Last year marked somewhat of a turnaround for the worldwide wireless industry-carrier capex spending increased by 18 percent in 2004 compared with 2003 levels after several years of declines, according to UBS. The same was true in North America, where capital expenditures increased 7 percent during the same period.
More importantly, most industry observers predict that carrier spending will continue to increase over the next several years. In part, the growth is due to the improving economy and telecommunications marketplace, as well as the beginnings of the 3G evolution. However, two conflicting trends likely will affect the U.S. wireless industry.
On one hand, carriers like Cingular Wireless L.L.C., Verizon Wireless and Sprint Corp. are building out high-speed, third-generation networks, and will put billions of dollars toward such endeavors. On the other hand, the industry’s massive spate of consolidation will result in fewer paying players. Further, new technologies could change the direction of capex allocations, as carriers evaluate the potential of innovations like WiMAX, Wi-Fi and Voice over IP. As the marketplace changes, so too will carriers need to constantly re-evaluate their spending priorities.
“Cellular carriers and (wireless) pureplays are going away,” said Phillip Redman, a wireless director with research and consulting firm Gartner. “The real movement is going away from selling these services (such as wireless and wireline telecommunications) separately.”
Despite changing market conditions, analysts generally forecast a lush playing field for vendors.
“Since the beginning of this year, our forecasts for consolidated industry capital spending have steadily increased from an initial projection of 3 percent year-on-year growth (made in January 2005) to nearly 5 percent today,” wrote Lehman Brothers in a recent research note to investors. “In aggregate, we believe the key drivers behind rising capital budgets have been several multi-year technology trends, including broadband deployment, increased packetization of the networks, as well as the addition of network intelligence. For the wireless providers, competitive pressures continue to lead to incremental spending and the need for differentiation by improving network quality and providing next generation, high-speed data capabilities.”
Indeed, wireless appears to represent the main driver for capex increases in the telecom market. Wireless capital spending in the United States will increase from $21.2 billion in 2004 to $22 billion in 2005, predicts Skyline Marketing Group. That 3-percent increase will occur at the same time wireline capex will decrease by 1 percent.
In the United States, behemoths Cingular, Verizon, Sprint and Nextel Communications Inc. will drive the vast majority of wireless carrier capital expenditures over the coming years.
According to Avondale Partners, Cingular plans to put $7 billion toward capital expenses in 2005. The carrier last year spent $5.9 billion, $3.4 billion of which went to its GSM/ GPRS/EDGE upgrade. Cingular also spent $288 million last year on planning and integrating its AT&T Wireless Services Inc. acquisition. Verizon Wireless spent $5.6 billion on its network last year, a number that will increase to $6.2 billion this year. Verizon also spent around $1 billion last year for wireless licenses and businesses, including NextWave Telecom Inc.’s New York licenses. Sprint’s capex spending will increase from $2.6 billion last year to $2.8 billion this year, while Nextel’s spending is set to increase from $2.4 billion last year to $2.6 billion this year, according to Avondale Partners. Such numbers include both network upgrade costs as well as network expansion and management.
Cingular uses infrastructure from L.M. Ericsson, Lucent Technologies inc., Nortel Networks Ltd., Nokia Corp. and Siemens AG, and is relying on Ericsson, Lucent and Siemens for its W-CDMA/ HSDPA gear. Sprint uses equipment from Lucent, Motorola Inc. and Nortel and has said it will rely on those suppliers for its EV-DO upgrade. Verizon uses equipment from Lucent, Motorola and Nortel, and is using EV-DO technology from Lucent and Nortel.
Although the emphasis to date has been on network upgrades and faster speeds, that trend may not continue. Gartner’s Redman said that 3G offerings like Verizon’s CDMA EV-DO network and Cingular’s HSDPA/W-CDMA network probably will satisfy the current need for speed. He said carriers will probably hold off on further network upgrades in favor of spending on network improvements and customer service technologies.
“It’s going to be customer service, billing and things like that where the carriers will differentiate,” Redman said. “I think the customers would rather see better service and more reliable service rather than just faster service.”
When U.S. carriers finish their 3G network upgrades, capex spending may be aimed elsewhere, although it’s unclear whether absolute spending levels will decline. Redirected capex budgets could be directed toward service management, and integrating wireless services into the larger telecom marketplace. Verizon Wireless, Cingular and Sprint PCS are each a part of larger telecommunications companies, and the move toward IP-based services could create more unified offerings. Consequently, vendors may have to refine their focus from network upgrades to service enhancements in order to stay in the game.
