Changewave Research: Telecom Industry Trends Second Half of 2005

ChangeWave Research: Telecom Industry Trends – Second Half of 2005

ChangeWave Research Report:

Telecom Industry Trends – Second Half of 2005

Telecom Equipment Demand Stable; WiMAX Future Upbeat; Lucent, Nokia and Alcatel Show Most Momentum

Overview

During the week of April 21–22, 2005, we conducted a telecom industry survey on key trends in VoIP, WiMAX, Carrier Equipment and Cable Telephony – including which companies stand to win and lose in the second half of 2005. A total of 158 telecom industry members knowledgeable in one or more of these areas participated.

(A) Telecom Carrier Equipment Trends

· Stable Demand. A net +49% of industry respondents see demand increasing for telecom carrier equipment in the second half of 2005 – 4-points more than in our July 2004 survey (when a net +45% saw demand increasing) but still 17-points less than the high reached in October 2003.

· Cable Shows Greatest Momentum. In terms of best performing equipment segment, the survey results show Cable (Telecom Equipment) has the greatest momentum (Net Difference Score improved +7 over our July 2004 survey).

· Less Optimism for Data Transmission/Networking. Data Transmission/Data Networking showed the least momentum, with a Net Difference Score decline of -10.

· Lucent, Nokia and Alcatel Lead. Among equipment vendors, Lucent (Change in Net Difference Score = +15) shows the greatest momentum with regards to improving performance for the second half of 2005, followed by Nokia (+14) and Alcatel (+9).

· Momentum Slowdown for Cisco and Nortel. Notably, industry respondents see significant weakness for Cisco (-31) in the carrier equipment market. Nortel (-24) also shows considerable signs of slowing in this market segment.

(B) WiMAX

· WiMAX Future Looks Upbeat. Fifty-seven percent (57%) of respondents believe carriers and data networking companies will be buying WiMAX equipment within the next two years – an increase of 5-points in the three months since our previous survey.

· Intel’s WiMAX Chip Will Hasten Deployment. Nearly four-in-five respondents (79%) believe availability of Intel’s first WiMAX chip will accelerate WiMAX deployment (26% say a significant acceleration and 53% say slight).

· Alvarion the Clear Leader Among Smaller WiMAX Equipment Companies. Thirty-two percent (32%) believe Alvarion is best positioned among smaller companies in the WiMAX equipment segment for second half of 2005 – 3-points more than in our previous survey (Jan 2005) and 20-points ahead of second place Proxim (12%).

· Sonus Best Positioned Among Smaller Companies. Sonus (27%) is seen as best positioned and having the greatest chance of improving performance among smaller companies in the VoIP market, up 5-points from previously (Jan 2005). Second place Juniper Networks (19%) showed little change – down 1-point from previously

· Lucent and Alcatel Also Show Momentum. While Lucent and Alcatel still score relatively weakly overall in terms of best positioned “top tier” suppliers, they do show momentum. Lucent is up 10-points over previous results (Jul 2004), Alcatel is +9.

· Once Again, Cisco and Nortel Losing Momentum. While still ranking as best positioned among “top tier” suppliers, Cisco again shows weakness with a Net Difference Score decline of 11-points since July 2004. Nortel has dropped even further, down 14-points.

(D) Cable Telephony

· Cable Telephony’s Biggest Market is Consumers. Industry respondents see Consumers (61%) as being the biggest market for cable telephony over the next 12 months. The Small Business Market (13%) ranks second.

· Capital Spending Drivers. Better than a third of respondents (36%) believe the “Rollout of Advanced Telephony/VoIP” will be the biggest driver of capital spending by cable companies over the next 12 months. Another 20% see the “Rollout of new entertainment features (e.g., Video on Demand, Pay Per View)” as the key driving force.

(E) Shift Towards Larger Vendors. Forty-six percent (46%) of respondents say they are

seeing a shift in the corporate market towards larger and presumably more stable

vendors – compared to only 2% who are seeing a shift towards smaller vendors.

Bottom Line: Telecom industry respondents foresee stabilized carrier equipment demand during second half 2005, with the Cable segment having the most momentum. Lucent, Nokia and Alcatel are the equipment vendors considered most likely to improve 2nd half performance, while the results indicate weakness for Cisco and Nortel in this segment.

In the VoIP market, Sonus is seen as best positioned among smaller companies, while Lucent and Alcatel show the greatest momentum among “top tier” companies. Once again, the survey findings suggest weaker prospects for Cisco and Nortel.

The future for WiMAX looks upbeat. Nearly four-in-five respondents believe Intel’s first WiMAX chip will act to accelerate WiMAX deployment. Alvarion is seen as best positioned among smaller companies in this market segment.

The ChangeWave Alliance is a group of 5,000 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

www.ChangeWave.com

Table of Contents

Summary of Key Findings 4

The Findings 5

(A) Telecom Carrier Equipment Trends 5

(B) WiMAX 11

(D) Cable Telephony 15

(E) Shift Towards Larger Vendors 17

ChangeWave Research Methodology 26

About ChangeWave Research 27

I. Summary of Key Findings

Introduction

(A) Telecom Carrier Equipment Trends

(B) WiMAX

(D) Cable Telephony

(E) Shift Towards Larger Vendors

II. The Findings

(A) Telecom Carrier Equipment Trends

(1) Question Asked: Based on your own knowledge and what you are seeing in the industry, do you believe that telecom carrier equipment demand in the second half of 2005 will increase, decrease, or remain the same in comparison to the first half of 2005?

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04 / Previous
Survey
Mar ‘04 / Previous
Survey
Oct ‘03* / Previous
Survey
Jul ‘03*
Demand will Increase in Second Half of 2005 / 54% / 53% / 58% / 68% / 51%
Demand will Decrease in Second Half of 2005 / 5% / 8% / 6% / 2% / 4%
Demand will Remain the Same in Second Half of 2005 / 32% / 32% / 27% / 28% / 38%

* Note that in the Oct 2003 and Jul 2003 surveys, the question referred to “telecom equipment” whereas in the current, Jul 2004 and Mar 2004 surveys, the question refers to “telecom carrier equipment.”

Stable Demand. A net +49% of industry respondents see demand increasing for telecom carrier equipment in the second half of 2005 – 4-points more than in our July 2004 survey (when a net +45% saw demand increasing) but still 17-points less than the high reached in October 2003.

(2A) Question Asked: Which one or two of the following categories of telecom carrier equipment will perform the best in the second half of 2005? (Please Choose No More Than Two)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04 / Previous
Survey
Mar ‘04
Wireless / 68% / 70% / 74%
Data Transmission/ Data Networking / 29% / 41% / 44%
Optical/Fiber / 22% / 22% / 18%
Cable (Telecom Equipment) / 18% / 14% / 9%
Metro / 4% / 10% / 9%
Billing/CRM Software / 4% / 6% / 4%
Net Management Software / 3% / 0% / 3%
Traditional Wireline / 1% / 3% / 4%

(2B) Question Asked: And which one or two of the following categories of telecom carrier equipment will perform the worst in the second half of 2005? (Please Choose No More Than Two)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04 / Previous
Survey
Mar ‘04
Traditional Wireline / 68% / 64% / 72%
Optical/Fiber / 14% / 10% / 17%
Billing/CRM Software / 9% / 17% / 11%
Metro / 7% / 12% / 7%
Net Management Software / 6% / 11% / 10%
Cable (Telecom Equipment) / 5% / 8% / 17%
Data Transmission/ Data Networking / 2% / 4% / 1%
Wireless / 1% / 2% / 2%

Net Difference Score – Current Survey (April 2005)

Perform
Best / Perform
Worst / Net
Difference
Score
Wireless / 68% / 1% / +67
Data Transmission/Data Networking / 29% / 2% / +27
Cable (Telecom Equipment) / 18% / 5% / +13
Optical/Fiber / 22% / 14% / +8
Metro / 4% / 7% / -3
Net Management Software / 3% / 6% / -3
Billing/CRM Software / 4% / 9% / -5
Traditional Wireline / 1% / 68% / -67

Change in Net Difference Score – Current Survey (April 2005) vs. Previous Survey (July 2004)

Current
Survey
Net
Difference
Score
(Apr ‘05) / Previous
Survey
Net
Difference
Score
(Jul ‘04) / Change
in Net
Difference
Score
Net Management Software / -3 / -11 / +8
Cable (Telecom Equipment) / +13 / +6 / +7
Billing/CRM Software / -5 / -11 / +6
Wireless / +67 / +68 / -1
Metro / -3 / -2 / -1
Optical/Fiber / +8 / +12 / -4
Traditional Wireline / -67 / -61 / -6
Data Transmission/Data Networking / +27 / +37 / -10

Cable Shows Greatest Momentum. In terms of best performing equipment segment, the survey results show Cable (Telecom Equipment) has the greatest momentum (Net Difference Score improved +7 over our July 2004 survey).

Less Optimism for Data Transmission/Networking. Data Transmission/Data Networking showed the least momentum, with a Net Difference Score decline of -10.

(2C) Question Asked: Of the following telecom carrier sub-segments, which one will be most in need of more capacity over the next 12 months? (Please Choose No More Than Two)

Current
Survey
Apr ‘05 / Previous
Survey
Mar ‘04
Wireless Networks / 60% / 60%
Metro/Local Area Networks / 27% / 26%
Data Transmission/Data Networking / 19% / 22%
Cable (including data services) / 12% / 16%
Towers / 8% / 10%
Cable Infrastructure / 4% / 7%
Long-Haul and Long-Distance Systems / 1% / 3%

Wireless Networks Still Need More Capacity. Sixty percent (60%) of respondents said Wireless Networks is the telecom carrier sub-segment most in need of more capacity over the coming year – unchanged from March 2004 survey results. Metro/ Local Area Networks (27%), the only segment to increase over the previous survey results, comes in second.

(3A) Question Asked: Within the market for telecom carrier equipment (including new technologies and applications), which companies do you believe have the best chance of improving their performance in the second half of 2005? (Please Choose No More Than Four)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04 / Previous
Survey
Mar ‘04
Cisco / 31% / 57% / 41%
Lucent / 25% / 21% / 17%
Motorola / 25% / 26% / 12%
Nokia / 22% / 14% / 12%
Juniper / 18% / 21% / 10%
Alcatel / 17% / 13% / 5%
Nortel / 15% / 35% / 26%
Ericsson / 11% / 14% / 9%
JDS Uniphase / 10% / 8% / 7%
Tellabs / 6% / 8% / NA
Foundry / 3% / 3% / 4%
Ciena / 2% / 8% / 8%
Extreme / 2% / 2% / NA
Arris / 1% / 3% / NA
Harris / 1% / 5% / 2%
Zhone Technologies / 1% / 1% / NA

(3B) Question Asked: And within the market for telecom carrier equipment (including new technologies), which companies do you believe have the least chance of improving their performance in the second half of 2005? (Please Choose No More Than Four)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04 / Previous
Survey
Mar ‘04
Nortel / 19% / 15% / 13%
Lucent / 14% / 25% / 26%
JDS Uniphase / 12% / 15% / 16%
Ericsson / 9% / 14% / 10%
Alcatel / 8% / 13% / 22%
Foundry / 8% / 10% / 9%
Harris / 8% / 7% / 14%
Zhone Technologies / 8% / 6% / NA
Ciena / 7% / 12% / 12%
Extreme / 7% / 7% / NA
Arris / 6% / 3% / NA
Cisco / 5% / 0% / 4%
Motorola / 4% / 7% / 8%
Tellabs / 4% / 10% / NA
Juniper / 3% / 6% / 3%
Nokia / 2% / 8% / 2%

Net Difference Score – Current Survey (April 2005)

Best Chance
of Improving
Performance / Least Chance
of Improving
Performance / Net
Difference
Score
Cisco / 31% / 5% / +26
Motorola / 25% / 4% / +21
Nokia / 22% / 2% / +20
Juniper / 18% / 3% / +15
Lucent / 25% / 14% / +11
Alcatel / 17% / 8% / +9
Ericsson / 11% / 9% / +2
Tellabs / 6% / 4% / +2
JDS Uniphase / 10% / 12% / -2
Nortel / 15% / 19% / -4
Foundry / 3% / 8% / -5
Ciena / 2% / 7% / -5
Extreme / 2% / 7% / -5
Arris / 1% / 6% / -5
Harris / 1% / 8% / -7
Zhone Technologies / 1% / 8% / -7

Change in Net Difference Score – Current Survey (April 2005) vs. Previous Survey (July 2004)

Current
Survey
Net
Difference
Score
(April ‘05) / Previous
Survey
Net
Difference
Score
(July ‘04) / Change
in Net
Difference
Score
Lucent / +11 / -4 / +15
Nokia / +20 / +6 / +14
Alcatel / +9 / 0 / +9
JDS Uniphase / -2 / -7 / +5
Tellabs / +2 / -2 / +4
Motorola / +21 / +19 / +2
Ericsson / +2 / 0 / +2
Foundry / -5 / -7 / +2
Juniper / +15 / +15 / 0
Extreme / -5 / -5 / 0
Ciena / -5 / -4 / -1
Zhone Technologies / -7 / -5 / -2
Harris / -7 / -2 / -5
Arris / -5 / 0 / -5
Nortel / -4 / +20 / -24
Cisco / +26 / +57 / -31

Lucent, Nokia and Alcatel Lead. Among equipment vendors, Lucent (Change in Net Difference Score = +15) shows the greatest momentum with regards to improving performance for the second half of 2005, followed by Nokia (+14) and Alcatel (+9).

Momentum Slowdown for Cisco and Nortel. Notably, industry respondents see significant weakness for Cisco (-31) in the carrier equipment market. Nortel (-24) also shows considerable signs of slowing in this market segment.