Clouds gather in carrier spending slowdown

North American carrier capital spending could drop 5% in 2009, Leopold wrote, adding that visibility is low for that year. “Although we do not expect a banner 2009 for carrier spending, we presume the macro economy improves, which will be generally favorable to the entire communications equipment sector,” he wrote.

“Wireless looks like a mixed bag, with favorable spending by AT&T and T-Mobile, Verizon stable and Sprint remaining at depressed levels,” he wrote. “In wireline, while budgets have not changed, we think carriers have spent cautiously, with even [AT&T’s fiber-to-the-node initiative] Project Lightspeed sequentially lower and deferred where possible.”

Spending in the cable space is rising, he wrote, thanks largely to Comcast’s deployment of DOCSIS 3.0 technology to increase the speed of its broadband networks.

Both Sue and Leopold pointed out that the fundamentals motivating carrier spending – competition and growing network capacity demands – are still in place. But carriers appear to be testing the limits of those forces. Last month, equipment vendor Ciena reported that North American carriers appeared to be cautiously balancing their aversion to spending with their need to increase network capacity. “I don’t think carriers have a tremendous ability to delay expenditures because they don’t have a lot of excess capacity,” Ciena CEO Gary Smith said then. “Carriers can always run their networks a little hotter, which is probably what they’re trying to do right now.”

Cisco Systems has made similar observations of late, Leopold noted.

In addition to the caution among North American carriers, the macroeconomy has weighed on purchase decisions among enterprise customers as well, further challenging the telecom equipment sector.

“Considering the deteriorating dynamics in the enterprise segment and our view that emerging markets may also show signs of weakness, we don't like much in our sector at the moment from an absolute return point of view,” Sue wrote.