Sizing Up AT&T's Cuts (and Chops)
The news doesn't look awful for wireless buildouts, and video-related projects like AT&T's U-verse are expected to at least keep a flat budget. Traditional wireline vendors, though, could have plenty to worry about.
AT&T has already said it wants capital expenditures to be lower in 2009 than in 2008. (See AT&T to Cut 12,000 Jobs .) And some analysts say that kind of thinking will be telecom's refrain for the coming year.
"We have expected, and still expect, that North American carrier capex will be down in the mid-to-single digits -- call it 3 to 7 percent," analyst Simon Leopold of Morgan Keegan & Company Inc. tells Light Reading. "AT&T, overall, would be consistent with that."
Telcos are going to hunker down, trying to squeeze more out of installed networks and to keep operating expenses as low as possible, writes Kermit Ross, principal of Millenium Marketing. It's possible for equipment vendors to help the telcos with that plan, but "suppliers who don't, including most of the big names, are going to hurt," Ross notes in an email to Light Reading.
Bad news isn't all over the map, though. The consensus is that AT&T is going to cut wireline expenses more than wireless. U-verse's budget -- $3 billion for next year, as estimated by UBS Research analyst John Hodulik -- should be safe.
Most analysts agree that U-verse, being high-priority and high-profile, won't see much change. Leopold adds that enterprise Ethernet could fall in the same category.
AT&T's wireline capital spending, minus U-verse, could fall 16 percent compared with this year's figures, Hodulik writes in a note issued today. Even wireless isn't safe, he believes, falling about 7 percent from this year.
Not everyone agrees; Barclay's analyst Thomas Seitz thinks AT&T will keep its wireless spending flat, at about $4.9 billion next year. (We should point out that AT&T doesn't spell out its capex for wireline versus wireless.) Seitz expects AT&T's wireline capex to fall to $11.9 billion in 2009, down 17.5 percent from 2008.
Who gets hurt most, in AT&T's case? Ciena Corp. (NYSE: CIEN) relies on the carrier for between 25 and 30 percent of revenues, while Alcatel-Lucent (NYSE: ALU) "is flirting with having AT&T as a 10 percent customer," Leopold says.
Wireless vendors might even feel the effects, even if AT&T keeps spending. "I do think they are likely to get better pricing and terms on equipment than they expected when they initially set their plans," says analyst Eric Kainer of ThinkEquity LLC .
The bigger picture
Beyond AT&T, analysts are already forecasting some difficulties for wireline equipment vendors.
The Carrier Ethernet market grew 14 percent in 2008, but that should drop to zero in 2009, Heavy Reading analyst Stan Hubbard says. That's the result, not just of economic troubles, but of increased competition driving down prices.
"One way to think about the CESR market is that we’re likely to see a one-year shift in the overall numbers. Instead of reaching $3.2 billion in 2011, we’ll hit that number in 2012," Hubbard says. That's still a compound annual growth rate of 11 percent.
In some markets, such as optical gear, a difficult 2009 will give carriers greater motivation to move their spending to newer types of platforms.
"I see metro/regional WDM as doing OK in 2009 -- suffering a bit from capex pressures but also benefiting from shifts away from multiservice Sonet/SDH," says Heavy Reading analyst Sterling Perrin.
And newer packet-optical systems could benefit as carriers alter their capex plans. Older gear, though, like that multiservice Sonet/SDH category, could be in for a steep descent. "Operators are already looking at how best to move away from these products for the future, and capex squeezes could accelerate this trend," Perrin notes.
Wireless remains a bright spot overall. Heavy Reading's Patrick Donegan notes in an email to Light Reading that Telefónica SA (NYSE: TEF), just this week, told analysts it's not expecting to lower 2009 capex predictions any further, as the company is sticking to ambitious goals in Germany and elsewhere.
Similar sentiments could prevail at Verizon Wireless , which Donegan belives "is going to spend, spend, spend whatever is necessary in 2009 and 2010 in order to get LTE [Long-Term Evolution] to a level where they can compete with AT&T’s HSPA Evolution roadmap" and with WiMax.
But even if wireless and video remain chipper, Ross of Millenium Marketing doesn't think the telcos are in for a happy ending.
"The big telcos' abandonment of their core POTS business in favor of wireless and TV is going to go into the history books as the biggest telecom marketing blunder of the last 100 years," he writes. "About 30% of their POTS customers have flown the coop and the demand for broadband will need to be irrigated with substantial price concessions in order to stay alive at all."
On the plus side, Ross thinks capex will decline, but not "all the way into the toilet like in 2001."
So, cheer up!
— The Staff, Light Reading