Corporate demand may prop gear sales

Corporate demand for next-generation telecom services may keep service providers buying new equipment in 2001, despite forecasts that growth in their capital expenditures will slow.

Recently, concern arose that service provider capital expenditures would decrease dramatically, which helped drive the Nasdaq down five per cent two weeks ago.

But corporate users looking to outsource or off-load application processing, network operations and Web site administration will actually keep service provider spending robust in 2001, analysts say. It won’t hurt that demand for high-speed Internet on-ramps remains intense, they add.

Telecom equipment spending grew 35 percent in 2000 and is forecast to grow 20 per cent in 2001, according to two investment firms that track the equipment and service markets.

“We believe, though, that a true sense of where we are headed will not be clear until early next year,” financial research firm UBS Warburg stated in a recent report.

Although growth projections for 2001 are substantially lower than 2000’s figures, analysts expect strong spending for Web hosting, which includes routers, servers and load-balancing switches. They also anticipate heavy expenditures for broadband access equipment, metropolitan-area optical gear and softswitches.

The reduction in capital expenditures growth from 2000 to 2001 is largely due to market conditions. Service providers are under increasing pressure to demonstrate sustainable profitability to receive funding from investors. This requirement has hit competitive local exchange carriers (CLEC) particularly hard. Some have been forced to lay off workers and curtail service rollouts, and some analysts say they cannot cite one CLEC that has made a profit.

Another factor slowing growth is a slowdown in spending on traditional telecom gear, such as circuit switches, time-division multiplexing equipment, SONET add/drop muxes and legacy data infrastructures, analysts speculate. Service providers are gradually replacing traditional telecom gear with gigabit/terabit routers, dense wave division multiplexing, softswitches for packet-based voice, and DSL and cable-access technologies. The decrease in spending on legacy gear is not yet offset by the uptick in spending on next-generation equipment.

The growth lag is not due to any decreased demand for new services from companies, and that’s leading carriers to continue to seek increasing returns on investment in bandwidth.

“You’ve got a bandwidth demand curve on your network that’s going through the roof,” says Robert MacLellan, director of business analysis at RHK Inc. “I don’t think the capital expenditures crunch will affect the ability of an enterprise to get next-generation services as long as the end goal hasn’t changed for the carriers, and as long as the enterprise IT managers have a realistic time frame in mind.”

Some industry pundits project 2001 spending growth to be as low as 3 percent to 5 percent, but that doesn’t wash with investment firm JP Morgan.

“We believe that this estimate will likely prove to be extremely conservative,” the firm wrote in a recent report. “To believe that spending growth will slow to the low, single-digit range in 2001, you would have to believe that service providers have decided to give up on the quest to build large, end-to-end, scalable next-generation networks.”

Like UBS Warburg, JP Morgan & Co. Inc. believes spending growth will be in the 20 per cent range for 2001, and optics, IP routing and wireless could experience 40 per cent to 60 per cent growth.

But another analyst says spending will be hard-pressed to grow 20 per cent next year.

“Twenty percent strikes me as a bit much, based on the layoffs and cutbacks we’ve seen,” says Jeff Moore, senior analyst for network services at Current Analysis Inc. “There’s an increased impetus to demonstrate that you’re profitable. Reality has reasserted itself, and CLECs that have been largely driving capital expenditures have to scale their expectations to match reality.”

Spending growth has even slowed among large, profitable interexchange carriers, according to Infonetics Research Inc.

That’s largely because of the sheer volume of players and dollars, says Kevin Mitchell, directing analyst for service provider networks at Infonetics. “When the numbers are getting large, the growth has to slow,” Mitchell says.

Infonetics says spending among tier-one service providers in the U.S. will grow 54 per cent in 2001. Spending growth will slow to 40 per cent from 2001 to 2002, the firm


“You can’t grow at 50 per cent forever, or at 30 per cent forever,” Mitchell says. “There are some markets that are growing only at three per cent or four per cent per quarter.”

Dial-access concentrators and DSL access multiplexers are slower-growth markets, Mitchell says, while gigabit/ terabit routers and optical switching and transport systems are accelerating.