Bankruptcy-cleansed carriers may have shed their debt, but they are still burdened with operational costs that dominate network operations, said Doug Ashton, Managing Partner with Pythar Capital. He is optimistic that spending levels will rise for network equipment because remaining competitive requires both scale and new investment. He believes the RBOCs will continue to dominate the local loop, the IXCs will move increasingly to wireless, and the MSOs will retain their CATV share. Ashton also expects the RBOCs to adopt a store-and-play video strategy — all they need to do is figure out the economic model for advertisers to provide video cached at a subscriber’s home.
The next major network upgrade cycle is going to be driven by fear, said Stephen Kamman, Research Analyst with CIBC. He believes that it is inevitable that broadband penetration rates will continue to climb and network traffic continue to grow — following the same “S” curve as with the adoption of previous technologies. But in the face of this growth, the major carriers have responded by drastically cutting their CAPEX budgets to historically low levels. “What they have is a voice network and what they need is a data network,” he observed, adding that everyone is pretending that the current infrastructure and spending plans could really support the next wave of subscriber growth. He believes we are at the start of a major network rebuild period and that those carriers that are unable or unwilling to move to a next generation network will go the way of Braniff, PanAm or Eastern airlines. Kamman thinks the upgrade cycle will be a demand-driven investment fueled by an increasingly vicious broadband war of cable vs. DSL vs. wireless. He sees early signs that Verizon and others are actually getting serious about IP. Look for senior management changes at top carriers when it becomes apparent that major spending on infrastructure is required to remain competitive.
Carriers coming out of bankruptcy will drive down pricing for the entire industry, said Dave Schaeffer, CEO of Cogent. In order to make sure that they have a lower cost structure to survive this next shake-out, carriers need to focus on their own service specialization. For ILECs, this means focusing on voice services. Strategically, he believes the RBOCs inherently are protected by the inertia that will keep most customers from leaving a service they are already familiar with. Because network scale is crucial for access to capital, further telecom carrier consolidation and carrier bankruptcies are inevitable. Schaefer believes that the financial markets will not support massive rebuilds of the incumbent carriers. His forecast is for more pain for service providers moving forward.
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