wireless broadband networks, applications and services can come from anywhere and bring unpredictable new network demands. Here are just a few data points to illustrate the scale of transition:

Super datacenters constructed by large Internet companies are of a scale that dwarfs state-of-the-art datacenters of a decade ago, and emerging cloud computing services are likely to put even more pressure on the network, because these increase network traffic far more than an architecture based on local computing.

But let us not get carried away with excitement. All these transitions will take time—probably more time that we expect. Ultimately, the end users generate the traffic, and changing their habits will take years on average and decades for the most conservative of us.

Because our forecast methodology is based on correlation between network bandwidth expansion and traffic growth, we maintain our earlier projections for the total optical transceiver market to grow at 11% CAGR in 2012–2015. However, the latest (December 2011) forecast report, which will be published on December 12, will have a lot of changes in projections for sales of specific products.

The changes to the forecast include

The next few years—or decades—will certainly be busy ones for the industry.