Time to wheel out that old Bob Dylan collection again, because times really are a-changin', according to Jefferies & Co. analyst George Notter.

In a research note issued today, Notter picks out two key changes in U.S. carrier capex trends. First, Notter says there are very few signs of the fourth quarter's usual "budget flush," when carriers spend what's left in their capex pots so that they don't have it snatched back by their central finance departments. In previous years, he notes, fourth-quarter numbers "have shown much more significant increases in year-end capital spending."

He says fourth-quarter capex is set to increase about 8.8 percent quarter-on-quarter, compared with a near 30 percent hike in each of the past six years. Major factors affecting this are the capex slowdown by the wireless operators, especially those involved in the sector's consolidation, and Verizon Wireless's concerted efforts to spread its capex more evenly across the year (see Cingular Buys AT&T Wireless and Sprint, Nextel Confirm Merger).

However, it seems as if financial analysts are not expecting the usual year-end spend hike, so vendors do not have unattainable targets to hit in the fourth quarter. Wall Street's expectations "don’t seem to reflect a big budget flush," writes Notter.

Second, the analyst is seeing evidence that "FTTx-related capital spending is starting to "crowd out" spending on legacy infrastructure at an accelerating rate. We expect this will be a more meaningful theme for 2005," he writes (see Mais Alors! Alcatel Bags $1.7B SBC Deal and Verizon Expands FTTP Plan).

The analyst says this is already happening at Verizon Communications Inc. (NYSE: VZ), and that he expects the same thing to happen at SBC Communications Inc. (NYSE: SBC) and BellSouth Corp. (NYSE: BLS) in the coming years.

Notter's contacts say that Verizon is planning to increase its FTTP investment from $800 million this year to more than $2 billion in 2005, and that investments at Verizon Wireless will increase, yet overall the capex budget for 2005 will be only slightly higher than this year's total.

"It makes sense to us that Verizon would cover some of its incremental 2005 spending by re-allocating dollars away from legacy wireline equipment," such as TDM switches. And, while investment in such systems has been on the decline for a while, Notter believes the new FTTP initiative "will accelerate the rate of decline in legacy infrastructure."

This is another clear indication that the U.S. carriers' new fiber network projects aren't just smoke and mirrors. That point was made at Light Reading's Telecom Investment Conference in New York City last week, where Lehman Brothers analyst Steve Levy told the 200-strong audience that he's never seen the RBOCs so serious about FTTx, and that this time around they're doing more than just talking about fiber rollouts.

So which companies will suffer from this capex shift? Notter believes that, in the access networks, "traditional digital loop carrier (DLC) and DSLAM infrastructure will get fully cannibalized by FTTx," and that Verizon pulled back investments in remote DSLAMs and DSL upgrade equipment in the third quarter.

This is bad news for Adtran Inc. (Nasdaq: ADTN), which is already suffering (see Adtran's Early Warning).

Other vendors likely to take a hit from Verizon's spending shift, according to Notter, are Ciena Corp. (Nasdaq: CIEN), which might see lower sales of its DLC upgrade product, and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which sells its traditional AccessMax DLC product to Verizon and SBC.

The plus side for Tellabs is that it should benefit from the increase in FTTx spending now that the acquisition of AFC is finalized (see Tellabs & AFC: Together at Last!).

Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Ltd. (NYSE/Toronto: NT) will also be affected by any cuts in legacy equipment spending.

"The two companies have still-meaningful amounts of legacy equipment spending in Verizon as well as BellSouth and SBC," writes Notter, but they "will have minimal participation in the FTTx deployments at these accounts. Lucent should get some incremental professional services [deals] at BellSouth and Verizon, while Nortel will capture FTTP-related VoIP infrastructure business at Verizon."

Overall, however, Notter believes the two firms will experience a net decrease in revenues from these customers, and, to add to the pain, "we expect that the lost business is fairly profitable revenue."

Overall, Notter expects 2005 U.S. carrier capex to experience mid-single-digit growth, which is in line with the 4.5 percent growth forecast given in the recent Light Reading Insider report, "2005 U.S. Wireline Capex Preview" (see Insider Sees 'Calm' Capex Growth).

The Jefferies analyst also notes a shift towards greater investment in wireless networks. Of this year's expected $42.3 billion capex total, about 60 percent will have been spent on fixed networks, compared with 83 percent in 2000, 77 percent in 2001, 64 percent in 2002, and 63 percent in 2003.

But at least the outlay on wireline gear is set to increase year-on-year, according to the Insider report. After the 20 percent declines exhibited on a yearly basis between 2001 and 2003, the combined fixed network spend of the seven major U.S. carriers in 2005 is set to show a 1 percent increase over 2004.

— Ray Le Maistre, International News Editor, Light Reading