11CONTACTSMCKINSEY & COMPANYJ.R. LowryMcKinsey & Company, Boston: 1-617-753-2110Jeff KosowskyMcKinsey & Company, Boston: 1-617-753-2263Kushe BahlMcKinsey & Company, New Jersey: 1-973-549-6462GOLDMAN, SACHS & CO.Debra Katz, Communications SoftwareGoldman Sachs, New York: 1-212-357-1377Natarajan Subu Subrahmanyan, US Communications Technology:Data Networking and Optical Components and SystemsGoldman Sachs, Menlo Park: 1-650-234-3313Brantley W. Thompson, US Communications Technology:Wireline/Wireless EquipmentGoldman Sachs, New York: 1-212-902-9823Luanne Zurlo, US Telecommunications ServicesGoldman Sachs, New York: 1-212-902-6702CONTRIBUTORS/ACKNOWLEDGEMENTSMany people at Goldman Sachs and McKinsey participated in the creation ofthis report. In particular, we acknowledge the following individuals:MCKINSEY & COMPANY GOLDMAN, SACHS & CO.Core TeamKushe BahlChris GilbertJeff KosowskyMoshiko LevharJ.R. LowrySarah PohlenDai VuBob HuManish SinhaGilad SokolovAbhinav TanejaShing YinSteering CommitteeGreg BesioPeter BissonBrad BrownTom FrenchVivek MohindraMike NevensStagg NewmanJim SeabergOther Advisors / ContributorsSimon BlackburnCurtis CopelandPerry CuiFeroze DewanChip HardtJames KaplanAndrew KincheloeSimon LandlessDana MaorGreg MooreJudith StopardCore TeamHerb BeatsonSara DawesChristopher FineLisa FontenelliJames SimmonsErnest Kwarteng (part time)Research AnalystsDebra KatzNatarajan Subu SubrahmanyanBrantley W. ThompsonLuanne ZurloOther Contributors / ReviewersJeff AdamsLawrence CalcanoFrank ConnorFrank GovernaliChuck HarrisMary HenryJim HimesTim IngrassiaBrad KoenigGregory LeeRyan LimayeWe would also like to thank all the individuals outside McKinsey and GoldmanSachs who spent time on this project. These include representatives from thecompanies we interviewed, including service providers, equipment andcomponent manufacturers, operational support systems (OSS) providers, andsystems integrators. We would like to thank the following individuals inparticular: Bruno Codispoti, Jim Frey, Joe Gleeson, George Kawand, VivekKhuller, Randy Korn, Tony Marson, Andrew Odlyzko, Debanjan Saha, and AnnVon Lehmen._This summary is an abstract of a larger report published jointly by GoldmanSachs & Co. and McKinsey & Company in August 2001. For a copy of the fullreport, please contact your Goldman Sachs & Co. or McKinsey & Co.representative.This report is the result of a joint research effort between McKinsey & Companyand Goldman Sachs. This industry-level study owes its genesis to a series ofongoing conversations among the authors and the mutual decision that poolingresources would prove a productive means to gain insight into key markettrends. McKinsey & Company was not retained by Goldman Sachs to work onthis effort. Goldman Sachs may subsequently draw on information andconclusions contained in this report to develop investment recommendations.McKinsey & Company does not make investment recommendations, in thisreport or otherwise, and nothing in this report should be interpreted as anopinion by McKinsey & Company on the prospects of specific companies._Important disclosures appear at the back of this report.11RESEARCH HIGHLIGHTSOPPORTUNITIES AMID THE GLOOMThe Wall Street Journal, on July 25, 2001, stated that “The impact of theTelecom bust reverberates far beyond telecom carriers and their equipmentsuppliers, down through a food chain that reaches into almost every corner ofthe economy.” Certainly, the last year has seen a serious contraction in stockvaluations throughout the telecom universe, from service providers toequipment and component vendors. Each of the past three quarters hasproduced a flood of negative earnings announcements, write-offs, and layoffs.Like all rapid and wide-ranging industry and economic shifts, the “TelecomCrash” gives rise to more questions than answers. How did it happen? Where isthe industry now? How wide are the effects? When will it be over? Whichcompanies and technologies will emerge and who will come out ahead?Over the past several months, a joint team of analysts from McKinsey andGoldman Sachs have examined these questions to gain context and perspectiveon the current communications infrastructure slowdown and life beyond forequipment, component, and Operational Support Systems (OSS) vendors. Thisteam arrived at the following conclusions and strategies for success.Key Conclusions1. The current equipment industry slowdown has not been caused by afalloff in actual bandwidth demand (versus ebullient demand forecasts)from enterprises and other end-users, but rather by supply-side factorssuch as over-building by carriers, over-manufacturing by vendors, andover-capitalization by financial markets, coupled with unrealisticmarket expectations.2. We expect sales of equipment to be impacted for one to two years inlong-haul and less