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Electronics Production | April 12, 2007

Telcos to Spend $41 B on Equipment in 2007

The good news for makers of wired communication infrastructure equipment is that 2007 will mark a recent record high year for telecommunications company spending on such gear. The bad news is that revenue growth will be relatively anemic compared to recent years, at only a 1.6 percent rise.
Telcos in 2007 are expected to spend nearly $41 billion on equipment, the highest annual level since 2002. However, this spending will be up only 1.6 percent from $40.4 billion in 2006. In comparison, telco equipment spending rose by 10.7 percent in 2006 and by 8.3 percent in 2005.

“The major reason for the slowdown is focused spending and a “pay-as-you–grow" strategy among telcos, said Steve Rago, principal analyst, IPTV, broadband and digital home research for iSuppli. “The marginal increase in 2007 spending is being driven largely by telcos' purchases of equipment to deploy Internet Protocol Television (IPTV) services. iSuppli estimates $9 billion will be spent on IPTV-related communications equipment in 2007."

The figure attached presents iSuppli's forecast of global capital spending on equipment by telecommunications carriers.



Desperate times, desperate measures
“The major motivation for the telecommunications companies to invest in IPTV is the flagging fortunes of their core business in voice communications," Rago added. “The telecommunications companies have been losing an average of 4 percent annually from their subscriber base, and more than 4 percent per year from voice revenues. This phenomenon is universal, with no region and no telecommunications company unaffected.

“The telcos hope their massive investments in IP broadband networks and IPTV will pay dividends in terms of a new source of revenue from providing video and other multimedia services to consumers."

Big spenders

Telcos in 2006 spent their funds primarily on access equipment. For 2007, iSuppli expects carriers to continue access-equipment spending at 2006 levels, while significantly increasing investments in their core networks. This shift will be necessary to provide the bandwidth and quality of service necessary to support IPTV growth.

The future of carrier capital spending depends on the success of the telecommunications companies' push into IPTV.

IPTV on the rise
Global IPTV subscribers will soar to 105.8 million in 2011, rising at a stunning 98 percent Compound Annual Growth Rate (CAGR) from 3.4 million in 2006, iSuppli predicts. To serve this huge base, the telcos' IPTV budget will have to grow to account for 20 percent of their total capital spending by 2011, including networking equipment, software and customer premises equipment.

Most-favored nations

North America and Europe will be the beneficiaries of most of these carrier expenditures due to the rapid establishment of IPTV services in those regions.

However, IPTV isn't the only factor driving telecom equipment spending worldwide; in developing nations, incumbent carriers are expanding their spending on broadband infrastructure as they focus on increasing their data revenue.

The only region that is exhibiting telco spending declines is Japan, where deployment of Fiber-to-the-Home (FTTH) has slowed. However, Japanese spending should recover during the next few years.

Feast and famine
The telcos' massive investments in IPTV infrastructure reflect their desperation in the face of the historic decline of their core business in voice communications. But for telecom equipment suppliers, the decline in voice and the rise of IPTV represents a boon. There will be plenty of opportunities for suppliers who know where to look.

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