Encouraging forecast for capital spending among telecommunications companies, reports Probe Group

16 September 2003 Cedar Knolls, NJ Lightwave--As the competitive outlook for the telecommunications market is becoming more stable and the rate of innovation is decreasing, the forecast for capitalized spending (capex) is moderately encouraging, according to Probe Group. However, Probe suggests that the nature of that "spend" will be very different from that of the "good old days."

"Certainly, many telcos are laboring under massive debt burdens and price erosions that may yet be their undoing, but taken as a whole we do expect the industry to begin to spend again," commented Richard Endersby, Probe vice president .

In the 1990s, there was a capex boom and bust. A combination of rapid deregulation, availability of capital and swift technological innovation led to a quick influx of capital. Telecommunications - characterized by large up-front investment costs with very low incremental costs - has tended towards pricing levels that are very low, leaving little, if any, room for profit. This, in addition to the bloated expectations of Wall Street analysts, led to a rise in interest costs as carriers' debt ratings fell.

However, Endersby feels that the now "restructured" competitive environment is better positioned to return to a free cash flow situation, which is conducive to capex spending. He suggests that investment will be targeted at growth sectors, particularly wireless and packet. Multiprotocol label switching (MPLS) will be a key technology as carriers seek to migrate their ATM and Frame Relay traffic onto a single IP network. Just as much as technology solutions matter, so does the back-office and after-sales support. "Vendors that do this well will prosper. Those that don't will inevitably fail--and probably deservedly so," said Endersby.

Probe's recent report, "Telecom Capital Expenditure Trends," analyzes the recent trends in capex for the telecommunications industry. It discusses the recent past and forecasts future telecommunications capital expenditures, including its driving forces. This report is part of the Global Internet Infrastructure Markets service, which provides ongoing quantitative and competitive analysis of the Internet infrastructure market and its technology and vendors. Developments in technology, MPLS, high-speed core, service, and access issues are considered from both the vendor and carrier perspective. Forecasts and assessments are global in nature, with regional and country analysis presented where appropriate.