North American service-provider capital expenditures to rebound in 2003

Feb. 1, 2002

North American wireline service-provider capital expenditures (capex) will continue to decline in 2002, claims a new report from San Francisco-based RHK Inc., but will rebound by late this year or early next year. Analysts forecast that 2001 capex will end at roughly $66 billion, down 28% year-over-year from $92 billion in 2000. For 2002, capex will total approximately $53 billion, a further decrease of 20% from last year's levels. However, RHK expects spending to increase in 2003, driven by service providers' improved operating cash flow, more robust balance sheets, and efforts to meet growing IP traffic demands. By 2005, capex should reach approximately $80 billion.

According to Robert MacLellan, director of RHK's Telecom Economics Program, the 2001-02 drop in capex is the after-effect of an unsustainable $50-billion bubble in service-provider capex in 1999-2000.

"Liberalization in the North American service-provider market, the explosion in access to the Internet, and the switch to optical networking by new and incumbent service providers drove spending rates that were unsupportable by service providers' operating cash flows and debt capacities," explains MacLellan. "The market simply became flooded with too many service providers offering price-centric transport services."

The shape of the capex recovery curve will be determined by the pace and nature of consolidation of the service-provider community over the next 18 months, MacLellan adds.

The capex forecast is the first release from RHK's new Telecom Economics Program, which examines service-provider spending history, tendencies, and abilities on a continuous basis. For more information, visit the company's Website at www.rhk.com.

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