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Outlook remains bleak for comms spending

Posted: 08 Mar 2002 ?? ?Print Version ?Bookmark and Share

Keywords:communications hardware? wired telecom? network outlook conference?

The outlook for communications hardware through 2002 remains bleak on multiple fronts, especially wired telecom, where carriers' spending plans and Wall Street's expectations for top telecom OEMs may be out of whack, according to analysts at the Network Outlook conference.

"We expect capital equipment spending at the top 40 carriers?who are now becoming the top 30 carriers?to come down as much as 35 percent this year," said B. Alexander Henderson, a senior analyst with Salomon Smith Barney.

Capital expenditure on telecom infrastructure was about $53 billion in 2001, including $19 billion in the fourth quarter, Henderson said. But capital spending in telecom is already expected to dip dramatically to $15 billion in the first quarter of 2002, he said.

Top telecom OEMs such as Lucent and Nortel are projecting revenue increases of about 10 percent in 2002, expecting most of that increase to come at the end of the year. Those projections are out of line with the carriers' own forecasts of their 2002 spending, which may be setting telecom companies up for a major correction this year, Henderson said.

Indeed, Nortel and Lucent?which reported a $1.3 billion loss in the last quarter of 2001?are particularly at risk. "They need a lot of revenue to get to the break-even point and I don't think they are going to get it," said Henderson.

Scenarios don't look much better beyond 2002, Henderson said. "It's tempting to think we will be back in recovery in 2003, but frankly I think that's a difficult call," he said. "There will probably only be a 2 to 3 percent growth in telecom capex in 2003. In fact further major consolidation?say if an AT&T merged with a Verizon?would actually result in a capex decline of 3 to 5 percent in 2003.

"Basically the carriers don't want to do any major new projects. Eventually that will turn, but for now it's much more incremental than it's been for several years, " Henderson said. "For anyone in wireline or optical communications, it's going to be a long hard winter."

Grim projections

Tam Dell' Oro, chief executive of market watcher the Dell' Oro Group, broke that gray outlook down into some sad projections for specific segments. Hardware revenue for access networking is expected to decline from $8 billion to $7 billion this year, wireless spending will decline from $31 billion to $29 billion and optical will sag from $16 billion to $11 billion, she said. "And that's providing there are no more carrier bankruptcies. If there are, things could become worse," Dell' Oro said.

Data networking for business users remains one slightly bright spot for both analysts, who expect flat to gentle growth in this arena, mainly in the second half of the year. "If you are in data networking you can do reasonably well this year," said Henderson.

"Cisco is feeling like they won. They are seeing 2 to 3 percent market share gains in a market where spending is essentially flat," he said, calling the router giant a "monopolist."

In addition, prices are holding for Cisco's products, which may give competitors an opportunity to undercut their prices. "So far we do not see price declines in routers," Dell' Oro said.

In a follow-up keynote, Mike Volpi, a senior vice president for Internet switching and services at Cisco Systems Inc., quipped, "If this is what it feels like to be a monopolist, it's tough."

Both Volpi and the analysts agreed that security is now the top spending priority for managers of business networks, followed by some growth in deploying wireless 802.11 LANs and voice-over-IP networks. But Dell' Oro noted "a big shift in attitude" among business users from spending on new technology to stay ahead of the pack to spending only when there is a case for increased productivity or cost savings.

She also predicted Ethernet revenues would be flat in 2002 largely because business users will stick with 100Mbps technology to the desktop, having no compelling reason to bring Gigabit Ethernet to end users.

Uncertainty abounds

Indeed, even in data networking the outlook is uncertain. Cisco is not providing any guidance on revenue growth beyond the next quarter because visibility is still poor, Volpi said.

Neither analyst sees any new technology on the horizon that might spark an uptick in comms spending. "From my perspective, I don't see much coming down the pike," said Henderson. "There are lots of optimizations people are working on but nothing like dense wavelength division multiplexing, which set off a whole round of spending."

"The closest thing to a killer comms app recently was Napster," said another panelist, "and that is dead."

? Rick Merritt

EE Times





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