FCC Talk Boosts Lucent, Nortel
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