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Carrier Spending: A Look Ahead

A recent report from SG Cowen Securities Corp. says carrier capital spending may now be in the doldrums, but prospects for growth remain strong. And optical networking will play a key role when carrier spending ramps up again.

According to the report, titled "Optical Networking Industry," the firm projects carrier capital spending will be $94 billion in 2001, compared to $113 billion in 2000 -- a 17 percent decrease. But by 2003, the total amount carriers spend on new equipment should hit $102 billion and will start to climb again, the firm predicts.

As in the past, IXCs and RBOCs will remain the major consumers of broadband and optical networking gear, the report says. This year, for instance, Cowen says IXCs will account for roughly 58 percent of all carrier capital spending; RBOCs will account for roughly 36 percent; and CLECs for 6 percent.

While the "competitive threat" of CLECs helped drive higher spending by these incumbents in the past, the CLEC capex contributions will be fractional for the foreseeable future. In 2002, the firm estimates CLECs will account for about 4 percent of all carrier capex.

The Cowen report says the current drop in carrier spending occurred for a couple of reasons. In 1999 and 2000, market conditions encouraged carriers to spend lavishly on long-haul network buildouts. This resulted in sizeable "one time" investments and led to inflated valuations for many optical networking companies.

Now that the bubble has burst, Cowen says, carriers are finding it hard to get more funding for new equipment. They're also changing their product focus, which is bound to affect future spending. While demand for bandwidth continues to climb, carriers no longer need to upgrade their long-haul networks. Instead, they're seeking ways to improve the edge of the net and equip it for lucrative new services such as applications hosting, storage area networks (SANs), and broadband access, the report says.

"Growth for long haul optical systems has moderated significantly this year, while demand for optical switching systems and metro optical systems is rising rapidly," the SG Cowen analysts write. "As a result, this transition is creating a significant opportunity for companies exposed to the metro DWDM, optical switching, and MSPP markets."

These transitions in the optical networking market are giving rise to opportunities for a range of companies that make optical switches for metro use, MSPPs, and DWDM gear. According to Cowen, examples of companies with sizeable market opportunities include Ciena Corp. (Nasdaq: CIEN), ONI Systems Inc. (Nasdaq: ONIS), Sorrento Networks Corp. (Nasdaq: FIBR), Sycamore Networks Inc. (Nasdaq: SCMR), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and Tellium Inc. (Nasdaq: TELM).

The suppliers of components for this kit also have an opportunity, Cowen says. This list includes companies like ADC Telecommunications Inc. (Nasdaq: ADCT), Agere Systems (NYSE: AGR), Alliance Fiber Optic Products Inc. (Nasdaq: AFOP), Bookham Technology PLC (Nasdaq: BKHM; London: BHM), Corning Inc. (NYSE: GLW), and JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU).

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
flanker 12/4/2012 | 7:59:00 PM
re: Carrier Spending: A Look Ahead it's likely cowen estimate projected numbers by simply doubling reported data for the 1st half of 2001, tacking on a few percentage points to adjust for undercounting and quarterly cyclicality in spending (carriers dont spend evenly through the year).

I have my doubts about their target list of vendors going forward. It sounds to me like companies Cowen's analysts cover (promote?) or want to do business with in the future.


wimchatta 12/4/2012 | 7:58:59 PM
re: Carrier Spending: A Look Ahead Mary,

The 2002 estimates probably do not reflect a natural competitive dynamic - significant price cuts by system vendors WITHOUT losing their shirts (suppliers down the supply chain will also lower prices).

Based on industry grapevine talk, it appears that the entire food chain is now getting ready for reduced margins, now that the Street will actually stomach that kind of talk. By the end of 2002, this will be a more grounded, cost aware industry with an emphasis on INNOVATING around the biggest cost levers : higher yield / lower cost / better architectures / increased tolerances, etc.

The number of units deployed in 2002 will be higher than in 2001, but the revenue will probably stay flat or go down. There will be fewer players, which should make the market a healthier one for the now-sobered survivors.

-wim



exnortel2 12/4/2012 | 7:58:58 PM
re: Carrier Spending: A Look Ahead Agree. Only the "emerging, next generation" players are listed, which is a fashionable practice among many "analysts" and "journalists". The big guys (NT, ALA, LU, Fujisu) are not completed dead in terms of innovation and market share.
ipcore 12/4/2012 | 7:58:53 PM
re: Carrier Spending: A Look Ahead IXC: InterExchange Carrier, i.e., AT&T, MCI (WorldCom), Sprint, etc. Typcially providing your long distance service.

RBOC: Regional Bell Operating Company; PacBell, Bell Atlantic (although, it might be noted that the line between the IXC and the RBOC is becoming blurred dispite the 1984 ruling breaking up AT&T). Typically, providing your local loop or local service.

CLEC: Competitive Local Exchange Carrier, there are many small/medium/large companies trying (and some succeeding) to penentrate the carrier market by providing an alternative to the ILEC (Incumbent Local Exchance Carrier) for both local and long distance service. Some are small "mom-n-pop shops," some are very large corporations.
rookie2001 12/4/2012 | 7:58:53 PM
re: Carrier Spending: A Look Ahead Who can explain these terms: IXC, RBOC and CLEC?
Thanks.
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