Communications Service Providers Slashing Their Capex; Equipment Vendors Need to Get Flexible

By Jacqueline Lee
Contributing Writer

Like so many other types of companies, communications service providers (CSPs) are looking for strong cost cutting measures that will keep them profitable in the face of intense competition and global instability. One major way that CSPs are honing their budgets is by taking expenses like software products and professional services out of capex and into opex.

The CSPs profiled, according to International Data Corporation (IDC), include Alcatel-Lucent, Ericsson (News - Alert), Huawei, Juniper and ZTE. Together, the eight companies embracing cuts in capex produced 90 percent of CSP revenue or $124 billion in 2012. These powerhouses are forcing equipment vendors to sit up and take notice.

“As network equipment continues to commoditize, the vendors look to sell software-based product offerings and value-added services in addition to network equipment as a way to drive margin expansion,” explained Nav Chander, who is research manager for Enterprise Communication Services.

“Those vendors that focus on virtualized product strategies; embrace open, software-based architectures incorporating SDN concepts; and create value by driving CSP (News - Alert) opex lower will have the greatest impact in the telecom market.”

In addition to slashing their opex, top CSPs are pushing through products that offer mobile broadband and virtualized solutions. These products produce higher margins for CSPs, meaning that equipment vendors that don’t adapt will find themselves losing contracts.

In 2012, according to ZDNet, CSPs chose maintenance and minor upgrades over significant capital expenditures so that they could improve slumping profits for shareholders. Cheaper equipment like small cell base stations upgrade CSP networks to 4G technology without requiring major investments in infrastructure.

In the long term, CSPs will have to build out their infrastructure to support LTE (News - Alert) networks and other forms of modernization. They will also have to figure out how to effectively make money off of their data traffic, which could lead them to focus on equipment that improves quality of service and network performance.

In the short-term, though, equipment vendors have to figure out how to adapt and ride out the storm. If they don’t, they may not be around when capex finally bounces back. 

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Edited by Brooke Neuman