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Optical/IP

VOIP Players Spur Spending

Excitement around the arrival of non-traditional telecom players like Skype Technologies SA and Google (Nasdaq: GOOG) may trigger a surge in capex spending among legacy voice carriers, according to a report this week by Jefferies & Co. Inc.

Analyst George Notter points out in the brief that telecom equipment stocks have rallied in recent weeks over news related to the new wave of Internet companies entering telco via VOIP. Notter refers to Vonage’s upcoming IPO or sale, the eBay Inc. (Nasdaq: EBAY) purchase of Skype, and the announcement of Google Talk.

(See Microsoft Buys Skype Rival, Vonage Selects IPO Bankers, Earthlink Joins VOIP Parade, AOL's Got VOIP Again , EBay Buys Skype for $2.6B, and Yahoo Enters VOIP Fray.)

But Notter believes there’s more to it than just investor exuberance. (See BellSouth: The IMS SuperBowl? )

“Network operators faced with an accelerating challenge to their core cash businesses will be put under increasing pressure to accelerate deployment of new service offerings in order to retain customers,” Notter writes.

That, Notter reasons, could mean increasing revenues for vendors of VOIP infrastructure gear like gateways, softswitches, and broadband access equipment. (See VOIP Port Shipments up 6.3% in Q1.)

Of the arms dealers Jefferies covers, Notter says ADC Telecommunications Inc. (Nasdaq: ADCT), Cidra Corp. (Nasdaq: CIDC), (NYSE: LU), (NYSE/Toronto: NT), Redback Networks Inc. (Nasdaq: RBAK), (Nasdaq: SONS), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) are possible beneficiaries.

Notter believes the pace of fiber deployment could also be affected. “We see the addition of these non-traditional carriers into the market as another potential catalyst for the FTTN and FTTP programs getting rolled out by (NYSE: SBC), (NYSE: BLS), and (NYSE: VZ)."

Notter points out that it is the defensive reaction by legacy voice providers to new VOIP offerings, not infrastructure spending by the non-traditional players themselves, that will drive new business for equipment providers in the short term. Skype, for instance, plans to spend only a couple million in capex during 2006, according to the brief. Meanwhile, the aggregate telco capital spend for 2005 is expected to reach $46.7 billion, according to Jefferies research.

Common knowledge has been that the LECs will resist as long as possible the movement of their wireline voice customers to the cheaper VOIP offerings. But a tipping point may be at hand, to which carriers will have to respond.

That idea tallies neatly with the recent results of a new study by Heavy Reading analyst Graham Finnie. Finnie recently surveyed 130 telecom service providers on their views and competitive response to the new wave of VOIP players. (See Carrier VOIP Deployments Surge.)

What he comes up with is conclusive and a little surprising. “It’s only a matter of time before VOIP sweeps away legacy telephony,” Finnie writes. Finnie says a majority of service providers believe that 50 percent of their traffic, both at the core and access levels, will be packet-based by the end of 2007.

Most carriers expect a rapid growth of VOIP traffic over the next two years, Finnie finds, as well as an increasing interest among consumers in flat-rate pricing for voice service.

Also driving the VOIP build-out is a keen awareness among carriers that broadband is spreading quickly across many markets, the report suggests. Many legacy carriers believe that if they don’t provide VOIP service over those broadband lines, their subscribers will have little trouble finding a service like Vonage that will.

— Mark Sullivan, Reporter, Light Reading

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