XCHANGE recently surveyed a variety of industry executives about their expectations for The Year Ahead. Here is our interview with Dan Moffat, president and CEO of New Edge Networks, a single-source national provider of secure multisite managed data networks and dedicated Internet access for businesses and communications carriers.
X: What do you see as the most significant potential developments in our industry in 2004?
Moffat: I think there are two significant developments to watch during 2004. First, I think we are going to see sharp take rates for multisite networking among small and midsize businesses. Broadband access is essential to their business success and most of them do not have broadband access. New technology choices, such as frame relay over DSL or VPN, will motivate more businesses that are still on dial-up to migrate to broadband access because their costs will be significantly less than traditional frame relay or T1 access, which many previously could not cost justify. For some businesses, actually, frame relay over DSL is less expensive than multiple dial-up connections they now use. Businesses that already have T1 or frame relay will look at alternate broadband access such as frame over DSL or VPN as a way of reducing their network costs. So growth in this area will come from both ends. Ubiquitous network reach will reign supreme in the years ahead. Customers want to use telecom services for their business. They don't want to run a telecom company. So, the race is about who can best seamlessly integrate solutions with the widest choices of technologies, carriers and geographies.
Also, I think there will be increased availability of capital for upstart companies that are well positioned for capitalizing on demand for multisite networking services. Wall Street is becoming increasingly anxious to invest. Communications is fundamental to business growth.
X: What do you expect in the year ahead in the way of industry recovery?
Moffat: I think 2004 will be the beginning of the return to our historical solid growth in aberrant communications niches. Most companies are reporting strong growth in broadband access and data communications for multisite networks. This business demand will drive growth and profitability among companies that can best integrate choice of technology, carriers and geography.
X: What are your expectations for service provider capital spending in 2004? What areas do you expect to see the most improvement? The least improvement?
Moffat: I think overall capital spending among service providers will continue to flatten or decline. You will see capex spending on an as-needed basis to maintain service levels or in isolated areas that will provide a fast payback on investment. I think we can expect to see increased spending on wireless handsets due to number portability. As an industry, we are overloaded with fiber backbones, cell sites and voice switches. Don't look for capex for more capacity. The RBOCs are promising an aggressive fiber-to-the-home deployment. As a group, RBOCs are over-leveraged and do not have economic incentives to execute their plans. And, Wall Street does not have patience for growth prospects in the long term.
X: How do you expect service providers' margins to be affected in the year ahead, considering the new wireless number portability rules that went into effect in November and the increasing move of RBOCs and cablecos into one another's businesses?
Moffat: The RBOCs and cable companies will not compete head to head except for low margin consumer broadband access. We're already seeing this downward pressure on their margins and it will continue. There are very good margins in business broadband and multisite network services. Aggressive service providers are more nimble and flexible for capturing attractive market share among small and midsize businesses that are too small for the RBOCs to adequately service, particularly when they require out-of-region network reach.
Wireless number portability creates a free-for-all. Lots of new phones sold but ARPU [average revenue per user] and margins will decline.
X: How do you think MCI's expected re-emergence from bankruptcy will affect the industry?
Moffat: I really do not expect MCI's successful emergence from bankruptcy to cause a sea [of] change in industry conditions. It does not appear they have lost any major customers during bankruptcy proceedings. I think they will be in a good position for retaining what they have and not allowing margins to deteriorate for them or anyone else. I think having MCI around will maintain more competition among the players and this is good for customers and other providers that rely on them for network access.
X: Do you anticipate a significant number of additional bankruptcies by communications companies in 2004?
Moffat: I hope not, for our industry's sake. We've lived through the darkest years in telecom. I hope those still standing become the stalwarts of the next decade.
X: What new marketing efforts do you expect to see from service providers or vendors in the year ahead?
Moffat: I think there will be more emphasis on packaging or bundling. While I think this encourages customer retention, I have yet to see any sustainable evidence that bundling will stimulate new growth or demand for services. I think customers are willing to buy data separately from voice. I think, at some point, some customers will get sticker shock when they get one big fat bill from their service provider. When smart customers closely study their bill, they may realize they are really not saving that much with a bundle.
X: What, if any, significant new developments on the regulatory front do you expect for 2004?
Moffat: UNE fighting will escalate to new levels as regulatory proceedings on pricing and availability heat up across the states. With all their financial might and political muscle, the RBOCs will continue pushing for deregulation with any group that is receptive to their political influence. During an election year, I don't expect much new at the federal level; but look out in 2005 if the GOP retains control.
X: What customer or service-type areas do you expect service providers to see the most demand from in 2004?
Moffat: I think the biggest growth opportunity is in multisite wide area networking that seamlessly integrates multiple technologies, carriers and geography. Broadband has become essential for small and medium businesses. Until recently, there was a wide gap for choices and affordable pricing between 56kbps dial-up and T1 or traditional frame relay. Now there are proven technology choices, such as DSL, frame relay over DSL, and VPN, that allow business customers to migrate to broadband from dial-up. Existing multisite customers are also interested in taking more network costs out of their business and stepping down to a solution that meets their business needs. This demand translates to huge growth opportunities for companies with proven track records of performance.
X: What software or equipment do you expect to see gain significant adoption in 2004?
Moffat: I see strong growth potential for software or hardware that enables wide area network integrators to offer their customers a single-stop solution for ubiquitous network reach spanning multiple technologies, carriers and geography. Broadband access is essential to business growth and expansion. Going forward, a business without broadband is a business without customers.
X: What services, software or equipment do you expect to fall off the map in 2004?
Moffat: Second line wireline. Voice switching.
