Dec. 27, 2000. 12:27 AM
Telecom spending to jump 20% in 2001
Service providers to boost outlays, study reports
Tyler Hamilton
TECHNOLOGY REPORTER
Capital spending in Canada's telecommunications services sector is on the
rise, despite a flurry of warnings from Wall Street analysts that a general
slowdown is crippling the U.S. industry, says a study from IDC Canada
Ltd.
The study, based on interviews with the country's 17 largest
telecommunications service providers, estimates that spending on network
equipment, software and services rose sharply to $14.5 billion in 2000, a
71-per-cent jump from $8.5 billion in 1999.
In 2001, IDC estimates that capital spending will rise another 20 per cent
to $17.4 billion.
``It's premature to point to an industry-wide slump in capital spending in
the Canadian telecom sector, in either 2000 or 2001,'' said IDC analyst
Lawrence Surtees, author of the report.
Capital spending is an important indicator of potential sales growth for
network equipment makers, such as Nortel Networks Corp., Lucent
Technologies Inc. and Cisco Systems Inc.
All three have been punished by the markets over the past three months as
jittery investors respond to a number of alarms, ranging from predictions of
a spending slowdown in the sector to fears of an impending economic
recession.
To ease concerns, Nortel has taken the unusual step - three times - of
assuring the markets that all is well and it will meet expectations this year
and next.
In Canada, service-provider spending is healthy - so far. But IDC
concludes that much of the prognosis goes to the well-funded ``big guys''
who have more financial breathing room than most of their smaller or less
established peers.
The conclusion: Sell to the big guys.
Nearly half of total spending in 2000 came from overseas carriers
Teleglobe Inc. of Montreal and Vancouver-based 360networks Inc.
Both companies are in a competitive rush to expand or upgrade their
respective global networks.
Teleglobe is well into a $7.5 billion, five-year project to build
GlobeSystem, a broadband Internet-based network linking 150 countries
around the world.
Meanwhile, 360networks is aggressively building its own high-speed
global system to link more than 100 major cities in North America, South
America, Asia and Europe.
Together, Teleglobe and 360networks spent an estimated $6.6 billion in
2000, an explosive 262 per cent increase over $1.8 billion the previous
year. Another rise of 70 per cent is expected in 2001 from both
companies.
In 2000, 360networks alone accounted for $4.26 billion.
``This underscores what Teleglobe has to do because 360 wants to eat its
lunch,'' Surtees said.
``And even if the economy comes to a screeching halt, this is money in the
pipe. It's money they've already raised.''
Large regional telephone companies - including Bell Canada, Telus Corp.
and Aliant Inc. - increased capital spending by about 20 per cent this year,
partly because of initiatives to expand their high-speed Internet services.
These domestic carriers represented half of over-all spending in 1999, but
their share dropped to about a third this year, with 360networks and
Teleglobe picking up the slack.
Exactly how long can this level of spending be sustained? What clouds
hang overhead in 2002 and beyond?
Even cash-rich players such as BCE Inc. can run out of money, and with
funding requirements for new-technology wireless networks and other
broadband projects around the corner, there will be intense pressure to
come up with new sources of revenue and financing.
``To me, the bigger issue is what happens when they deplete these funds?''
Surtees said. ``When they have to go back to the markets in 2003, that's
where it's going to hit the fan if there's a worsening economic slump.''
In the meantime, there exists an opportunity for the bigger players to
``gobble up'' the smaller and increasingly underfunded ventures in the
Canadian industry, Surtees said.
Sprint Canada is still struggling to stay afloat. Wireless service providers
such as MaxLink Communications Inc. and Look Communications Inc.
are already sporting ``For Sale'' signs.
As well, local services rivals such as Axxent Inc. have seen funding dry up.
Cannect Communications Inc., another newcomer, has been unable to sell
a relatively small $50 million initial public offering.
``The market's dead,'' Surtees said.
``It's not giving out any more money. Looming in this is increased
consolidation for the industry next year.''
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