Analysts see slow growth for capital spending
 
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Those looking for an optimistic assessment of 2002 telecommunications capital spending will not get one from the market analysts at RHK whose current $53 billion projection is down $20 billion from Wall Street and carrier estimates of $73 billion.
However, RHK can see better days ahead. The speed at which carrier consolidation occurs is key to the "vigor" of any recovery, says Rob MacLellan, director of RHK's Telecommunications Economics Program.
"The nature and pace at which this happens will largely define how quickly this downturn will turn around," he says. "The consolidation process has certainly started, but not between the Tier 1 and Tier 2 carriers. The consolidation we're seeing is taking longer than we'd expected."
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What RHK expects to emerge from this consolidation process are what the firm calls competitive "Super-LECs" or "Mega-BOCs" that will gobble up leading-edge start-ups and their products.
"Carriers will be forced to depend on these large vendors to supply them with gear," MacLellan says. "These guys may not meet the carriers' long-term needs. If we sit back and view this like a high-stakes chess game, we're waiting for that first move to be made. After that catalyst, the moves will start to be made faster and faster."
MacLellan also says that the jury is out on the longevity and business plans of a number of larger carriers that went unnamed. He says a number of companies, including 360networks, were unsecured creditors of Enron and may be hurt by that company's recent bankruptcy.
MacLellan points out that carriers have shown they will use equipment already purchased and in stock to make the move from legacy, copper-based networks to the more sophisticated optical network, rather than spend additional capital to buy the latest technological innovations.
It's this optical technology that remains at the forefront of the current economic troubles and the future economic turnaround, MacLellan says. He notes carriers spent too much too quickly and experienced enhanced revenue growth accordingly, mostly due to high equipment pricing.
"Optical [capital expenditures] drove excess and it will suffer accordingly," MacLellan says. "It's also what's going to drive the future."
The move to an all-optical infrastructure is currently in the first of innumerable migration stages, MacLellan says. There is a "digestion period" needed to dissolve the capital expenditure bubble that grew from 1999 and into 2000. It's this $49 billion bubble that must be overcome within the next few years to set the telecommunications market upright again, he says.
"We see the emerging interexchange carriers as being the culprits here," he says. "The breakout of spending by these guys forced many of them into Chapter 11 within a couple of years."
MacLellan says the industry is now realizing that cuts that weren't made last year must be made over the coming year to dissolve the capital expenditures bubble.
Another key trend, MacLellan notes, is the emergence of monthly capital expenditure budgets within incumbent local exchange carriers.
"What they're trying to do is eliminate the use-or-lose mentality," he says.
MacLellan says to survive, vendors must have stronger selling propositions and be aware that while service providers want next-generation products, they will only be spending on the basics over the next year.
"Forget about the OC-768 race," he says. "Carriers aren't looking for that right now. They want to see higher channel counts, increased flexibility, more density, more diversity and smaller boxes."
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