Market Drivers

The concept of market drivers is fundamental to understanding, developing, and prosecuting a winning business case. A driver may be defined as a market fundamental that is basic to meeting a buyer's criteria, need, or desire to have a product or service. A driver, however, constitutes the factor that will move a potential buyer into becoming an actual buyer. This understanding may be best exemplified by one example from AT&T, and another, by looking at an overall model relative to telecommunications equipment manufacturers.

In the AT&T Wireless case, at the time a wholly owned subsidiary of AT&T, Dan Hesse, a brilliant market strategist and at the time president of AT&T Wireless (he is presently CEO of Terabeam), with his team, determined that the fundamental and all-important market drivers in the wireless narrowband communication business in the United States were as listed in Table 1.

Table 1: Mobile Narrowband Wireless Market Drivers
A simple rate plan—one price all the time. No domestic long-distance charges—all calls are local. No time of day or roaming complications or charges. A fixed number of minutes for a fixed price that is deemed "fair." Subsidized handset purchases under term period contracts.
Source: Hilliard Consulting Group, Inc., 2001.

Hesse was right. These were the key market drivers in the U.S. narrowband wireless market at the time needed to take this market from primarily a business user market, to one encompassing the nonbusiness user as well. AT&T's narrowband wireless customer base exploded. In fact, most other major narrowband wireless providers were forced to follow AT&T's lead in offering such "One-Rate" pricing programs. These programs led to a major growth spurt in U.S. narrowband wireless subscribers, taking the number of users from approximately 30 million in the mid-1990s to more than 100 million by the end of 2000. Clearly, Hesse and his team's understanding and definition of the "right" drivers for the narrowband wireless marketplace were important to quickly gaining competitive advantage and growing market share.

Conversely, in an important industry example, we see that most industry experts and investment analysts missed predicting the downturn in the telecommunications sector beginning in late 2000 and continuing into 2001. Yet, an understanding of the market fundamentals (drivers) clearly indicated not only that the market would decline but also approximately when.

For instance, from 1996 to 2000/2001, there were five primary concurrent market drivers that pushed Telecom equipment capital expenditures rates to approximately 26% cumulative annual growth rate (CAGR) over this period (see Table 2). ^[2]

Table 2: The Five Concurrent Telecom Drivers, 1996–2001
Period	Driver	Demand Status	Reason
1996–1999	Y2K equipment replacement	Satisfied Y2K	passed
1996–2000	Telecom Act of 1996	Mostly mitigated	Many new entrants failed or consolidated—flawed business cases
1997-present	Wireless digital one-rate plans	Mostly satisfied; markets such as wireless cap out at approximately 50% of the population or 70% of the adult population	Largest demand met, growing from approximately 30 million to 100+ million users—growth slowing significantly: will accelerate with the introduction of broadband
1995-present	Internet usage	Mostly satisfied Growth will accelerate when broadband is more universally available	Largest demand met, growth slowing
1997-present	Circuit to packet	Continuous—the availability of broadband wireless will restart growth here	Transition continues but was slowed by CLEC failure/debacle
Source: Hilliard Consulting Group, Inc., 2001.

Y2K: Many telecommunications carriers and other companies had equipment that had hard-coded dates embedded in the equipment's software. It was felt that such equipment would fail or malfunction with the beginning of the year 2000. This was because years ago, when memory was at a premium, programmers coded years by only the last two digits. Hence, it was known that systems would be confused as to whether the year was 1900 or 2000 when we reached January l, 2000. Many entities believed it was more practical to replace aging equipment than attempt to remediate it. This replacement of older equipment, which began in some earnest in 1996, was basically completed by December 31, 1999. Hence, this driver was satiated by early 2000.

Deregulation: Telecom Act of 1996—In 1996 Congress enacted The Telecommunications Act of 1996. This Act created a more deregulated environment that encouraged many new entities to enter the service provider market. Many of these entities, mostly Competitive Local Exchange Carriers (CLECs) and Internet Service Providers (ISPs), raised significant levels of debt and equity funding that they used to buy infrastructure equipment. Unfortunately, most had flawed business cases, resulting in significant financial losses and business failures. In fact, in 2000 alone, 225 CLECs ceased to exist. Further, the market did not fully comprehend how large, entrenched competitors compete—by administrative delay, litigation, and regulatory appeals. These entrenched competitors understood that cash position and flow are king. They had it and the fledging new market entrants did not, so delay through complex administrative matters, legal challenges, and regulatory appeals would likely consume the new entrants' cash positions, as well as the new entrants' abilities to raise more equity or debt because of missed revenue milestones. This competitive practice of entrenched companies was well known and should have served as a red flag to participants in this market and the analysts that covered it.

Wireless: During this same time, AT&T Wireless introduced the "Digital One Rate Plan." The introduction of this plan drove narrowband wireless utilization of not only Customer Premise Equipment (CPE—handsets, accessories) to high levels, but also drove the requirements for increased levels of network infrastructure to carry the rapidly expanding levels of traffic. Today, narrowband wireless growth slowed significantly, relative to its recent past, and probably will not accelerate until the introduction of GPS-enabled devices and true broadband capabilities. Hence, we see that many equipment manufacturers and wireless service providers did not fully comprehend the dynamics of their market drivers or properly discern approximate levels of market saturation.

Internet: In the United States, Internet usage started growing in 1995 and continues today. But lately, growth slowed, and it too will likely not accelerate again in the United States until broadband connectivity (the FCC defines broadband as 200 KBPS in both directions) is more universally available. In fact, the timing of this growth is easily seen if we ask ourselves how many of us had an e-mail address in 1995, versus how many of us today have one or more e-mail addresses. But this market too is somewhat satiated with narrowband services and needs broadband access to grow significantly again.

Circuit to packet: The transition from a circuit to a packet environment will continue, but growth will be slower than would otherwise have been the case had the CLEC failures not taken place and had broadband been more universally available. The impetus for this transition is that packet networks are inherently more efficient in resource utilization than circuit networks. Moreover, as true broadband access becomes more widely available, this transition will again accelerate.

Hence, the main drivers that took place concurrently in the 1996–2001 period created a voracious demand for telecom equipment that has been satiated or mitigated to a large degree (Figure 1).

Figure 1: The Telecommunications Market—A Return to Normalcy

Lessons Learned

As we have seen, understanding the right market drivers permitted one company, AT&T Wireless, to grow rapidly and capture market share, while a lack of understanding of market drivers and their linear constraints caused many telecom equipment manufacturers to misperceive the size, breadth, and duration of the telecom equipment and service markets.

In fact, merely plotting the telecom capital expenditures (CAPEX) in 1995 and 1996 relative to gross revenue growth for that same period would have indicated the existing discontinuity between the CAPEX CAGR of 26% and the gross revenue CAGR of 12% to 16% overall for the industry. That is, as early as 1996, we should have seen that an impending correction would take place. And an understanding of the market drivers would have signaled approximately when the correction would take place.

The Past is Prologue

Now that we examined the recent market past and saw the importance of market drivers, it is important to see if there are additional tools coupled with a view of future drivers that can assist us in discerning the future with more clarity. Here, several tools in particular will assist us in this analysis. The first is the State, Gap, and Trend Analysis.

^[2]Nugent, J. H. (2001). Telecom downturn was no surprise. Dallas Fort Worth TechBiz (www.dfwtechbiz.com), September 10–18, 22. Provided in this article was the analysis that permitted all to see the rapid decline in the telecommunications sector based upon key market driver satiation or mitigation.