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Telecom vendors face 'pain' from operators' restraint

Manufacturers can expect lower revenue in short term due to telcos not willing to spend big on equipment refresh, opting for incremental upgrades instead.
Written by Ryan Huang, Contributor

Telecom equipment makers will have taken a hit to their bottomlines after most telecom operators decided to hold back on investing further on their infrastructure amid the testing global economic climate. Manufacturers' pain may be expected to continue for the immediate future too, as the type of equipment being sought after offer lower margins, observers note.

According to figures from ABI Research, global wireless network vendors reported their lowest revenue for the first quarter of 2012 in nearly nine years at US$11.4 billion. This was down 17 percent from the previous quarter, it noted.

Jake Saunders, vice president for forecasting at the research firm, pointed out one would have to go back to the first quarter of 2008 to see a similar drop in revenue, and that the decline was "pretty significant". "It translated to a lot of pain for the equipment vendors," he said.

This drop was due primarily to operators cutting back on their capital expenditure in order to show profits to investors when times are tough. This leads to equipment purchases being put off in the short term in favor of maintenance and minimal upgrades for existing hardware, Saunders said.

He added that most operators around the world have achieved over 90 percent of coverage for their 2G networks, and a similarly large coverage for 3G, which would dampen operators' inclination to invest in further network hardware.

Agreeing, Nipun Jaiswal, industry analyst for ICT practice in Asia-Pacific at Frost & Sullivan, noted that vendor margins have been hit because of the lower investments in traditional CDMA and GSM technologies by telcos as well as the tightening of their purse strings due to the macroeconomic instability and slowdown in China.

"Operators are squeezing their capex and focusing on coopetition through network sharing too," said Jaiswal.

Among the telecom equipment vendors which have had a challenging second quarter of 2012, the analyst said Nokia Siemens Networks posted an 8 percent drop in revenue year-on-year, while Ericsson recorded a 63 percent decline in net income. Chinese giants Huawei Technologies and ZTE both reported a 22 percent drop in operating profit and forecast a 60 percent to 80 percent dip in net profit, respectively, for the first quarter of this year, he added.

Upgrades more cost effective
Saunders noted that many operators are choosing upgrades over wholesale replacement of their existing networking systems as these are more cost-effective right now. Even in the shift toward 4G services, telcos can still afford to be measured in their spending as a fair amount of their existing equipment just needs incremental upgrades to support the next-generation wireless technology, he explained.

For example, this could involve using a new line card in the radio access network (RAN) or new transceivers, which means the whole base transceiver station (BTS) tower or pole does not need to be ripped out, he said.

This, in turn, means there is a paradigm shift in the type and cost of equipment needed at the moment, the ABI Research VP stated.

"What operators are buying is changing. For heavy-duty 4G coverage and capacity, a lot of small cell BTS will be needed. The cost per unit is substantially less. However, over time the operator may need several thousand small cells on top of their existing macro BTS count," Saunders said.

He doesn't believe the reduced operator spend will have an immediate impact on consumers. That said, in the long run, operators will need to invest in building out their 4G services to stay in the game as subscriptions to these products will be the most profitable, Saunders added.

"An operator cannot afford to lose a 3G subscriber who becomes a 4G subscriber on another network. Also, over time the percentage of dropped calls will mean lost revenue and poor data connections, and lead to frustrated customers who could potentially defect to another operator," he said.

Spending rebound will come
Jaiswal added that with skyrocketing global mobile data traffic due to fixed and wireless broadband penetration and increasing smartphone adoption, operators would have no choice but to invest in networks to support these trends in the long run.

"Operators would have to build their networks to cater to the rising demand. LTE network build outs, network modernization with multi-standard, multi-vendor equipment, and increasing coverage and capacity needs would induce network spending from operators," the Frost & Sullivan analyst said.

Furthermore, competition from other operators and over-the-top (OTT) service providers mean telcos will need to focus on how to monetize their data traffic effectively. This would lead to them procuring tools centering on network performance and quality of service, he stated.

To achieve optimum operational cost efficiencies investments in cloud computing, operational support system (OSS) and business support system (BSS) transformation will also play a crucial part and lead to further investments, he added.

As these dynamics evolve, operator spending will increase. "We expect the telecom equipment spending in Asia-Pacific to grow by 4.1 percent in 2012 and by a compound annual growth rate (CAGR) of 3.7 percent between 2011 and 2015," Jaiswal forecasted.

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