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US Market Construction Update Telecommuications / High Tech Construction

Five years after substantial deregulation of the U.S. telecommunications industry, spending on wireless and wireline communications infrastructure remains strong. According to the Telecommunications Industry Association, the total U.S. market for all telecommunications equipment and services grew 12.5% in 2000 to over $600 billion. However, future growth is dependent upon reopening of the capital markets to the telecommunications sector.

The second quarter of 2000 represented the peak of public and private investment in the telecom sector, but relatively little new outside funding has occurred through the third quarter of 2001. This lack of new funding has resulted in the financial collapse, including bankrupcy, of numerous telecom firms whose business plans depended on ready access to capital markets. Two major events contributed to the financial collapse of these firms and the subsequent cutoff of new or additional funding by Wall Street.

First, the collapse of the "Internet bubble" and corresponding failure of many dot-com companies had an immediate negative impact on the performance of major telecom equipment vendors (e.g., Cisco, Lucent, and Nortel) that were the primary suppliers of equipment to these firms.Second, wholesale prices for bandwidth fell even faster than anticipated while costs to deploy nationwide and regional fiber optic networks ("long-haul networks") escalated well above most forecasts. Consequently, most new entrants to the market since 1996 have fallen well short of their original revenue projections and have been allowed to fail as investors attempt to minimize their losses.

Notwithstanding the current economic turmoil, the underlying fundamentals supporting continued growth in infrastructure spending remain strong. The primary drivers of future growth include:

strong commercial and consumer demand for bandwidth
new technologies and applications ("killer apps") requiring state-of-the-art communications infrastructures
continued growth of wireless voice services and the emergence of wireless data services.
Long-haul networks owned by wholesale carriers are substantially complete, and there is currently an oversupply of highcapacity bandwidth ("dark fiber") available for lease. The focus now and for the next few years is completing middle-mile fiber rings around second-tier and third-tier markets and building out the "last mile" from the carrier's central office, data center, or head-end facilities to the commercial and residential end user's location.

Significant opportunities exist to retrofit and upgrade the communication infrastructures of commercial office buildings. Current estimates are that less than 10% of commercial office buildings in the United States are broadband-enabled. Likewise, it is estimated that fewer than 10% of homes have highspeed internet access- a digital subscriber line (DSL), cable modem, or two-way direct broadcast satellite (DBS). Opportunities exist for firms specializing in engineering, furnishing, and installation of equipment for telecom central office, cable head-end, and customer premises. As communication networks continue converging onto common Internet Protocol (IP) platforms, substantial opportunities exist for firms specializing in the design, installation, and maintenance of integrated voice, data, and video applications. Furthermore, as a result of the events of Sept. 11, firms specializing in security and access controls are expected to be in high demand.

To date, there are more than 118 million wireless subscriberss in the United States- a penetration rate of under 50%. Based on trends in Europe and Asia, penetration rates in the United States may reach as high as 75% over the next five years. In first-tier markets, the basic wireless infrastructure is approximately 80% complete. However, in smaller markets, network deployment is only around 50% complete, and industry estimates are that between 50,000 and 100,000 additional antenna sites need to be built. Because of increased network demand and in anticipation of the introduction of wireless data and Internet services, carriers are in the process of upgrading their existing network technologies, resulting in large demand for firms specializing in radio frequency engineering, network optimization, antenna and line equipment installation, and commissioning.

The telecommunications market continues to be volatile, and future spending on infrastructure is highly dependent upon ready access to investment capital. FMI forecasts that Wall Street will return to the industry within nine to 15 months.


The Associated General Contractors of Iowa
701 East Court Avenue, Suite B -- Des Moines, IA 50309
phone: 515-283-2424 fax: 515-244-6289

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