The amount Canadian telecom companies spend on capital expenditures continues to fall, according to a report by two Toronto analysts, and all projections for the short term suggest things will not get better for a few years yet. The IDC Canada report, titled Telecom’s Continuing Chill: Canadian 2003 Capital Spending Outlook, is the third annual examination of capex outlay. While authors Lawrence Surtees and Warren Chaisatien warn about continued decreases in capital spending, their analysis is not as dire as their 2002 study. Last year’s study, titled Telecom’s Nuclear Winter, was a more ominous description than the chill illustrated in this year’s report (NL, Feb. 26/02)."The capital spending outlook for Canada’s telecom operators remains bleak in 2003," the pair writes. "The data for 2003 does not support the optimistic view of some industry players that the worst has passed. The January 2003 guidance from carriers reaffirms IDC Canada’s previous forecast that Canadian telecom capital expenditure budgets have yet to hit bottom." There are two prime causes of the downturn, the report notes. Successful telcos like Bell Canada and Telus Corp. are facing pressure from shareholders and lenders to cut their capex-to-revenue ratios; other firms have slashed spending as a result of restructuring. Among those who fall under this category are AT&T Canada Inc., GT Group Telecom Inc., Teleglobe Inc. and 360networks Corp. "The wireline sector sustained a year-over-year decline in operating revenue of 3% in the third quarter of 2002 – the third consecutive quarterly decline," the report states. "Continued strong competition in the long-distance market, the loss of customer connections and lower intra-industry network access rates created the downward pressure on the industry’s revenue." By the end of last year, total capex for the ILECs was $5.5 billion, a 10% drop from the estimated $6.2 billion in July and a 17% decline from January’s $6.7 billion. The incumbent with the highest capital intensity ratio was Manitoba Telecom Services Inc. at 26%; the lowest was Aliant Telecom Inc. at 16%. Telus registered 24%, SaskTel was at 20% and Bell Canada was coincident with the ILEC average of 21%. A look at all telecom firms shows that the vast majority saw their estimated capex for 2003 decline from the figures from 2002 (see table). Of the 19 companies listed, only 360networks recorded a jump in capex while SaskTel was steady at $180 million. The authors point out that capital spending relies on several factors and assumptions, including macroeconomics, market ecosystems and technology. On the down side, global economic growth will edge up slowly but will likely not reach traditional levels until 2004 or 2005. Coupled with this is uncertainty over a war with Iraq and increased terrorist activity. Telecom equipment spending loosely correlates with the larger economy, Surtees and Chaisatien note. On the positive side, no major recession is forecast, with Canadian GDP expected to be in the range of 3-4% until 2005. Similarly, inflation is projected to be stable, with a CPI increase of less than 2%. The news in the market ecosystem is not as hopeful and the stagnation in the sector will continue with no upturn until 2004-2005. The current review of foreign investment restrictions (see story in this issue) offers some hope, but any new rules will not be in place until next year. Even if that does happen, IDC warns, no huge influx of outside capital into Canada is likely. Technological prospects are also cautious. Adoption of an all-IP carrier network architecture and 3G wireless networks have been delayed until at least 2005, which act as further brakes on the capex recovery. The IDC report lists half a dozen accelerators of Canadian capex spending in 2002-2003 and an equal number of inhibitors. Advancing the market were the following: the national expansion of Bell Canada and Telus; the need for next-gen OSS and billing systems; the migration to all-IP network architecture; wireless integration and public wireless LAN projects; fibre optic builds for WAN and MAN growth; and adoption of managed service platforms. Acting to retard growth were the following six factors: the sectoral slowdown and capital squeeze; the collapse of under-funded players; surplus capacity of optical networks; the need to reduce capex-to-revenue ratio; reduced coverage of DSL expansion; and completion of 2.5G wireless networks and spectrum sharing. All of this shows that Canada is following the international example. Although new markets are emerging in Asia and in Russia, overall capital expenditures are predicted to fall. "IDC expects worldwide telecom capex spending to decline by 5% in 2003," the report states. To offset the waning investment, equipment manufacturers are likely to turn their attention to different parts of the market. IDC projects that the percentage of global sales to service providers will continue to fall, with greater retailing being made to enterprise and consumer customers. The gap between the two sectors will gradually lessen, until enterprise sales overtakes service providers in 2006.