Analysts see slow recovery for carrier spending

Capital spending by North American telecommunications carriers probably will not recover until 2004 from a slump caused by a recent glut of infrastructure investment and slow demand for new services, according to research company RHK Inc.

And even after the recovery, North American carriers as a group, including both incumbent and competitive telecommunications service providers, probably will not return to their 2001 spending levels until about four years from now, according to figures from an RHK report released Monday.

The South San Francisco company determined a range of possible spending levels for each of the next four years by examining three possible scenarios. The most likely scenario shows capital expenditure staying roughly flat through 2003 before it begins to recover in 2004, according to Melanie Swan, director of the Telecom Economics Program at RHK.

Service providers’ capital expenditure will drop to a range of US$46 billion to $51 billion in 2002 from $77 billion in 2001, according to Swan. RHK projects spending to stay roughly flat through next year, in a range of $44 billion to $57 billion for 2003.

A recovery probably will begin in 2004, when spending will be in a range of $46 billion to $63 billion, and continue in 2005 and 2006, Swan said. RHK projects a range of $48 billion to $70 billion in 2005 and from $51 billion to $78 billion in 2006, the last year of the study.

The Internet and telecommunications boom that peaked in 1999 and 2000 has left the industry with plenty of network backbone capacity and a large number of competitors driving down service prices, Swan said. In addition, corporations have been slow to migrate from legacy services such as frame relay to data networks based on IP (Internet Protocol), so carriers don’t have to buy more equipment to keep up with demand, she added.

“Now that we’re back from the bubble, service providers don’t have capacity demands driving additional network (building), and also, there’s quite a bit of pricing competition because there are too many service providers in the market,” Swan said.

Capital spending by carriers will start to rebound as ailing carriers close down or are acquired, which will ease price competition, and as customers begin more rapidly to adopt new services. New types of services that are likely to catch on include widely deployed wireless LANs provided by carriers, and video services such as Internet-based gaming, videoconferencing and video on demand, she said.