Global Network Spending Hobbled

Ericsson posted disappointing earnings. So did network supply firms Alcatel-Lucent (NYSE: ALU) and ZTE. Telecom firms, wireless suppliers and cable companies have retreated from increasingly higher spending habits that have ranged over several years. Either the recession has undermined their investments or technology has advanced enough that many customers do not require improved services. If the latter is the case, the landscape of the wireless and broadband industries has changed entirely.

The telecom spending arch has parallels in the PC industry. Many consumers, both business and individuals, have reached the point where increased computing power is not useful. Upgrades of chips and operating systems become less necessary. PC sales already have flattened worldwide. Part of this trend has been put at the feet of a slow economy. But it also is likely due to the fact that consumers do not need machines that have better and better screens and more and more powerful processors. Moore’s law may predict the advance of some technology, but it cannot predict its use or demand.

Spending on 4G wireless networks and fiber intrastate likely has slowed in the United States, which is one of the largest consumers of network equipment. The three major wireless carriers — AT&T (NYSE: T), Verizon (NYSE: VZ) and Sprint-Nextel (NYSE: S) — have most of their superfast systems in place. The same is true with fiber. Companies like Verizon have built the systems they need to compete with cable. Wireless firms and cable and fiber businesses may need to make modest expansions to handle customer needs, but the really large investments are a thing of the past. The same likely is true in Europe and Japan. That leaves a few huge markets such as India and China. But expansion in those nations could be hurt by slowing economies. The combination of low intrastate improvement requirements in some nations and GDP growth erosion has brought the network equipment industry to its knees.

The fortunes of network equipment makers are not helped by the fact that there are too many of them, particularly in an era when global spending has slowed. A lower need for equipment means the circumstances of the firms will not improve.

Douglas A. McIntyre