Capex Results Reveal a Telecom Industry on the Cusp of Change

Last week, Cisco reported that sales will fall short of expectations. Or, perhaps, it was reporting something more subtle: That “expectations” have changed and that a new and as yet undetermined normal will be established.

All sectors are liable to good cycles and bad. That is the nature of business. The savviest of planners, however, recognize when the change is more a transition in the business than normal cyclical ebb and flow.

The telecom hardware business seems to be knocking on the door of that permanent change. The very reason that virtualization has blossomed during the past few years is the thing that spells bad news for hardware vendors: Software-defined networks, network functions virtualization (SDN and NFV) and 5G are at some level all about reducing the need for physical assets.

That is not to suggest that capital spending is collapsing. IHS Markit is forecasting a basically flat year for telecom capex, with perhaps a small gain, according to Lightwave Online. There will be, according to Senior Research Director Stéphane Téral, some regions that are slightly ahead and others that are a bit behind. Overall, worldwide service provider capex spending will rise 0.7 percent to $341 billion by year’s end.

It is not surprising that capex is hanging on. SDN and NFV are just getting rolling on a commercialized basis and 5G is just approaching the standards-setting phase. This suggests that the middle-term future looks rough for capex – and that the present doesn’t look too good, either.

The Street provides a rundown of the generally bad news that telecom equipment vendors are experiencing. Ericsson said that its third-quarter sales would fall 14 percent. The culprit? A 19 percent drop in equipment revenue. Nokia’s core networking unit had a 12 percent third-quarter revenue drop and said it anticipates similar performance in the fourth quarter. ZTE missed its third-quarter sales numbers. Infinera released a downbeat fourth-quarter outlook.

Uncertainty over the election of Donald Trump could have an impact as well. In the CRN story on the Cisco results, CEO Chuck Robbins said that fallout from Trump’s election has not yet materialized – but could.

That would only be a short-term disrupter. The real challenge to hardware vendors is that their business is fundamentally changing in ways that they almost certainly don’t like. Sales are down now because prospective customers simply don’t want to lock themselves into a model that is on the way out. And that new model won’t be particularly kind to them, either.

The smart companies, especially those with money to spare, are preparing. For the next year or so, the industry likely will be in a transition period in which SDN and NFV become more prevalent and 5G gets finalized. Legacy gear still predominates but carriers will avoid locking themselves into equipment that is on the point of obsolescence.

Eventually, the new approaches will gain traction and a new era – one that is software-based and therefore smaller than the current hardware-dominated market – will emerge.

Carl Weinschenk covers telecom for IT Business Edge. He writes about wireless technology, disaster recovery/business continuity, cellular services, the Internet of Things, machine-to-machine communications and other emerging technologies and platforms. He also covers net neutrality and related regulatory issues. Weinschenk has written about the phone companies, cable operators and related companies for decades and is senior editor of Broadband Technology Report. He can be reached at cweinsch@optonline.net and via twitter at @DailyMusicBrk.