Saying Capacity's Cheap, BCE Cuts Network Gear Budget
By Scott Moritz
Senior Writer
4/25/01 4:25 PM ET
BCE (BCE:NYSE - news), Canada's largest phone company, is delivering on its promise to cut spending on networking gear, saying capacity is now cheaper to buy than to build.
Jean Monty, BCE's chairman and CEO, said Wednesday that his company will cut its 2001 network expansion budget by some 10%, slashing total spending to $5.2 billion. The cut will come from the GlobeSystem international fiber-optic network program that is part of BCE's Teleglobe division. The budget for that project will drop by 30%, to $1.4 billion.
The news delivers yet another blow to the network equipment sector, which is populated by onetime highfliers like Nortel (NT:NYSE - news), Lucent (LU:NYSE - news), Alcatel (ALA:NYSE ADR - news) and Cisco (CSCO:Nasdaq - news). These companies, which are among BCE's biggest suppliers, have sustained heavy financial damage in recent months as big telecom companies like BCE have begun pulling back on network building. BCE's move indicates that trend is only broadening, and may point toward a larger change in the telecom landscape, analysts say.
Stringing Them Along
"We are buying capacity on favorable economic terms," Monty said in an interview Wednesday. "It marks not only a true cost savings -- it also gives us more scalability, so we can match capacity with demand."
Typically, network building involves stringing fiber-optic cables from point to point and then adding spiffy laser-powered equipment to transport and manage the communications traffic. It's a labor-intensive and costly process. As debt and equity markets tighten and phone service revenues drop, telcos have been looking for ways to conserve cash. And buying less gear from top suppliers is among the options.
The spending crunch started last summer, as TheStreet.com has chronicled extensively. As we have seen this week, additional cuts are slicing into already trimmed equipment budgets. The troubling part about BCE's move is that it may signal a surplus of network capacity brought online by numerous long-haul bandwidth players. These megacarriers like Level 3 (LVLT:Nasdaq - news), 360Networks (TSIX:Nasdaq - news) and Williams Communications (WCG:NYSE - news) are now eagerly seeking ways to sell services, which will in turn help repay debt taken on to defray construction costs.
Your Hometown
This looming capacity-provider glut, which has driven bandwidth pricing in some markets below half a penny per minute, is of no small consequence to the already battered equipment-making sector. These gear makers are anxious to see new Internet construction pick up again soon. But as some analysts have pointed out, the build-like-crazy era has waned and new business strategies are being devised.
"What you're seeing here is a fundamental shift in telecom, to a wholesale vs. retail structure," says CIBC World Markets analyst Steve Kamman. "Some players will focus on providing services, while others will focus on operating the assets that carry those services." In the past, the likes of AT&T (T:NYSE - news) have attempted to be all things to all telecom customers, but to little effect.
Much like AOL Time Warner (AOL:NYSE - news), BCE has been busy blurring the distinction between Net content and Net delivery services in recent months. Canada's Ma Bell now owns Canadian TV network CTV; The Globe & Mail, Canada's largest newspaper, and internet service provider Sympatico-Lycos. So now, every dollar that goes to content development is arguably a dollar that doesn't go toward new optical networking equipment. Not a very heartening prospect for the networkers.
"The vertically integrated telecom is dying off in the same way the vertically integrated mainframe companies did during the PC revolution," says Kamman. |
