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Optical/IP

FCC Talk Boosts Lucent, Nortel

The stocks of major telecom equipment companies continued to react positively on Tuesday to the news that the Federal Communications Commission (FCC) is considering providing regulatory relief for the RBOC networks, and a prominent telecom analyst says such changes are likely to benefit companies such as Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT).

A note from analyst Paul Sagawa at Sanford C. Bernstein & Co. Inc. says action by the FCC to relieve RBOCs of the requirement to share their access networks would boost the incumbent equipment providers. The note appeared one day after news reports yesterday speculated that the FCC is planning to phase out policies that ensure competitive carriers low-price access to elements like switching in the Bells’ networks (see Will Powell Pull the Plug?).

A two-year phase-out of the regulations is probable and would be beneficial for the industry, writes Sagawa, insisting that the change would force both the Bells and their competitors to increase their investments in network equipment. He writes that he expects the FCC to make its decision within the next two to three weeks.

“The change in regulation will stimulate new spending by RBOCs... and would-be competitors,” Sagawa writes in the note.

The regulations, which were instituted with the 1996 Telecommunications Act, have served to dissuade the Bells from investing in their networks, Sagawa writes. As the “forced wholesale” policies are phased out, he says, the stimulative effect could be felt as early as the second half of this year and is very likely to result in strong spending growth by 2004.

“It is not a policy that encourages investment,” said Verizon Communications Inc. (NYSE: VZ) CEO Lawrence Babbio, at a Salomon Smith Barney conference in California today, speaking of the regulations in place today. “We need to make a transition, and we need to make one that’s quick.”

While any increase in carrier spending is good news for the hard-hit equipment vendors, Sagawa writes that he expects Lucent to be the main beneficiary. Lucent gets more than 45 percent of its sales from the RBOCs, which are almost certain, he believes, to accelerate their spending plans under a new regulatory framework.

Nortel, too, will prosper following a regulations change, according to Sagawa, although not as much, since it gets less of its business from the Bells. The vendor will, however, probably experience additional growth from CLEC customers like Sprint Corp. (NYSE: FON) and WorldCom Inc. (OTC: WCOEQ), which could be forced to increase spending to remain competitive with the Bells, he writes.

Not everyone agrees with Sagawa’s take. The competitive carriers, for instance, claim that abandoning regulations will not only threaten their businesses, and thus their spending, but that it will also put the Bells in a monopolistic position in which there will be little incentive to invest in much of anything.

"In theory, it might encourage some companies to make some investments a little earlier than planned,” says Robert Atkinson, a director at the Columbia University Institute for Tele-Information. However, he says, if the regulations are helping to aggregate traffic, changing them could actually slow investments. “It could go either way,” he says. “I don’t think that there’s a predictable outcome.”

Lucent saw its shares jump 12.34 percent in afternoon trading today, rising to $1.73 a share, while Nortel’s share price increased 3.96 percent, to $2.10 a share.

— Eugénie Larson, Reporter, Light Reading
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maryhadalambda 12/5/2012 | 12:54:53 AM
re: FCC Talk Boosts Lucent, Nortel "Bigger suppliers to the RBOCs such as LU and NT and TLAB are not likely to benefit anytime soon from UNE-P policy changes, in our opinion"


60grit 12/5/2012 | 12:54:52 AM
re: FCC Talk Boosts Lucent, Nortel I have trouble believing that the manufacturers would benefit by fewer customers! During the '90s, there were many trying to get into the business and the manufacturers were more than wiling to sell them equipment, thus the boom in Telecom. Now, competitors are leaving, and this will improve the manufacturers? C'mon, this makes no sense.

As more CLECs and IXCs go out of business, this will allow the RBOCs to either buy these networks for pennies on the dollar, or merge with them and have a lot of equipment at their disposal.

Sure, this change in policy will bolster the economics of the RBOCs, but they will not need to increase their capital outlays, just their prices for services. Thus, expect the RBOC revenues to increase, expenses to stay about the same, and
guess what, profits will increase. Don't expect the extra revenue to turn into expendatures for capital equipment.

Lets all be realistic.

60grit
kephill 12/5/2012 | 12:54:52 AM
re: FCC Talk Boosts Lucent, Nortel Sagawa always predicts LU will outperform NT. He is usually wrong when he says that.
willywilson 12/5/2012 | 12:54:52 AM
re: FCC Talk Boosts Lucent, Nortel Bigger suppliers to the RBOCs such as LU and NT and TLAB are not likely to benefit anytime soon from UNE-P policy changes, in our opinion

My general disrespect for Wall Street research notwithstanding, I think this is correct. The decision to watch for is the Broadband NPRM. If it does as I expect and the FCC shuts down competitive access, Cisco will get a few crumbs from it but their p.r. machine will go into high gear and proclaim it the Second Coming.
lightmaster 12/5/2012 | 12:54:51 AM
re: FCC Talk Boosts Lucent, Nortel More may be going on here than appears at face value. I hear rumors that behind the scenes Powel has been bashing the RBOCs for their total lack of spending and it's effect on the industry. The RBOCs have been complaining that the reason they can't spend is that they are not incented to invest due to UNE policy. Perhaps Powell is calling their bluff.

They can't have it both ways, using the spending arguement to get the changes and then not spending once they get them. If Powell allows them to continue the lack of spending in spite of removing their excuse, then he should be forced to resign.
willywilson 12/5/2012 | 12:54:50 AM
re: FCC Talk Boosts Lucent, Nortel I hear rumors that behind the scenes Powel has been bashing the RBOCs for their total lack of spending and it's effect on the industry. The RBOCs have been complaining that the reason they can't spend is that they are not incented to invest due to UNE policy. Perhaps Powell is calling their bluff.

You need to understand something about the RBOCs. They hate competition. They are anticompetitive to the core. They wake up in the morning irritated that there is competition, and go to bed at night planning new ways of preventing competition. They believe they have a divine right to monopoly.

The "UNE policy" requires the RBOCs to face competition. Any argument, regardless of how ridiculous, that the RBOCs can use in their ongoing effort to end the possibility that they will ever face competition, will be used.

The zeitgeist is that there was too much investment? The UNE policy, i.e., the threat of competition, is to blame. The jaw-flappers say there is too little investment? The UNE policy, i.e., the threat of competition, is to blame.

How far will they go? Consider this: Within a week of the Sept. 11 attacks, the head of Verizon went to a Goldman Sachs conference and said that CLEC technicians working in Verizon central offices constitute a national security threat. Remember: They RBOCs will say anything, and do anything, to stifle competition. Anything.

Therefore, you should never, ever take anything any RBOC ever says with respect to competition at face value. They have one goal, and they are single-minded in its pursuit: Restore their God-given monopoly.


lightmaster 12/5/2012 | 12:54:49 AM
re: FCC Talk Boosts Lucent, Nortel "You need to understand something about the RBOCs."

Perhaps I didn't make myself clear. I agree that the RBOCs are using the "lack of investment" story to get rid of competition.

My question is this: If Powell removes the competiton based on the RBOCs "story" that it will spur spending, will he follow up and make sure the spending happens, or will they get away with eliminating competion WITHOUT increasing network investment?

I expect they will at least do some token spending in the beginning for fear (real or immaginary) that the changes might be revoked. Long significant investment is another issue.

PS: IMO, the RBOCs have no choice but to be anticompetitive because they do not KNOW HOW to compete. Decades of monopoly have totally removed the free market gene from their DNA. They don't have another card to play.
BobbyMax 12/5/2012 | 12:54:47 AM
re: FCC Talk Boosts Lucent, Nortel First of all RBOCs should not be forced to buy equipment unless they want it. Most of the RBOCa are underhuge debt. So unless rhey clear up the debt, they should be free to clear the debt or whatever else they wish to do.

Unless Lucent and Nortel stocks trade over $65.00 per share, no one benefits. The stocks of these two companies were bought with real money, but that money has vanished, Foreign countries have lost over $8 Trillion dollars. These countries would be lucky to see a penny per dollar of their investments.
willywilson 12/5/2012 | 12:54:44 AM
re: FCC Talk Boosts Lucent, Nortel I expect they will at least do some token spending in the beginning for fear (real or immaginary) that the changes might be revoked. Long significant investment is another issue.

The RBOCs control huge physical assets. They must spend a lot of money to keep them going. They have great discretion of the short-term timing of this spending, but limited long-term discretion within the context of maintaining acceptable standards of availability and quality.

Of course they will increase capital spending. Of course they will say it's being done because they are now "free to compete," which in RBOC-speak means "free to strangle competition." It is impossible to be too cynical about a phone company.
futureisbright 12/5/2012 | 12:54:42 AM
re: FCC Talk Boosts Lucent, Nortel The bastards (RBOCs) won't even pretend to spend a penny more after the FCC caves in to them.

They won't need; they'll be closer to monopoly and, by their own argument, will get extra capacity with CLEC forced to find alternate ways tto implement their network. Hey, even if they pick up all the CLECs' customers, they lready have that capacity
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