Capital spending for telecoms looking better for Canada than U.S. — IDC report

Wall Street’s prediction of a slowdown in telecom spending south of the border may not have an immediate impact on Canadian companies, according to a new report released by IDC Canada. Making a similar forecast for the Canadian market is premature, says IDC analyst Lawrence Surtees, although he warns that raising new financing is proving difficult, particularly for newer companies. Capital Spending Caps: Telecom Capital Expenditure Trends and Outlook 1997-2002 looks at capital expenditure (capex) budgets of telecommunications service providers across the country. Surtees reviewed quarterly and annual financial reports and securities filings of publicly traded companies to determine audited annual capital spending from 1997 to 1999. Figures for 2000 and 2001 were estimated following interviews with officials at 17 of the largest firms in the telecom field. The companies surveyed include major telcos like Aliant Inc, Telus Corp and Bell Canada; competitors such as Sprint Canada and GT Group Telecom; independent wireless carriers, including Microcell and Rogers Wireless; and the international facilities carriers Teleglobe Inc and 360networks Inc. The study did not include smaller, privately held companies. The report does warn, however, that these players are facing severe difficulties in raising new financing. "IDC Canada expects capital spending in the Canadian telecom sector in 2000 will rise to C$14.5B — a 71-per cent jump — from 1999 capex of C$8.5B," the report says, "and increase 20 per cent in 2001 to $17.4B, based on most recent estimates obtained from Canada’s major telecom providers." On both sides of the border, there are three major initiatives that account for the majority of the spending: expanding fibre-optic broadband networks; high-speed xDSL access rollout; and the development of 3G wireless data networks. The growth of the Internet has driven the increase in optical fibre backbone networks. Major players in this field include 360networks and Group Telecom in Canada and Qwest International and XO Communications in the United States. "Logic holds that the phenomenal expansion in the number of route-kilometers of fibre lines will slow. The glut of surplus fibre optic capacity is indicated by so-called fibre swaps and by the divestiture of unlit fibre lines by financially strapped long distance telephone carriers such as Sprint Canada," Surtees writes. "However, that overcapacity in the number of lines has not translated into a surplus of bandwidth. Consumers are still demanding faster, more." The report notes that capacity and speed of optical networks is doubling every six to nine months, and that consumer demand will fuel growth far beyond 2002. The study predicts expenditures on DSL technology will be substantial for the next two or more years. "Transmitting data to users on current telecom networks has been likened to attaching a garden hose to a fire hydrant," it says. "The slower-speed copper local loop continues to be a bottleneck." The IDC survey notes that capex spending by the country’s nine largest ILECs jumped nearly 20 per cent last year (see chart below). Telco spending (which includes the wireless divisions) made up 36 per cent of the telecom industry total in 2000. The share of total capital spending has fallen from 52 per cent a year earlier. In the United States, ILECs accounted for 25 per cent of the American telecom industry. Quoting Federal Communications Commission data, Surtees reports the companies spent US$21.2 billion in 1997, US$21.8 billion a year later and US$24.3 billion in 1999. By comparison, Canadian ILECs spent $3.7 billion in 1997, $4.4 billion in 1998 and $4.4 billion in 1999. Estimated spending for 2000 is $5.2 billion. Surprisingly, Bell Canada is no longer the largest capex spender. Last year 360networks spent $1.2 billion more than the ILEC; next year both it and Teleglobe are projected to outspend Ma Bell. Bell’s $3-billion budget includes $1.5 billion invested in a three-year DSL expansion. The company expected to have DSL service available to 70 per cent of its customers in Quebec and Ontario by the end of 2000. That number should jump to 85 per cent by the end of next year. Fellow BCE Inc subsidiary Aliant has also placed most of its capex spending in DSL technology. It is budgeting $66 million for 2000. The major component of Manitoba Telecom Services Inc’s budget is destined for Bell Intrigna, the broadband network co-owned by MTS and Bell Canada. (BCE also holds a 20 per cent stake in MTS). MTS is also rolling out an expanded DSL service. All of the Bell moves have forced Telus to increase its DSL spending. The western telco’s capex expenditures are also jumping due to the company’s recent takeovers of QuebecTel and Clearnet. LD providers decreased their spending. AT&T Canada has reduced its capex budget for last year and this. Wireless carriers spent less than ILECs or IX carriers. "Long distance companies, already pummeled by the 1999 price war and declining margins, are the most vulnerable to an economic downturn," the study warns. CLECs that managed to get their IPOs issued before the stock market tumble are in better shape than some of their newer competitors. Group Telecom and Axxent/Rhythms get a favourable rating from IDC. "Privately-held CLECs like Norigen Communications and Cannect may be forced to consolidate if they require additional financing and equity markets do not ease up in 2001," Surtees suggests. His report notes that Cannect could not issue its IPO because of stock market uncertainty. Those troubles are global, IDC notes. In the U.S., AT&T, WorldCom, Sprint and Verizon have all missed profit targets for last year. Internationally, firms like Telefoncia, BT and Deutsche Telekom have reorganized into smaller structures. "Yet as gloomy as those indicators are, telecom service providers are caught in a Catch-22: they must continue to invest in new network technologies—particularly wireless and optical—if they are to grow revenue and compete," the study reports.

Capital spending for telecoms looking better for Canada than U.S. — IDC report

News | 01/15/2001 5:00 am EST

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