In June, I had the opportunity to interview Stephane Teral, the principal analyst for Mobile and FMC Infrastructure for Infonetics Research. He said that the firm had studied what he termed "capital intensity" -- the measure of revenue to capital expenditures -- and found that carriers were reacting to the recession by cutting the amount of money they were putting into their networks. At the same time, however, the firm found that the carriers were weathering the tough times in comparatively good shape.
The money was being saved around the edges, so to speak. Inventories were stretched thinner than in flush times. Upgrades were put on hold. Network infrastructure was run at higher capacity. Preventative maintenance (as opposed to repairing or replacing gear that actually broke) was reduced. The bottom line of my conversation with Teral was that the impact was felt more by vendors than carriers and service providers. The service providers were further innoculated from the ravages of a bad economy simply because phone and data services are right below food and energy as expenses folks don't want to cut, no matter how bad times are.
It looks like Teral and Infonetics hit the nail on the head. Total Telecom and the Dow Jones Newswires report that the vendors are about to rebound. Equipment vendor executives and the rest of the food channel may be tempted to laminate and display the first sentence of the story:
Companies that supply big phone companies with network equipment suffered in the first half of 2009, but sales are almost certain to accelerate over the next few months.
The story provides two examples. It says AT&T could spend more than $10 billion between now and the end of the year and that Sprint Nextel may take out its wallet to the tune of about $1 billion. Both numbers far outstrip what the carriers spent in the first half of the year.
Another interview I had the opportunity to do -- with analyst Chetan Sharma, who runs is own firm-- indirectly reinforced the basic theme. Sharma said that revenue per user (RPU) remained at about $50. The fact that RPU didn't edge downward is very important. The key is that despite the severe recession, the growth of wireless networks and the transition from voice to data has kept usage steady. That the demand was healthy while expenses cut bodes well for margins once the economy recovery, since there is no reason to jettison the cost cutting measures that work.
Putting all the pieces together-the continued growth of wireless in general and wireless data in particular, the need to relieve the stresses caused by the general belt tightening of the past year or so, and the incremental improvement in processes and procedures-clearly means that the telecom industry in general and vendors in particular have some good times ahead.