Telecom market poised for growth

The telecommunications market is undergoing significant changes, which include industry consolidation and a shifting contracting environment. At the same time, the demand for services is increasing.

In a recent market analysis report, Input predicted steady growth for the federal and the state and local markets. In the state and local market, the firm's analysts predict 70 percent spending growth in the next five years — from $9.6 billion in 2005 to $16.4 billion in 2010. That represents compound annual growth rate of 11.4 percent.

In the federal market, the uptick is less pronounced. Input analysts predict about 6 percent annual growth and 25 percent total, but in dollars, the spike is from $16 billion to $21.4 billion.

At the state and local level, most spending will be on network services; leased voice and data circuits; and the professional services, software and hardware needed to support telecommunications, said James Krouse, manager of Input's state and local market analysis. Homeland security initiatives will continue to influence state and local spending, he said.

Those governments will invest in emerging technologies such as voice over IP and wireless fidelity systems. Such technologies allow residents in remote rural areas to gain access to e-government services. Governments can use such technologies to provide Internet access to lower-income residents and spur economic development.

However, Krouse said it's unclear how strong the government's support for emerging technologies will be. Some of them, such as VOIP, are essentially tax-free.

At the federal level, the Defense Department's transformation efforts are pushing the market higher, said Payton Smith, Input's director of public-sector market analysis.

"Defense transformation, when you think about it, is primarily about communications," he said. E-government efforts, which are now evolving from tentative initiatives to more mature projects, will also account for significant telecom growth, he added.

Telecommuting, Smith said, despite all the talk, has not yet gained much of a foothold in the government. "It has a lot of potential, but it really hasn't realized that goal to this point," he said.

Some companies see telework as an increasingly important market, said Thomas Kreidler, vice president of government at Juniper Networks. Federal workers, tired of spending hours driving only 15 or 20 miles in Washington, D.C., traffic, are demanding telework options. Agency managers are being pressured to provide it.

Telework applications, including Juniper's network hardware products, have a horizontal appeal, he said, meaning that any agency is a potential buyer.

In listing the key federal contracts in his report, Smith named four maintained by DOD agencies and one by the Federal Aviation Administration.

GSA will award Networx, a major telecom procurement, in April 2006, but it will take agencies several years to transition contracts to the new vehicle from expiring contracts.

GSA believes that the two contracts combined — Networx Universal and Networx Enterprise — will be worth about $20 billion.

Smith also pegged wireless technologies, including radio frequency identification systems, as a growth market.

Tony D'Agata, vice president and general manager of Sprint's Government Services Division, said wireless technology is growing in importance for several reasons, including the convergence of services and the transition from traditional wired services to wireless.

At the same time, the market for traditional wireline services, while it won't disappear, is shrinking. Along with wireless, wireline services face competition from cable companies and other alternatives, D'Agata said.

"We see the integration of wireline and wireless communications services coming together," he said. "More and more applications will be addressed or handled remotely, and government employees and agencies are looking for this capability to manage their operations from anywhere. We see that as a major thrust."

Where wired services remain, they will more often be based on IP rather than older technologies, D'Agata said. "With IP, you're more likely to see converged offerings like voice, video and data over the same platform," he said. "You'll see voice over IP being a little more dominant."

Warren Suss, president of Suss Consulting, said that wireless technologies have been constrained by concerns over security and cost.

"If the industry can address those issues, there's enormous potential for growth," he said. "Those issues are at the forefront with both commercial customers as well as government customers, so the companies that solve those challenges are going to be the ones who lead the marketplace. They have plenty of incentive."