Telecom Should be Safe Port to Ride Out Economic Storm

Implications: 1. Despite the economic downturn, the overall telecom services business in the US continues to remain rather good. 2. While residential building has taken a hard hit, the performance numbers at the three major service providers have stayed fairly strong – especially at AT&T and Verizon. 3. Future competitive pressures at the RBOCs will be a driving force to maintain CAPEX budgets from big swings downward.  

Analysis:  The telecom industry suffered through a depression in the early part of this decade.  This severe slowdown was unprecedented in the history of the industry.  Even during the Great Depression, telecommunications remained one of the best sectors in the market.  But in the more recent past, Wall Street and venture capital entities caused such humongous buying and overbuilding of the basic networks that the balloon burst under its own weight.  In the so-called “golden years,” it has often been said that if one was able to spell “fiber optics,” money was thrown at that person by the handful.  Today, thankfully, that mentality has been replaced with one of building a solid network with a minimum of frills and a method to expand as needed.  

It is for those reasons that even in this tight financial market, it would be wrong to suggest that there is a sense of panic at the RBOCs. Yes, they are feeling the pinch of the reduction in builds in the housing and commercial markets.  But the key point is that it is more of a slight squeeze, not excruciating pain.  

Verizon, AT&T, and Qwest have all been taking a closer look at their CAPEX budgets. While there might be significant cuts in the 4th quarter (5% or more), the year will wind up at worst down one or two percent compared with last year’s forecast.  While 2009 is being billed as slow in the first half, a strong finish is forecasted.  Overall, the CAPEX budgets are expected to be flat for the year over year numbers.  

Several factors influencing the RBOC equipment market are as follows:  

· AT&T is still struggling to get its house in order from the triple merger process. During this ongoing reorganization, the networks (both wireline and wireless) have tended to have relatively little, if any work, completed in terms of the various modernization efforts.  The company realizes that it will soon face major challenges from competitors, if it does not make improvements.  AT&T cannot afford to wait until the general market cloud passes over.  

· Verizon has the cable companies on the run and its business offerings have been improving over the past couple of years. With fiber now at the front door of the vast majority of the Fortune 2000 companies, it cannot afford to let down the pressure to make further penetration in the enterprise arena.  

· Even Qwest is beginning to make waves in its territory.  This carrier, too, must maintain a steady improvement in its network offerings, if it wants to remain the first choice of consumers within its footprint.  

So, while other segments of the business world might face a major downturn, the telecom space will experience some reduction in equipment expenditures -- but certainly not as severe as many analysts are predicting.  The need and desire to be ready to meet the certain challenges that will follow a recession are going to fuel spending during the storm.  Of course, all of the RBOCs are making the assumption that access to credit will stop being any kind of hindrance in the very short term.