IT and Telecom Sector Analysis

1
IT and Telecom Sector Analysis
2
Overall Project Objectives

• Adopt a baseline of NYC economic forecasts prior
  to September 11
• Assess economic impact of September 11 attack on
  all key industries and sectors of city economy in
  short- and long-term
• Specific focus on lower Manhattan and New York
  City
• Identify priorities to accelerate New Yorks
  recovery
• A.T. Kearney, Bain Company, Booz-Allen
  Hamilton, The Boston Consulting Group, KPMG,
  McKinsey Company, and PricewaterhouseCoopers
  are collaborating in this unprecedented effort by
  addressing the Energy, Financial Services,
  Healthcare/Biotech, Insurance, IT/Telecom,
  Manufacturing, Media/Entertainment, Non-profit,
  Professional Services, Real Estate, Retail, Small
  Businesses, and Transport/Tourism sectors

3
Table of Contents

• Executive Summary
• NYC Snapshot
• Pre-9/11 Baseline
• Impact Assessment
• Actions
• Methodology and Assumptions
• Appendices

4
Executive Summary
5
The events of 9/11 modestly impacted the
technology sector recommended actions can help
the sector support an overall economic turnaround

• The impact of the attacks on the sector was
  small--the expected return to growth for the
  technology sector is delayed by 6-12 months
• Pre 9/11, slowing revenue growth was expected to
  reverse by early 2002 new estimates show a
  return in 2003
• Traditional IT and telecom heavy spenders (e.g.,
  Financial Services, Media) expect to continue
  spending reductions in 2002
• Infrastructure rebuilding and repair help the
  sector turn around as companies replace damaged
  equipment with upgraded technology standards
  where possible
• Carriers (e.g., Verizon, Sprint, ATT) suffered
  capital losses, and should seek to hasten the
  recovery through advanced technology rollout and
  increased capacity for redundancy in the New York
  area
• IT infrastructure providers can use
  rebuilding/repair activities as an opportunity to
  help clients upgrade the capabilities of their
  pre 9/11 infrastructure
• In the short term, the sector can work together
  with the business community to address critical
  post-9/11 concerns including data and system
  security, redundancy, and survivability
• Companies have become more cognizant of system
  and data backup/redundancy issues and expect to
  spend more on these services in the future
• Products and services provided by the technology
  sector companies can address many of these
  concerns
• For the long term, the sector needs to work
  together to build a truly redundant and
  distributed infrastructure for New York and for
  the country
• Rebuilding the technology sector and improving
  the overall technology infrastructure for
  business in NYC
• Establish mechanisms for ongoing demand- and
  supply-side cooperation to ensure requirements
  are met
• Preserve the entrepreneurial influence by
  supporting small businesses
• Provide an environment that fosters innovation
  and competition within the technology sector

6
Understanding the nature of the impact, we
developed four imperatives and associated actions
to mitigate the effects
Imperatives
Key Actions
Rebuild World-Class Infrastructure

• Accelerate restoration of communications
  infrastructure
• Reimburse/finance rebuilding of damaged
  infrastructure
• Leverage opportunities to deploy leapfrogging
  technologies
• Build the broadband infrastructure to support
  multiple centers of business around New York City
  (e.g., Lower Manhattan, Brooklyn, Queens, Upper
  Manhattan)

• Create industry-specific demand-side and
  supply-side consortia (e.g., Financial Services,
  Communications Services)
• Develop current and future industry-wide
  infrastructure requirements (e.g., redundancy,
  availability, capacity) and the plans to
  implement
• Establish clear communication of priorities to
  suppliers (equipment and services)
• Coordinate new technology implementation efforts
  (e.g., mesh networks, 3G, etc) among multiple
  service providers
• Leverage existing industry consortia to extent
  possible (e.g., SIAC)

Collaborate for the Future

• Establish new business development zone(s)
  throughout NYC
• Identify and prioritize prospective areas for
  development
• Deploy advanced technology infrastructure,
  targeted toward small-business requirements

Make NYC Better for Small Business

• Establish industry-wide commitment to develop
  innovative technologies
• Channel greater investment to new technologies
  enabling new business platforms
• Provide public sector support where possible to
  encourage development and deployment of new
  technologies (e.g., 3G, 802.11b, mesh networks)

Nurture Innovation and Foster Competition
7
Pre-attack, the IT and Telecom sector generated
37.8B and employed nearly 97,000 people
throughout New York City
Information Technology Revenue, Jobs, and
Companies (2000)
Telecommunications Revenue, Jobs, and Companies
(2000)
1,174
52,867
11.6B
524
43,922
26.2B
Note Only includes revenues generated in New
York City. Verizon generates an additional 61B
outside of New York City Source Dunn
Bradstreet, BAH Analysis
8
On an annual basis, the IT and Telecom sectors
generally showed declining growth prior to 9/11
IT Industry Pre-9/11 Projected Annual Growth
Telecom Industry Pre-9/11 Projected Annual Growth
Annual IT Revenue Growth
Annual Telecom Revenue Growth ()
Source IDC, Gartner Group, Economy.com, BAH
Analysis

• New technology purchases drive the IT Hardware
  market, creating greater sensitivity to slowing
  corporate IT spend and a general economic
  downturn
• Outsourcing, maintenance, and other short-term
  fixed IT spend areas support the service sector,
  limiting its exposure to economic downturns
• Emphasis on security systems (e.g., virus
  protection, intruder detection) drove any
  software growth in 2000-2001

• Decreased growth in wireless and data was
  expected as penetration increased
• Local voice maket expected to remain flat, with
  long distance services seeing declines due to
  price competition
• Hardware will experience a rebound with the roll
  out of new technologies such as 3G and 802.11b

9
In addition, industries that are historically
large consumers of IT and Telecom (e.g.,
Financial Services) were reducing their spending
levels
US IT and Telecom Spendas Avg of Firm Revenue
by Industry
Observations

• Technology has become an integral part of
  business operations and firms have to spend on
  technology upgrade and maintenance every year
• Reduction in spending as percentage of revenue is
  offset by overall increasing corporate revenues
• Slower growth is driving down stock prices,
  however long-term forecasts indicate double-digit
  growth
• Potential risk in New York City market as key
  local industries plan to reduce technology spend

US IT Spend by Industry (2000)
59 B
112 B
151 B
Technology Spend as a of Revenue
379 B
67 B
(1)
(1) Other industries include Agriculture, Mining,
Construction, Transportation, Utilities, IT,
Petroleum, Services, Healthcare, Manufacturing,
Transportation and EducationNote IT spend
includes corporate expenditure on hardware,
software and services expenses and telecom spend
includes voice and data communication expenses.
Source Gartner Group, IDC, Economy.com, Dun
Bradstreet, BAH Analysis
10
The 9/11 events caused major infrastructure
damage of 2B to the IT and Telecom sector
Source Morgan Stanley estimates, NYC
Comptroller Report, news articles, BAH Analysis
other sectors lost 10B of technology
infrastructure
11
Lower Manhattan saw a direct loss of 16 sector
companies and 1,123 sector jobs
Sub-Sector
Co.s
Jobs
Listing of Sector Businesses Lost in Lower
Manhattan
IT Hardware
3
49
Pre 9/11 Lower Manhattan IT and Telecom Sector
IT Services
159
8,525

• Avesta Computer Svcs
• Bridge Fixed Income Svcs
• Careerengine Network
• Espeed
• Lindatech
• Metiom
• SRA America
• Thor Technologies
• Financial Technologies
• Lava Trading
• Optech Systems
• Temenos USA
• Thebeast.com
• Ati Telecom
• Ingress Net
• Interoute Telcommunications

IT Software
107
5,122
Telecom Hardware
2
468
Telecom Services
92
3,944
Total
363
18,108
Sub-Sector
Co.s
Jobs
IT Hardware
0
0
Business Loss in Lower Manhattan IT and Telecom
Sector
IT Services
8
800
IT Software
5
238
Telecom Hardware
0
0
Telecom Services
3
85
Total
16
1,123
Note Includes companies with head offices in
buildings destroyed on 9/11, in which gt75 of
employees worked at the head office Source Dun
Bradstreet, BAH Analysis
12
Looking forward, planned technology spending has
been postponed by six to twelve months
STAGE 1
STAGE 2
STAGE 3
Reinstate Service
Rationalize Installation
Upgrade to New Standards

• Incur large tactical emergency spend to restore
  basic services
• Address emergency needs via patches to systems

• Replace stopgap measures with more permanent
  solutions

• Install new equipment and systems to match (or
  surpass) original upgrade plans

IT Spending
ILLUSTRATIVE
13
The current downward trend in revenue growth will
likely be extended for 2-3 quarters
Quarterly NYC IT Revenue
Quarterly NYC Telecom Revenue
Revenues ( BN)
Revenues ( BN)

• Replacement of 12B technology infrastructure
  will be a source of revenue for the national
  technology sector
• New York City will see 2.3 (of 12B) over 6-8
  quarters

Source Gartner Group, IDC, Economy.com, Dun
Bradstreet, BAH Analysis
14
The employment downturn will also be extended and
a turnaround will lag revenue recovery
Quarterly NYC IT Employment
Quarterly NYC Telecom Employment
60,000
50,000
40,000
Employees
Employees
30,000
0
0

• Rebuild efforts and temporary outsourcing service
  requirements limit additional layoffs
• As economy recovers, greater perceived need for
  decentralized IT operations and enhanced business
  continuity plans (particularly for FS firms)
  drives increased IT service and equipment demand
  and needed employment
• New employment recovery expected in late 2002,
  approximately three quarters later than
  originally forecasted

• Service reconnection efforts and new service
  connections limit additional layoffs
• As economy recovers, enduring security and travel
  concerns cause incremental increases in data and
  voice service usage as well as new network
  technology (e.g., VPN) deployment -- driving
  longer term employment increases
• Long term recovery now planned for late 2002,
  early 2003, approximately three quarters later
  than originally forecasted

15
Overall, the incremental impact on IT and Telecom
from the 9/11 attacks is minimal relative to
other sectors
Key Drivers

• Companies replacing damaged and/or destroyed
  equipment will drive a temporary increase in
  spending in certain technology subsectors
• In addition, somewhat more persistent factors
  (e.g., increased concerns over security,
  redundancy, and disaster recovery) will drive
  longer-term increased spending
• Spending on smaller, more forward-looking
  projects may increase as management time is
  redirected from enterprisewide application
  upgrades/installations
• However, the increasingly uncertain environment
  created by the events will translate into a
  deceleration of new growth
• The expected recovery from slowing growth trends
  will be delayed 6-12 months and is widely
  expected to occur in late 2002

Net Incremental Impact
Nearly zero incremental impact -- overall
economic trends continue to drive the NYC IT and
Telecom sector
16
The IT and Telecom sector provides critical
capabilities that can help support a recovery in
overall NYC business
Areas of Potential Contribution
Examples

• Increase availability of mobile cellular banks,
  mobile switches, and other quick-fix equipment
• Establish new precedents in cooperation for
  disaster recovery planning (e.g., system sharing,
  wiring blueprints, and other operational
  knowledge)
• Work as an industry to roll out 3G and 802.11b
  wireless technologies in high-impact areas for
  business network infrastructures
• Accelerate optical switching rollout to speed new
  business/location deployment time
• Leverage new and existing network infrastructures
  to provide greater data transport capacity
• Incorporate lessons learned from recovery efforts
  to set new targets/thresholds for service
  provisioning and repair cycle times
• Install state of the art broadband infrastructure
  allowing distributed business operations within
  New York City (e.g., Lower Manhattan, Queens,
  Brooklyn)
• Leverage newest high-speed fiber technologies to
  distribute existing telecom switching operations

Provide robust levels of redundancy and
survivability
Develop and deploy new technologies to drive
business forward
Provide enhanced capacity and service levels
Deploy infrastructure to enable distributed
business operations
17
Limits on the IT and Telecom sectors ability to
drive these innovations and improvements could
impair the remainder of the NYC economy
Investors are reluctant to fund high-risk ventures
Newly uncertain environment restricts access to
new venture capital
Dangers for the remainder of the economy
Available funds have been used for recovery
?

• The development of new technology-dependent
  products/services (e.g., online brokerages) is
  hindered
• Competition in the space is diminished
  potentially increasing costs and limiting
  innovative approaches to business
• The natural redundancy of multi-carrier networks
  is reduced, increasing risk for all businesses

Technology companies cannot support cutting edge
efforts
Communications companies in particular are short
of cash for new projects
Customers feel insecure and vulnerable
Sense of vulnerability (on both individual and
corporate levels) heightens concerns about
redundancy, security
so they are reluctant to spend on new
technologies
Customers are less focused on expanding offerings
vs. protecting/preserving core operations
and any spend is for traditional services
Customers exhibit greater reliance on/gravitation
towards proven service offerings of established
players
18
To address any potential issues we developed
eleven joint public and private sector actions
Action
Impact on NYC
Primary Support
1.) Reimburse/finance the efforts of key players
to rebuild while upgrading
4
Combined public and private sector
2.) Help companies with capacity find customers
with needs
1
Private sector
3.) Upgrade capacity and capability of
communications infrastructure
4
Combined public and private sector
4.) Improve customer service, satisfaction, and
customer options for communications service
options
2
Combined public and private sector
5.) Establish demand-side and supply-side
consortia to address key infrastructure
requirements
4
Private sector
6.) Establish new business development region
with advanced technology infrastructure
2
Combined public and private sector
7.) Provide mechanisms to help small technology
sector companies take advantage of rebuilding
spend
2
Combined public and private sector
8.) Enable small companies to refocus and/or
diversify to accommodate shifts in company
priorities
1
Private sector
9.) Support competition in communications
services by educating businesses on available
service alternatives
1
Combined public and private sector
10.) Channel investments to technologies critical
to native NYC industries
3
Private sector
11.) Establish NYC as center of technology RD by
fostering climate for new technology venturing
2
Public sector
High Impact
Low Impact
0
4
19
SAMPLE ACTION Establish business and
service-provider consortia to address
infrastructure requirements
Action
Establish business and service-provider consortia
to address infrastructure requirements
EXAMPLE
Implementation Actions

• Solicit participants, from key businesses,
  service providers, and equipment manufacturers
  (e.g., Large Financial Services companies,
  Verizon, ATT, Lucent, AOL) to ensure buy-iin
  from all key consituents
• Business and service provider consortia should
  operate jointly and independently to determine
  constituents specific needs
• Suggested agenda items
• Disaster recover and survivability planning
• Capacity requirements and constraints
• New technology requirements and implementation
  methods
• Suggested action-item categories
• Methods for funding potentially non-economically
  beneficial activities (e.g., redundancy creation)
  by individual members
• Required / Suggested policy changes
• Specific responsibilities for implementation by
  member companies (e.g., client corporations
  required to upgrade so service provider
  investments in new technologies will have a
  market)

Key Costs

• Establishment of consortia and coordination costs
  should incur minimal costs
• 1 management-level FTE to help coordinate key
  players
• Overall Cost Estimate 4-6MM
• Source of funds Private consortia/key
  individual company members

Key Benefits

• Enables greater infrastructure redundancy and
  advanced capabilities without placing undue
  burden on supply-side sector companies to invest
  capital with no expectation of reasonable return
• Potentially, provides valuable precedent for
  greater cooperation between supply-side sector
  companies and demand-side industries for future
  issues
• Provide forum to develop future disaster recovery
  plans

Feasibility

• High
• Cost to establish consortia is minimal, and cost
  to deploy redundancy should be matched as best as
  possible with potential for increased
  revenue/earnings to supply-side companies
• Allows greater redundancy to be built without
  public-sector intervention

20
SAMPLE ACTION (continued) Establish business
and service provider consortia to address
infrastructure requirements
EXAMPLE
Sample Agenda Items
Kickoff Timing
Key Players
Business
Service Providers

• Infrastructure providers (e.g., Verizon, ATT)
• Business continuity service providers (e.g.,
  SunGard)
• Equipment providers (e.g., IBM, EMC)

• Business Continuity Requirements
• Infrastructure Redundancy
• Data Backup
• Equipment/Space Availability

• Immediate

• Representatives from key NYC industries (e.g.,
  Financial Services, Media)

• Advanced/Alternative Technology Capability
  Requirements

• 12-24 months

• Infrastructure providers (e.g., Verizon, ATT)
• Equipment providers (e.g., IBM, EMC)
• Key new technology players (e.g., Level3)

• Representatives from key NYC industries (e.g.,
  Financial Services, Media)

• Disaster Recovery Requirements for Small
  Businesses

• Representatives from key NYC industries (e.g.,
  Financial Services, Media) -- with representation
  from small players within each

• Immediate

• Infrastructure providers (e.g., Verizon, ATT)
• Business continuity service providers (e.g.,
  SunGard)
• Equipment providers (e.g., IBM, EMC)

• Infrastructure Capacity Requirements

• Representatives from key NYC industries (e.g.,
  Financial Services, Media)

• 6-12 months

• Infrastructure providers (e.g., Verizon, ATT)
• Ley new technology players (e.g., Level3)

21
NYC Snapshot
22
The New York IT and Telecom sector includes a
number of familiar names, along with plenty of
smaller players
Sector
Sub-Sector
SIC Code - Description
Examples
IT
Hardware

• 357 - Computers, Peripherals, Office Equipment

• Human Scale Corporation
• Dot Hill Systems Corporation

Software

• 7371/2 - Computer related software

• Nutech Integrated Systems
• Aegis Software

Services

• 7373 to 7379 - Computer related services

• AMC Computer Corporation
• Netik Inc.

Telecom
Hardware

• 366 - Communications Equipment

• L3 Communications
• Loral Space Communications

Voice (Local LD)

• 4812 - Wireless Telecom Services
• 4813 - Telecom Services
• 4822 - Telegraph and other Communications
• 4899 - Telecom services, not elsewhere classified

• Verizon
• RSL Communications
• Arbinet-thexchange

Wireless
Data
23
The technology sector generated 37.8B and
employed nearly 97,000 people throughout New York
City
Information Technology Revenue, Jobs, and
Companies (2000)
Telecommunications Revenue, Jobs, and Companies
(2000)
1,174
52,867
11.6B
524
43,922
26.2B
Note Only includes revenues generated in New
York City. Verizon generates an additional 61B
outside of New York City Source Dunn
Bradstreet, BAH Analysis
24
Small companies provide nearly 40 of the
employment and approximately 15 of revenues
NYC IT Telecom Industry by Firm Size
1,698
96,789
100B
37.8B
Note Only includes revenues generated in New
York City. Verizon generates an additional 61B
outside of New York City Source Dunn
Bradstreet, BAH Analysis
25
Most sector companies reside within Manhattan --
Lower Manhattan hosts approximately 20 of the
employment
New York City IT and Telecom Employment (2000)
Overall Distribution of IT/Telecom Firms, Jobs,
and Revenue by NYC Region
Lower Manhattan
Other Manhattan
Other Boroughs
30.9B
IT
Hardware
49
501
956
1,131
Software
8,525
24,626
2,543
60,554
Services
5,122
10,025
520
Telecom
Hardware
468
432
616
Services
3,944
24,970
13,492
Total
18,108
60,554
18,127
Revenue
Firms
Jobs
Other Manhattan
New York City IT and Telecom Revenues (2000)
Lower Manhattan
Other Manhattan
Other Boroughs
363
18,108
4.0B
IT
Hardware
0.02
0.5
0.1
18,127
206
Software
1.1
3.1
0.07
3.0B
Jobs
Revenue
Firms
Services
1.1
5.4
0.2
Lower Manhattan
Firms
Revenue
Jobs
Telecom
Hardware
0.3
3.9
0.2
Other Boroughs
Services
1.4
18.0
2.4
Total
4.0
30.9
3.0
26
Pre 9/11 Baseline
27
Pre-attack trends for IT and telecom showed
slowing growth rates, with an anticipated rebound
in Q4 2002
IT Industry Pre-9/11 Projected Annual Growth
Telecom Industry Pre-9/11 Projected Annual Growth
Expect steady 8-10 long-term growth for wireless
Annual IT Revenue Growth
Annual Telecom Revenue Growth ()
Source IDC, Gartner Group, Economy.com, BAH
Analysis

• New technology purchases drive the IT Hardware
  market, creating greater sensitivity to slowing
  corporate IT spend and a general economic
  downturn
• Outsourcing, maintenance, and other short-term
  fixed IT spend areas support the service sector,
  limiting its exposure to economic downturns
• Emphasis on security systems (e.g., virus
  protection, intruder detection) drove any
  software growth in 2000-2001

• Decreased growth in wireless and data was
  expected as penetration increased
• Local voice maket expected to remain flat, with
  long distance services seeing declines due to
  price competition
• Hardware will experience a rebound with the roll
  out of new technologies such as 3G and 802.11b

28
Prior to the 9/11 attacks, the IT hardware
subsector was on a downward trend, with software
and services experiencing slowed growth
Subsector
Trend
Drivers
Hardware

• Corporate IT spending trends play a major role
• Key consumers of technology were slowing overall
  capital expenditures
• Slowdown in consumer spending affects PC market

Software

• Shift in spending was away from discretionary
  software
• Security was already a priority for many
  companies
• Spending levels are maintained by long-term
  contracts and need to upgrade

Services

• Outsourcing services benefited as companied
  sought to reduce costs
• Companies delivering discretionary services (e.g.
  customer software development) saw the greatest
  slowdown

Company Size
Trend
Drivers
Small

• Smaller firms felt disproportionately large
  impact from economic slowdown
• Funding for new ventures had become scarce

Large

• Many large firms had begun to lay off workers to
  maintain profitability
• A return to growth was expected in 2002

Detailed subsector-specific trend data is
included in Appendix A
29
In the telecom sector, well-capitalized incumbent
wireless service providers drove pre-9/11 growth
while the hardware sector was in a decline
Subsector
Trend
Drivers
Hardware

• Slowdowns in corporate spending limited once-high
  growth
• Large providers that had planned for continued
  explosive growth faced an inventory glut
• Failures/bankruptcies in several sectors (e.g.,
  CLECs) placed strains on vendor financing
  activities

Wireless (voice)

• Trends from Europe and Japan indicated wireless
  services would weather the economic slowdown well
• Slowdown in growth was a consequence of increased
  penetration rather than economic conditions
• Increasing ARPU offset slowdown in new subscribers

Wireline voice (LDIXC)

• Markets were nearly 100 saturated and facing
  cutthroat price competition
• Growth was extremely limited

Data

• Growth in high-bandwidth services was driven by
  constantly increasing data requiremens and
  advanced internet applicaitons
• CLEC and competitive player failures were
  becoming increasingly common, but incumbents
  continued to perform well

Company Size
Trend
Drivers
Small

• Smaller firms felt disproportionately large
  impact from economic slowdown
• Funding for new ventures had become scarce

Large

• Large telecom firms (e.g., Verizon) experiencing
  increased profit margins
• Medium size wireless carriers were having trouble
  accessing capital for growth
• Voice continued to experience margin pressure
• Data services were growing

Detailed subsector-specific trend data is
included in Appendix A
30
Impact Assessment
31
Emphasis on infrastructure integrity and security
will help lessen the decline and hasten the
rebound in the IT and Telecom sector

• Overall, the IT and telecom sector in NYC is
  expected to see an immediate reduction in growth
  rates for the next two quarters before recovering
  to pre-9/11 levels by the end of 2002
• Opportunity for stronger players to consolidate
  their position
• Challenge for small business to survive this
  slump
• IT hardware will likely continue on a downward
  trend until the overall economy recovers
• Spending on subsector is driven by overall
  economic trends
• The impact on the NYC economy is small relative
  to other sectors
• Multiyear contracts will help IT services firms
  avoid the impact of 9/11 in the near term
• Changes in spending priorities and habits will
  not be immediately felt as existing long-term
  contracts must be served out
• Certain services provided are fundamental to
  business operations (e.g., data center
  operations) and cannot be easily curtailed in the
  short term
• Software manufacturers could begin to see
  negative growth in the short-term
• NYC based clients are likely to spend less on
  software
• Majority of the software companies are small
  firms and may not be able to absorb several
  quarters of reduced revenues

32
The immediate capital loss from the 9/11 attack
is estimated at 2B, comprised primarily of
facilities equipment
Source Morgan Stanley estimates, NYC
Comptroller Report, news articles, BAH Analysis
Other sectors lost 10B of technology
infrastructure
33
Overall, the incremental impact on IT and Telecom
from the 9/11 attacks is minimal relative to
other sectors
Key Drivers

• Companies replacing damaged and/or destroyed
  equipment will drive a temporary increase in
  spending in certain technology subsectors
• In addition, somewhat more persistent factors
  (e.g., increased concerns over security,
  redundancy, and disaster recovery) will drive
  longer-term increased spending
• Spending on smaller, more forward-looking
  projects may increase as management time is
  redirected from enterprisewide application
  upgrades/installations
• However, the increasingly uncertain environment
  created by the events will translate into a
  deceleration of new growth
• The expected recovery from slowing growth trends
  will be delayed 6-12 months and is widely
  expected to occur in late 2002

Net Incremental Impact
Nearly zero short-term incremental impact --
overall economic trends continue to drive the NYC
IT and Telecom sector, and could result in slower
long-term growth
34
but limits on the IT and Telecom sectors
ability to drive innovations could impair the
remainder of the NYC economy
Investors are reluctant to fund high-risk ventures
Newly uncertain environment restricts access to
new venture capital
Dangers for the remainder of the economy
Available funds have been used for recovery
?

• The development of new technology-dependent
  products/services (e.g., online brokerages) is
  hindered
• Competition in the space is diminished
  potentially increasing costs and limiting
  innovative approaches to business
• The natural redundancy of multi-carrier networks
  is reduced, increasing risk for all businesses

Technology companies cannot support cutting edge
efforts
Communications companies in particular are short
of cash for new projects
Customers feel insecure and vulnerable
Sense of vulnerability (on both individual and
corporate levels) heightens concerns about
redundancy, security
so they are reluctant to spend on new
technologies
Customers are less focused on expanding offerings
vs. protecting/preserving core operations
and any spend is for traditional services
Customers exhibit greater reliance on/gravitation
towards proven service offerings of established
players
35
Although Lower Manhattan is home to 363 sector
companies, their business base was not severely
impacted by 9/11
Sub-Sector
Co.s
Jobs
Listing of Sector Businesses Lost in Lower
Manhattan
IT Hardware
3
49
Pre 9/11 Lower Manhattan IT and Telecom Sector
IT Services
159
8,525

• Avesta Computer Svcs
• Bridge Fixed Income Svcs
• Careerengine Network
• Espeed
• Lindatech
• Metiom
• SRA America
• Thor Technologies
• Financial Technologies
• Lava Trading
• Optech Systems
• Temenos USA
• Thebeast.com
• Ati Telecom
• Ingress Net
• Interoute Telcommunications

IT Software
107
5,122
Telecom Hardware
2
468
Telecom Services
92
3,944
Total
363
18,108
Sub-Sector
Co.s
Jobs
IT Hardware
0
0
Business Loss in Lower Manhattan IT and Telecom
Sector
IT Services
8
800
IT Software
5
238
Telecom Hardware
0
0
Telecom Services
3
85
Total
16
1,123
Note Includes companies with head offices in
buildings destroyed on 9/11, in which gt75 of
employees worked at the head office Source Dun
Bradstreet, BAH Analysis
36
Rebuilding efforts support the technology sector
estimates indicate 8B of technology
infrastructure must be replaced by former WTC
occupants
WTC Towers, Tenants by Floors and Employees,
9/10/01
Observations

• A significant portion of the companies within the
  WTC are large-sized firms (500 employees)
• Not considering those with significant lost
  employees, these firms are likely to require
  significant additional IT and telecom spending
  outlays to set up operations elsewhere
• These IT and telecom expenditures can be expected
  to mostly go to NYC-based IT firms

UNKNOWN Who will leave NYC?
Companies with greater than 500 employees within
WTC
Source NYC Comptroller Report
37
Technology subsectors taken individually see
minimal net incremental impact of the attacks
Note Impact figures defined as difference
between pre-9/11 growth levels and base scenario
post-9/11 growth levels, one quarter and eight
quarters beyond 3Q-01 for short-term and
long-term, respectively
Detailed projections are provided in Appendix B
38
Actions
39
After analyzing the impact to the sector, we
developed four imperatives and associated actions
to mitigate the effects
Imperatives
Key Actions
Rebuild World-Class Infrastructure

• Accelerate restoration of communications
  infrastructure
• Reimburse/finance rebuilding of damaged
  infrastructure
• Leverage opportunities to deploy leapfrogging
  technologies
• Build the broadband infrastructure to support
  multiple centers of business around New York City
  (e.g., Lower Manhattan, Brooklyn, Queens, Upper
  Manhattan)

• Create industry-specific demand-side and
  supply-side consortia (e.g., Financial Services,
  Communications Services)
• Develop current and future industry-wide
  infrastructure requirements (e.g., redundancy,
  availability, capacity) and the plans to
  implement
• Establish clear communication of priorities to
  suppliers (equipment and services)
• Coordinate new technology implementation efforts
  (e.g., mesh networks, 3G, etc) among multiple
  service providers
• Leverage existing industry consortia to extent
  possible (e.g., SIAC)

Collaborate for the Future

• Establish new business development zone(s)
  throughout NYC
• Identify and prioritize prospective areas for
  development
• Deploy advanced technology infrastructure,
  targeted toward small-business requirements

Make NYC Better for Small Business

• Establish industry-wide commitment to develop
  innovative technologies
• Channel greater investment to new technologies
  enabling new business platforms
• Provide public sector support where possible to
  encourage development and deployment of new
  technologies (e.g., 3G, 802.11b, mesh networks)

Nurture Innovation and Foster Competition
40
We developed specific actions, using four key
imperatives that drive the IT and Telecom
sectors ability to support a NYC recovery
Imperative
Description
Potential Benefits

• Replace one-time capital losses suffered by the
  industry as a result of the 9/11 events
• Drive the NYC infrastructure forward by upgrading
  it where possible

• Provides short-term financial support to sector
  companies experiencing significant infrastructure
  damage
• Restores IT/Telecom services and infrastructure
  while instituting higher levels of customer
  service

Rebuild World-Class Infrastructure

• Enables greater infrastructure redundancy and
  advanced capabilities without placing undue
  burden on supply-side sector companies to invest
  capital with no expectation of reasonable return
• Potentially, provides valuable precedent for
  greater cooperation between supply-side sector
  companies and demand-side industries for future
  issues

Collaborate for the Future

• Develop ongoing mechanism to determine technology
  requirements of different industries and NYC
  economy as a whole
• Establish cooperative environment for technology
  players to work with customers to provide best
  solutions to address requirements

Make NYC Better for Small Business

• Provide resources to ensure the viability of
  small businesses within NYC, both within and
  outside of the technology sector

• Allows small companies to leverage leading
  technologies in operations and/or service
  offerings
• Provides key selling point for NYC to potential
  small business community members, vs. other
  regions
• Encourages development/testing of innovative
  technologies on limited basis within NYC

Nurture Innovation and Foster Competition

• Facilitate the development of new technologies on
  an ongoing basis
• Create an environment to encourage the
  exploration of new products and services

• Provides continued funding to high-growth areas,
  to ensure industry is not left behind by faster
  players elsewhere
• Helps to retain skilled high-tech talent pool
  within NYC area

41
Eleven actions emerged across the imperatives
Actions
Imperatives
1.) Reimburse/finance the efforts of key players
to rebuild or repair damaged/destroyed
infrastructure, getting NYC services back to
normal while upgrading current
infrastructure 2.) Help companies with capacity
find customers with needs -- support customer
access to key providers/subcontractors for
short-term requirements 3.) Upgrade capacity and
capability of communications infrastructure 4.) Im
prove customer service, satisfaction, and
customer options for communications services
Rebuild World-Class Infrastructure
5a.) Establish demand-side consortia to address
key infrastructure requirements 5b.) Establish
supply-side consortia to address key
infrastructure requirements
Collaborate for the Future
6.) Establish new business development region
with advanced technology infrastructure 7.) Provid
e mechanisms to help small technology sector
companies take advantage of rebuilding
spend 8.) Enable small companies to refocus
and/or diversify to accommodate shifts in company
priorities 9.) Support competition in
communication services by educating businesses on
available service alternatives
Make NYC Better for Small Business
10.) Channel investments to technologies critical
to native NYC industries 11.) Establish NYC as
center of technology RD by fostering a climate
for new technology venturing
Nurture Innovation and Foster Competition
42
Four actions stand out as the highest priority,
with potentially enduring benefits and high
feasibility
Actions
Imperatives
Highest-Priority Actions
1.) Reimburse/finance rebuilding
1.) Reimburse/finance the efforts of key players
to rebuild or repair damaged/destroyed
infrastructure, getting NYC services back to
normal while upgrading current infrastructure
2.) Help companies with capacity find
Rebuild World-Class Infrastructure
3.) Upgrade capacity and capability
4.) Improve customer service, satisfaction
5a.) Establish demand-side consortia to address
key infrastructure requirements 5b.) Establish
supply-side consortia to address key
infrastructure requirements
5a.) Establish demand-side consortia
Collaborate for the Future
5b.) Establish supply-side consortia
6.) Establish new business development
6.) Establish new business development region
with advanced technology infrastructure
7.) Provide mechanisms to help small
Make NYC Better for Small Business
8.) Enable small companies to refocus
9.) Support competition in communications
10.) Channel investments to technologies critical
to native NYC industries
10.) Channel investments to technologies
Nurture Innovation and Foster Competition
11.) Establish NYC as center of
Each of the actions is discussed in detail in
Appendix C
43
Methodology and Assumptions
44
At each stage of analysis, we validated
hypotheses with multiple credible sources
Section
Description

• Leveraged Dun Bradstreet database of NYC
  companies identified by SIC code
• Gathered key information for these companies
  including employee and revenue figures
• Isolated Lower Manhattan companies by zip code
• Developed profile of the technology sector,
  segmented by size and subsector

NYC Snapshot

• IDC
• Gartner Group
• Economy.com

• Projections based on external sources and overall
  economic drivers
• Key factor is planned IT spend at major companies

Pre 9/11 Baseline

• Incorporated interview results (industry
  executives, analysts, investment experts) where
  possible

• Utilized three forecast scenarios (Base,
  Pessimistic, Optimistic)
• Incorporated interview results (industry
  executives, analysts, investment experts) where
  possible
• Developed and incorporated subsector-specific
  assumptions where appropriate (discussed within
  Impact section)

Impact

• Developed set of candidate initiatives by
• Tapping internal resources within BAH (both
  within and external to project team)
• Identifying key prospective actions suggested in
  research resources
• Added to and refined this set based on interview
  feedback

Initiatives
45
Our sources included interviews with over 30
individuals, including large and small companies
as well as sector experts
Interviewees
46
We analyzed the data from these sources to arrive
at our projected estimates
Projection Development Framework
IDC
BAH Analysis
Growth Rates
Revenue Growth Projections
Gartner Group
Revenues
Economy.com
2000 Revenues
Analyst Reports

• Compute national growth trends
• Adjust national trends to New York City trends
• of spend
• Elasticity for growth
• Population Base

• Dun Bradstreet Report

• National revenue projections

IDC
Employment Projections
BAH Analysis
Gartner Group
Growth Rates
Employment
EmploymentReports

• Dun Bradstreet data
• New York city relationship to national
  projections
• Job Loss reports (newspapers, reports) in New
  York City

• National growth projections
• NYC Comptroller Reports

47
in the context of the three standard scenarios
established by the Core Team
Impact Scenarios
Scenario
Assumptions
Implications
Base

• Unclear implications of conflict
• Recession in Q3 and Q4 2001 due to declining
  consumer confidence
• Recovery in Q1 2002

• Market expectations of industry growth rates over
  the next few years considering the impact of 9/11
  attacks
• Further reduction in growth rates following the
  9/11 attacks but recovery time is expected to be
  the same

Pessimistic

• Economic depression with 4 consecutive declining
  quarters
• Plunging consumer confidence stays low
• Escalation of hostilities with lingering fear

• Deeper plunge in growth rates followed in some
  cases by a longer wait time for the growth rates
  to turn around

Optimistic

• Best-case scenario
• Conflict primarily resolved and/or clarified in
  short term
• Consumer confidence rejuvenated
• Downturn subdued

• Technology sector demonstrates immediate comeback
• Growth rates continue to rise but at a slower
  pace than in the early 1990s

48
A three-stage recovery spending framework drove
the development of post-9/11 trajectories for
each scenario
STAGE 1
STAGE 2
STAGE 3
Reinstate Service
Rationalize Installation
Upgrade to New Standards

• Incur large tactical emergency spend to restore
  basic services
• Address emergency needs via patches to systems

• Replace stopgap measures with more permanent
  solutions

• Install new equipment and systems to match (or
  surpass) original upgrade plans

IT Spend
ILLUSTRATIVE
49
New York Citys historically close tracking of
national growth rates guided the sector
trajectories
US and New York City GDP Growth Rates
Observations

• Rebuilding expense and a lower starting point
  were expected to drive growth rates - San
  Francisco and Tokyo earthquakes have witnessed
  such returns in their growth rates following the
  initial downturn
• This rise is expected to arrive after a 3 or 4
  quarter time lag as the rebuilding spend trickles
  throught he economy
• New York city economy has grown faster than the
  national average in boom cycles and this trend is
  expected to continue in the next boom phase

GDP Growth
Source Economy.com, Bureau of Economic Analysis,
BAH Analysis
50
New redundancy communications requirements and
rebuilding spend should help move technology out
of the decline
Drivers
Description

• Demand to create additional redundancy
  infrastructure drives most technology sub-sectors
  (hardware, software, services) exception being
  telecom services
• Industries like postal services, airlines will
  increase their technology spending on security
  and redundancy needs
• Industries which have traditionally been high
  consumers of technology will also re-evaluate
  their budgets to increase their spend on
  security/redundancy

Additional Security/Redundancy

• Drive to decentralize key information will lead
  to increased implementation of remote
  communications solutions
• Some larger players may acquire small companies
  with proprietary technologies -apply marketing
  supported by brand name to grow the market for
  these services
• Increase in telecommuting needs will increase
  demand for services like home offices and video
  conferencing

New remote communication needs

• 10-12B flowing into technology sector --
  230-275 MM in New York specific companies
• Rebuilding spend and a lower starting point were
  expected to drive growth rates e.g., San
  Francisco and Tokyo earthquakes led to an
  immediate downturn in the regioanl economies, but
  rebuilding spend resulted drove a quick rebound
  in growth rates

Rebuilding Activities
51
The inertia of maintenance vs. new IT spending
is another factor reductions come most readily
from trimming new technology purchases
Discussion
ILLUSTRATIVE
IT Spend Reduction Scenario Effect on Different
Spend Types

• IT spend dedicated to maintenance purposes (e.g.,
  HW maintenance, support) is relatively
  uncompressible -- spending requirements are
  relatively unchangeable in the short term
• When overall IT spend faces reduction pressures
  (e.g., economic downturn, uncertainty), spend
  typically must come from the New IT spend while
  Maintenance IT spend continues
• The New IT spend area is most closely related
  with the Hardware and Software subsectors, moreso
  than with the Services subsector

Total 1.0
Total 0.8
52
We considered IT industry perspectives that
despite corporate spending pullbacks, long-term
growth is inevitable
US IT and Telecom Spendas Avg of Firm Revenue
by Industry
Observations
US IT Spend by Industry (2000)

• Technology has become an integral part of
  business operations and firms have to spend on
  technology upgrade and maintenance every year
• Reduction in spending as of revenue is offset
  by overall increasing corporate revenues
• Slower growth is driving down stock prices,
  however long-term forecasts indicate double-digit
  growth
• Potential risk in New York City market as key
  local industries plan to reduce technology spend

59 B
112 B
151 B
Technology Spend as a of Revenue
379 B
67 B
(1)
(1) Other industries include Agriculture, Mining,
Construction, Transportation, Utilities, IT,
Petroleum, Services, Healthcare, Manufacturing,
Transportation and Education.Note IT spend
includes corporate expenditure on hardware,
software and services expenses and telecom spend
includes voice and data communication expenses.
Source Gartner Group, IDC, Economy.com, Dun
Bradstreet, BAH Analysis
53
A simple risk-return framework enabled a
prioritization of the actions
Prioritization Framework
Hi
Pursue with multiple partners or as an industry
to reduce risks
Identify participants and implement immediately
Potential Return (Financial)
Avoid as private firms -- public sector may fund
if societal benefits exist
Pick low hanging fruit and implement
Lo
Hi
Lo
Complexity and Sensitivity
54
Utilizing this framework revealed that actions
fostering cooperation deliver the highest return
with the least complexity
Prioritization of Actions
Actions
Hi
5a/b
3
1
1.) Reimburse/finance efforts of key players to
rebuild while upgrading infrastructure 2.) Help
companies with capacity find customers with needs
-- support customer access to key
providers/subcontractors for short-term
requirements 3.) Upgrade capacity and capability
of communications infrastructure 4.) Improve
customer service, satisfaction, and customer
options for communications services 5a.)
Establish demand-side consortia to address key
infrastructure requirements 5b.) Establish
supply-side consortia to address key
infrastructure requirements 6.) Establish new
business development region with advanced
technology infrastructure 7.) Provide mechanisms
to help small technology sector companies take
advantage of rebuilding spend 8.) Enable small
companies to refocus and/or diversify to
accommodate shifts in company priorities 9.) Suppo
rt competition in communication services by
educating businesses on available service
alternatives 10.) Channel investments to
technologies critical to native NYC
industries 11.) Establish NYC as center of
technology RD by fostering a climate for new
technology venturing
10
6
Potential Return (Financial)
4
2
9
11
7
8
Lo
Hi
Lo
Complexity and Sensitivity
Note Size of bubble indicates relative impact
on NYC businesses Shading indicates
highest priority actions
55
To evaluate funding sources for the actions, we
strove to ensure primary beneficiaries provide
the majority of the investment
Funding Framework

• Little economic benefit for individual firms
  investing in these initiatives
• Long-term horizon for benefits realization e.g.,
  6-7 years
• Typically focused on overall infrastructure
  improvements (e.g., universal connectivity,
  public transit)

Community Building Initiatives
Public
Combined Initiatives

• Community benefits are indirect or a result of
  companies in the New York City area competing
  more effectively
• Public sector provides incentives or funding to
  increase economic viability of projects for
  individual companies/groups of companies
• Profit potential for individual companies,
  however long lead times limit corporate investment

Beneficiary Sector
Joint
Corporate Self-Help Initiatives

• Investments return tangible returns for
  participants
• Private companies will undertake these projects
  since they result in shareholder value creation
• May need encouragement from demand side consortia
  to ensure demand for new products or services
  provided

Private
Private
Public
Joint
Resultant Potential Funding Source
56
The highest-priority actions should be
private-sector or jointly funded
Funding Framework
11.) Establish NYC as center of technology RD by
fostering a climate for new technology venturing
Community Building Initiatives
Public
1.) Reimburse/finance efforts of key players to
rebuild while upgrading infrastructure 3.) Upgrade
capacity and capability of communications
infrastructure 4.) Improve customer service,
satisfaction, and customer options for
communications services 6.) Establish new
business development region with advanced
technology infrastructure 7.) Provide mechanisms
to help small technology sector companies take
advantage of rebuilding spend 9.) Support
competition in communication services by
educating businesses on available service
alternatives
Combined Initiatives
Beneficiary Sector
Both
2.) Help companies with capacity find customers
with needs -- support customer access to key
providers/subcontractors for short-term
requirements 8.) Enable small companies to
refocus and/or diversify to accommodate shifts in
company priorities 5a.) Establish demand-side
consortia to address key infrastructure
requirements 5b.) Establish supply-side consortia
to address key infrastructure requirements 10.) Ch
annel investments to technologies critical to
native NYC industries
Corporate Self-Help Initiatives
Private
Private
Public
Both
Primary Funding Source
Note Actions in bold indicate highest priority
57
Appendices

• A. Subsector Pre-9/11 Baseline Trends
• B. Subsector Post-9/11 Projections
• C. Detailed Actions

58
Appendix A. Subsector Pre-9/11 Baseline Trends
59
The IT hardware market sensitivity to the overall
economy will result in reduced revenues for 2001
recovery is expected by 2002
IT Hardware Annual Revenue
NYC market represents 0.50 of national market
Pre-9/11 Observations

• PC market is saturated, traditional drivers of
  growth are no longer applicable (e.g., enterprise
  desktop roll-out)
• PC makers depend on increasing demands of
  advanced software packages and peripherals to
  drive growth (e.g., Windows XP, video
  conferencing)
• Spending on storage subsystems will not see a
  downturn as information revolution and internet
  expansion will continue to drive spending on
  network-related storage products
• Servers were expected to see a quick rebound
  driven by the ongoing need to build greater
  redundancy

Annual IT Hardware Revenue (BN)
IT Hardware Annual Revenue Growth
Annual IT Hardware Revenue Growth ()
Source Gartner Group, IDC, Economy.com, Dun
Bradstreet, BAH Analysis
60
Security systems support continued double digit
growth for the software sector with enterprise
applications driving future growth
NYC market represents 4.4 of national market
Pre-9/11 Observations
IT Software Annual Revenue and Growth Rate

• Current slowing growth trends attributable to
  three key factors
• Slow down in PC spending
• Halt in corporate upgrades with announcement of
  Windows XP
• Loss of fascination with e- trends
• Security systems (e.g., firewalls, login, etc.)
  continue to be the number one priority for
  corporate IT departments
• Enterprise applications such as ERP and CRM drove
  previous growth and will continue to drive growth
  in the future

Annual IT Software Revenue (BN)
Annual IT Software Revenue Growth ()
Source Gartner Group, Economy.com, IDC, Dun
Bradstreet, BAH Analysis
61
Demand for IT Services was expected to continue
growing but at a slower pace than the mid 1990s
NYC market represents 2.1 of national market
Pre-9/11 Observations
IT Services Annual Revenue and Growth Rate

• Long-term outsourcing contracts provide steady
  source of revenue for sector
• Several failures in the Internet space limited
  2000 growth
• Pent up demand for IT projects (e.g., systems
  integration, CRM, supply chain services) is
  expected to help growth in 2002
• Large service firms (e.g., IBM, EDS) growth
  easily counters smaller companies

Annual IT Services Revenue Growth ()
Annual IT Services Revenue (BN)
Source Gartner Group, IDC, Dun Bradstreet, BAH
Analysis
62
Corporate IT spending reductions hurt the
high-dollar communications hardware industry
NYC market represents 3.7 of national market
Pre-9/11 Observations
Network Hardware Annual Revenue and Growth Rate

• Marginal impact on New York City since none of
  the major manufacturers have significant
  operations in the city
• Equipment manufacturers exacerbated demand-side
  issues with over production (for aggressive
  growth) resulting in large inventories
• Revenues will continue to grow slowly or see
  negative growth for one to two years driven by
  the time required to absorb excess inventory
• Current economic climate prevents many service
  providers from accessing capital markets to fund
  expansion
• Continued margin pressure is expected as
  customers continue to reduce IT spending

Annual Network Hardware Revenue Growth ()
Annual Network Hardware Revenue (BN)
Source Gartner Group, US Census Bureau , BAH
Analysis
63
Local and LD Voice revenue continues to decline
due to ongoing price competition and wireless
substitutes
NYC market represents 2.8 of national market
Voice Services Annual Revenue
Observations

• Long distance price competition is eroding
  revenue streams across the industry
• Consumers and businesses continue to adopt
  wireless, pagers, and email as substitutes for
  phone calls

Annual Voice Services Revenue (BN)
Voice Services Annual Revenue Growth
Annual Voice Services Revenue Growth ()
Source JP Morgan HQ and McKinsey Co. Joint
Study, BAH Analysis