The storm cloud looming over the Canadian telecommunications industry is showing a silver lining according to a recent study by the Bank of Montreal.
Last month, the Bank of Montreal (BMO) economics department released the Sectoral Outlook Study, which concluded that the telecom industry is expected to lead all other sectors in growth over the next five years, with telecom services propelling the growth.
According to BMO’s report, communication and information services output jumped by almost 13 per cent in 2001, withstanding poor economic conditions.
“True telecoms – carriers – have faced very difficult financial conditions,” said Earl Sweet, assistant chief economist with BMO in Toronto. “But what has happened is that the demand for telecommunications services has been growing so rapidly over the past several years that naturally telecoms have been investing to expand their capabilities to meet the needs of their customers.”
Sweet describes these telecommunication services as being anything from local or long-distance telephone service to high-speed Internet capabilities and new services such as digital television.
“There are two things driving our forecast that telecommunication services are going to be a growth leader: it is the increased room for further penetration of existing markets for existing services and it is also new services that are being created,” Sweet said.
For Toronto-based WorldCom Canada, the focus is mainly service-oriented while network expansion has been put on hold.
“When the industry was building and building a couple of years ago, a lot of [carriers] had trouble keeping up with the demand because the amount of bandwidth available on a relatively inexpensive basis was small,” said Brad Arsenault, vice-president of technology operations for WorldCom Canada. “Now that everyone is getting past this building surge, everybody is trying to find the most optimum way to use what has been built. Our focus is geared toward services and helping customers realize the true potential of them.”
Although telecom services are expected to drive the Canadian market growth rate, one area of the telecom industry will continue to see dismal forecasts throughout the next two years. Manufacturers of telecom equipment have faced tough times and the bank’s study claims high inventories of electronic products will contribute to a further market output decline of 17 per cent this year.
“During 1998 and 2000, there was very rapid expansion of telecommunications capability,” Sweet explained. “What that meant was that the telecoms were investing very heavily in the types of equipment that the electronic manufacturers make. But what happened was toward the end of 2000 telecoms began to feel stress because they had over-expanded. They took on a huge amount of debt to do that. They basically overestimated for a while the amount of capacity they would need.”
Furthermore, Sweet continued, once carriers found their finances strained by reduced margins, they simply put a halt to buying new equipment, leaving a cramp in the plans of electronic manufacturers.
However, BMO assures that all is not lost for the Nortel Networks and Lucents of the world. Sweet said BMO expects a significant snap-back in demand of equipment between 2003 and 2006.
Telecommunication network testing equipment manufacturer Agilent Technologies Inc. maintains that while capital spending for communications and networking equipment has faltered, network operators and service providers continue to spend money to gain operational efficiency in their networks.
“Agilent is in a unique position to see the deployment of new network technologies and services,” said Steve Witt, general manager of Agilent’s network systems test division in Colorado Springs, Col. “On a worldwide basis, new applications continue to drive growth. For example, the deployment of new mobile services creates the need to provide greater capacity in the network infrastructure, and Gigabit Ethernet installation in metropolitan area networks continues at a rapid pace.”
For more information on the Bank of Montreal Sectoral Outlook Study, visit www.bmo.com/economics.