Capital spending peaked in 2001, but likely to deflate this year: IDC report

The decline in the telecom world is starkly portrayed in a recently-released report on capital expenditures. While capex spending in 2001 was slightly higher than the year before, the two firms that sat atop the Canadian spending list in 2000 will be responsible for the greatest reductions in projected spending for 2002. The details are contained in the annual capex survey Telecom’s Nuclear Winter: Canadian Capital Expenditure Outlook 2001-2002 prepared by IDC Canada. In 2000, capex spending for all major telecom firms was $13.1 billion, less than the $14.5 billion IDC had projected last year (NL, Jan. 15/01). For 2001, the figure was $13.4 billion. According to the report, four companies will be cutting spending by a combined total of $5.1 billion. Fibre giant 360networks Inc. is responsible for most of that, or more than 70 per cent. It is slashing its outlay by $3.6 billion after being the number one spender in last year’s survey. Number two on last year’s list of spending was Teleglobe. It followed 360networks’ lead, and chopped its expenditures by $900 million. In the previous study, the two companies accounted for more than one-third of total capex spending; this year they make up less than eight per cent. Those capex reductions were offset at least in part by the increased spending by four ILECs and one wireless carrier. Bell Canada hiked its capex budget by $650 million while its west-coast rival Telus Corp. posted a jump of $560 million. Two regional telcos, Aliant and SaskTel, reported increases of $65 million and $25 million respectively. Rogers Wireless Communications Inc. rounded out the list, with a hike of $50 million. The report’s authors, Lawrence Surtees and Warren Chaisatien, expect that capex spending has peaked, and they place responsibility for that change squarely on the shoulders of investors. "Quite simply, recent expenditure levels are unsustainable. Having invested record amounts of capital in their networks to deploy new services, surviving carriers are now seeking a return on those investments," they write. "The first step is to put the brake on capex spending. And the second step, which has become a mantra of incumbent telephone companies in North America, is to boost pre-tax earnings or EBITDA." One section where expenses have been cut back is broadband grids. "After two years of accelerated spending on high-speed Internet access technologies to increase the coverage reach of their xDSL broadband networks, Canadian carriers have substantially eased off spending in this area," IDC states. "Bell Canada was first to follow the lead of several U.S. RBOCs. It announced early this winter that it would slow its DSL spending and be content with 74 per cent coverage within its territory – down significantly from its previous goal of 90 per cent." Unlike the previous study, IDC did not spell out how each telco planned its expenditures. Instead, it gave detailed accounts of spending by Bell and by Telus, with separate reports on CLECs, wireless service providers, and cablecos. Bell has been aggressively moving to reduce its capex-to-revenue ratio. The IDC report says the telco wants to bring the rate down to 17 percentage points within three years, similar to numbers Bell chief strategy officer Bernard Courtois presented last month at a conference (NL, Jan. 29/02). Despite that goal, Bell is facing greater demand for capital expenditures. "The construction of Bell Intrigna’s network in western Canada, the launch of new Internet-based networks such as IP VBP services, the rollout of new 2.5G wireless services and the transformation of back-office systems are just a few of the big-ticket items in Bell’s $3 billion capex budget for 2002," Surtees and Chaisatien write. "More than one-half of Bell’s total capex is earmarked on new growth markets." Its main rival, Telus, is poised to spend about the same as it did a year ago. It will concentrate on expanding its reach in Ontario and Quebec, allocating about 40 per cent of the spending in central Canada. The amount doled out for its national fibre backbone will be reduced. "Telus also plans to boost capex spending on its DSL network," the study notes. "Unlike Bell, which has surpassed its biggest cable rival in the high-speed access market, Telus has had the lowest penetration of any phone company and must spend heavily to catch up." The report’s section on IXCs and CLECs is thinner than last year’s. That is due to the collapse of so many competitors such as Axxent, Cannect, C1, and Norigen. The shakiness of the market has made investors wary of lending to surviving new entrants, which could use the money for infrastructure. IXC and CLEC spending is projected to be $870 million in 2001 (against $6.3 billion for the ILECs) and $595 million this year (versus $6 billion for the incumbents). Most of the competitors are chopping their outlay. AT&T Canada has seen its capex fall every year since 1999. It spent $400 million last year and plans to cut $100 million from that total this year. The report quotes AT&T Canada investment relations spokesman Dan Coombes as saying, "We’re over the hump of our national fibre build-out and we’re now in fill the pipe mode." Sprint Canada, which paid out $600 million two years ago, saw that figure plummet to $100 million last year. It expects to spend $120 million in 2002. Group Telecom had capex levels of $278 million in 2000, $378 million in 2001, and an estimate of $175 million for 2002. The numbers in the IDC survey were released before Group Telecom went through its cost-cutting measures announced last week.

Capital spending peaked in 2001, but likely to deflate this year: IDC report

News | February 26, 2002

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