Network migration pause impacts capex : Investment expected to be flat this year

In the midst of a lull between completing the buildout of 3G networks and beginning work on next-generation networks, U.S. telecom companies are expected to keep their wireless capital spending mostly flat this year as they figure out how to better sell applications to profit off their current networks before plunging ahead to build new ones.
If anything, telecom companies such as AT&T Inc. and Verizon Communications Inc. are talking more about their progress in expanding wireline fiber networks, pursuing video offerings and IP-based network infrastructure-as opposed to foaming at the mouth over the next generation of wireless evolution.
Not that the operators are standing idle in relation to their wireless networks-they can’t, when network quality messages have become so important to their marketing efforts. AT&T Mobility is still working on pushing its HSDPA coverage into the top 100 markets. Both Verizon Wireless and Sprint Nextel Corp. are busily upgrading their mobile broadband networks from CDMA2000 1x EV-DO Revision 0 to Rev. A. Meanwhile, Sprint Nextel is the only carrier to have committed to a next-generation standard and plans to spend about $800 million this year deploying its WiMAX network.
In examining trends among 15 global operators that account for more than 60% of wireless capital spending, analyst Dan Locke of Pyramid Research found that the rate of capex spending is expected to grow fastest in emerging markets such as India and Africa. In those markets, operators are “kind of starting from scratch. They have to buy base stations and things which are the most expensive” to get their networks up and running, according to Locke. Meanwhile, more mature markets such as Europe and the U.S. are seeing wireless capital expenditures flatten, especially where carriers have already made the bulk of their 3G investments and are concentrating on upgrades, which mostly require software and minimal hardware, Locke said.
In the domestic market, the additional spending by Sprint Nextel doesn’t outweigh the capex cost reductions planned by AT&T Mobility, according to Locke, which will push down U.S. wireless capex overall.
Current Analysis analyst Peter Jarich observed that in the frenzied network evolution of the past five years, the industry has gotten used to leaping headlong from one network technology to another, usually before the older technology is ubiquitous. Instead, this time most operators are sitting back, building out their networks and trying to figure out how to make money off of their 3G networks before signing up for still more network investment in yet another new technology.
“You’ve got that initial layer of coverage built up . now you have to have people to sign up and use the service,” Jarich said. “That one single chunk of spectrum and initial upgrade is enough to carry operators for awhile, to figure out how they drive more users.”
The investment in Rev. A is important to CDMA carriers because of its usefulness for Voice over Internet Protocol and, particularly for Sprint Nextel, the ability to run the high-performance push-to-talk QChat product. Sprint Nextel plans to trial the QChat-based PTT service this summer and have it commercially available by early 2008.
Sprint Nextel, with its heady visions of being first to market with a WiMAX network and service, said it expects to spend about $7.2 billion this year on capex, a substantial increase from the $5.8 billion it spent in 2006. Verizon Wireless expects its spending to essentially remain flat for the year. Meanwhile, AT&T surprised analysts when it turned in a first-quarter 2007 capex figure of $3.3 billion-of which only about $500 million was wireless.
In AT&T’s quarterly call, CFO Rick Lindner cited several reasons for the low capex number for the first quarter. Lindner said the low spend wasn’t atypical, but that new leadership in the network arena wanted to review capex spending plans, which “has created probably a little bit of a pause in the timing of cap spend in the wireless business.”
Lindner also credited the company’s major network integration work in 2006 for allowing AT&T Mobility to increase traffic with little capital cost. The integration also allowed the company to terminate leases and remove some T1 backhaul costs, but AT&T said in Securities and Exchange Commission filings that it expects its UMTS/HSDPA network spending to pick up in the second half of the year.