The battered telecommunications equipment segment, one of the most troubled areas of the technology industry, began to face trickling revenue streams at the turn of the last decade following a period of intensive network buildout in the late 1990's. Manufacturers of core copper and fiber-optic wireline transmission and switching as well as wireless products implemented extensive reorganization efforts to offset the resulting losses.

Some of the leading equipment makers, particularly Lucent Technologies, were hit hard by debt resulting from the unpaid bills of a host of bankrupt customers. Lucent made the additional blunder of clinging to outmoded products as demand turned to newer, faster technology. Other companies, like optical equipment leader Nortel Networks, found themselves hemorrhaging cash while wrangling sprawling telecom holdings built with billions in acquisition dollars. Most in the industry used layoffs and spinoffs to cut costs and have since fought to keep operating expenses to a minimum. Many of the smaller equipment and component vendors agreed to be acquired by rivals; scores of startups and other minor players simply sold off the office furniture and shut their doors.

The frugal fiscal policies of telecom service providers are at the root of the industrywide slump. Total spending on equipment fell by about 15% in 2001 and fell another 20% in 2002; the International Telecommunications Union estimates that revenues from telecom equipment totaled $275 billion in 2002. This stands in contrast to a 30% rate of growth for both fiscal 1999 and 2000 as network operators expanded fiber optic and digital wireless capacity to handle the projected broadband demands of consumers and businesses. The resulting long-haul optical networks now operate at below half of their capacity. In these lean times, carriers will focus on squeezing as much bandwidth as possible out of existing systems before upgrading.

Until sales of core wireline equipment pick up, manufacturers in the US and Europe also face the challenge of developing new products to deliver data and voice traffic from long distance networks to broadband customers in urban areas. These metropolitan area network (MAN) products ease the strain at bottlenecks between high-capacity optical lines and the older analog networks that feed subscribers. Equipment makers continue to adapt and improve existing technologies to suit this purpose; products based on Ethernet (originally used in LANs) have taken hold in the industry and leading regional Bell operators have agreed to develop common standards. Cellular and satellite equipment is also being adapted (as an alternative to cable or DSL) to link subscribers to carriers over the last mile.

Competition between makers of network gear is heated in developing overseas markets. China, which is undergoing a major network buildout following the recent deregulation of its telecommunications industry there, has proven to be fertile ground for leading telecom equipment vendors prospecting for new contracts. Motorola led foreign investment in that country's electronics industry for 2001. Regional vendors, including Huawei, have emerged as international contenders in their own right and begun to seek overseas sales.

The mobile communications segment is also undergoing change as exhaustively-hyped mobile data services arrive and the tide of third generation (3G) wireless technology begins to see the light of day. In the US and other regions, which trail Europe in the transition to 3G, service providers have introduced interim 2.5G services to provide callers with the expanded functionality they crave; wireless leaders Ericsson and Nokia provide much of the network equipment, as well as phones, that enable these services.

After a lull in demand for 2G and 2.5G handsets in 2001 and 2002, sales of replacement phones picked up in 2003 as new services and features like text messaging, cameras, and color screens kick-started a trend toward upgrade among consumers armed with well-worn wireless gadgets.