The end of this week represents the two-year anniversary of the first bull market since the double whammy of the telecom recession and September 11. Floyd Norris, economics writer for The New York Times, speculated in late September that the miniboom bore little relationship to price/earnings ratios or the real state of business in mid-decade. In communications markets, I tend to agree with him.
Sure, no one in network equipment or telco equipment development is expecting great things for the next few quarters, but there does seem to be a touch of irrational exuberance surrounding expectations for early 2005-except in the semiconductor industry.
Executives and market analysts in chip markets already see signs of inventory correction for 2005, much of it having to do with end market softness for equipment in transport, cellular and consumer compute-platform products.
U.S. development lags
There is significant broadband carrier business in Asia, and region-specific markets in Europe. Perhaps a U.S. fiber-to-the-home market will emerge in a handful of regions, but, for the most part, North America will be a backwater for infrastructure development until the end of the decade.
I wrote a column recently for a CMP Media affiliate, Network Magazine, in which I warned that such an economic environment creates a no-win situation for IC designers. OEMs want a minimal set of features to compete against Asian ODMs, but at the same time would like highly integrated access devices that offer a wealth of capabilities at virtually no premium over a first-generation chip.
A semiconductor company can elect to play in this race to the bottom and be caught in a spiral where profits are hard to realize, or choose to avoid certain niches in which potential volumes are hopeful but profit margins are razor-thin.
The scenario for the rest of the decade is not unbounded gloom and doom. Broadband connection in industrialized nations is rapidly approaching the tipping point, gaining entry into a majority of homes. The potential in Asia's boom nations is real and soon will spread to developing nations.
The reality, however, is that the salad days of the late 1990s will never be repeated, and good riddance to them. Investors in Nasdaq or more mature stock exchanges need to recognize that the "patient capital" mind-set common in the 1970s and 1980s will characterize the rest of this decade as well.
Those who are not prepared for volatile swings in the market and minuscule bull runs are the type of high rollers who will not do the communications world any favors when markets reach levels they cannot support.
Loring Wirbel is Communications editorial director for EE Times and its network publications.
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