Packets Key to Capex Comeback

All things being equal, the health of the telecommunications equipment market really has one master: the capital spending (capex) budgets of the major telecom carriers.

So what's in store for 2004? Research from Light Reading Insider, Light Reading's paid subscription service, shows that the large carriers are finally getting serious about their forays into next-generation packet-switching and routing gear -- and they're starting to spend money on it.

In fact, the latest Insider, "Capital Spending Outlook," shows a raft of RFPs brewing in the multiservice and IP networking markets for the new year. This is where some of the largest battles for carrier cash will be likely be fought. Here are some of the important ones:

In short, the packet and the edge are in, and optical long-haul transport remains out. The companies best positioned for spending increases are those with with solid multiservice, IP, and Ethernet gear.

Overall, Insider research shows that capex trends look far more favorable for 2004 than they did in 2003 (see Carrier Capex Set for 2004 Rebound). The report concludes that the shift to next-generation multiservice packet and IP networking gear is a long-term trend that is likely to take hold as the next capital spending cycle ramps up into the latter half of the decade.

Another good sign is that carriers have returned to their historic norms in spending, in terms of a percentage of revenue. At the height of the investment bubble, these numbers skyrocketed as high as 80 percent to 90 percent of revenue, fueled by massive debt and equity investment. With historical norms of capex/sales ratios being in the mid teens percentage-wise, this pattern was bound for a correction. These have since fallen to a more normal range of 10 percent to 15 percent of revenue.

Light Reading Insider's research tracks the spending plans of the "Big Six" carriers – including AT&T, BellSouth Corp. (NYSE: BLS), SBC, Sprint, Qwest Communications International Inc. (NYSE: Q), and Verizon.

— R. Scott Raynovich, US Editor, Light Reading

The current Light Reading Insider report – "Capital Spending Outlook" – is available here. A single-user license to the report is $400. An annual single-user subscription to the Insider, which includes access to the complete archives, the current report, and each of the monthly reports issued over the next 12 months, is available for $1,250 per year.

BobbyMax 12/4/2012 | 11:08:30 PM
re: Packets Key to Capex Comeback Capex is not alklocated because there is some way need to be found to spent this money. Capex ia allocated because some money is needeed to make the system more easily operational and reliable. There are some advantages to using packets in teerms of gaining operational efficiency.
arch_1 12/4/2012 | 11:08:30 PM
re: Packets Key to Capex Comeback This story reports an encouraging trend for router vendors: Carriers will be buying more routers. However, the story continues the unfortunate overgeneralization from routers to CAPEX.

We can subdivide carrier CAPEX into several categories. I'm interested in big routers, so I'll categorize into "big routers," "transmission," and "everything else."

The bubble was driven by massive technological improvements in transmission, notably EDFAs and DWDM gear. This had two effects on routers:
1) The carriers spent all their CAPEX on transmisison gear, making it harder to find money for routers.
2) The massive increase in available raw point-to-point bandwidth made router consolidation possible.

In the mean time, the rate of increase in internet demand continued at a fairly steady rate. This is not enough demand to use more than a tiny fraction of the new transmisison bandwidth, but it is enough to put stress on the existing deployed routers.

I conclude from this that carriers have a real need for new routers, and will buy them. Carriers have no need for new transmision equipment.

The moral of this story is overall CAPEX is a worthless metric unless you are a macroeconomist. If you are router vendor, the CAPEX bubble was bad news because your customers were spending money elsewhere that they should have been spending on routers. If you are a vendor of transmission equipment, the current modest rise in CAPEX is bad news because the money is being spent on routers.
Scott Raynovich 12/4/2012 | 11:08:19 PM
re: Packets Key to Capex Comeback A strange a assertion that "capex" is meaningless. Is it just coincidence that the industry peaked with the capex bubble?
Scott Raynovich 12/4/2012 | 11:08:19 PM
re: Packets Key to Capex Comeback A strange a assertion that "capex" is meaningless. Is it just coincidence that the industry peaked with the capex bubble and is now bouncing as capex rebounds?
materialgirl 12/4/2012 | 11:08:17 PM
re: Packets Key to Capex Comeback This depends on your point of view. Yes, capex is a general term, typically covering all equipment intended to last over a year. It is just an accounting term.

It does, however, indicate both the health of an industry and management's view of their own future. If you are an RBOC cutting capex, that says one thing. If you are an IXC spending on capex, that says something else. Whether or not that investment results in a positive pay-off down the road in terms of service revenues in excess of costs, is yet another issue. This is TBD for IP in my book.
arch_1 12/4/2012 | 11:08:06 PM
re: Packets Key to Capex Comeback OK, generalized "CAPEX" is relevant to the generalized "industry."

Most of us don't care about the generalized, aggregated "industru." we each care primarily about our own sub-segment of the "industry."

The bubble and its bust reflected primarily a particular industry sub-segment, namely transmission equipment.

According to your story, the rebound is primarily on a different sub-segmebnt of hte industry, specifically routers.

If you are a router expert, rebound is encouraging. If you are an EDFA guru, the rebound is worthless.

So, my real objection to the article is the title and the tone, which overgeneralizes the router up-tic to the entire "industry," and which overgeneralizes router spending to "CAPEX."
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