Telecom spending

The Wall Street Journal yesterday had an article about how the expected recovery in the telecom sector hasn’t materialized. The evidence? Capital spending by large incumbents like SBC and AT&T is continuing to go down. This is a misleading way to evaluate the market. It’s the same mistake the music industry makes in using CD sales trends to show the threat from online file-sharing. The part is substituting for the whole.

There are several telecom businesses. There is the telecom industry that actually delivers stuff to users, which further divides into those who deliver bits, and those who deliver atoms. And then there is the industry that delivers stuff to other telecom companies, again divided into bits and atoms. The spending numbers you’re hearing are for the last of these categories: companies selling infrastructure equipment to service providers.

In a slow-growth, infrastructure-heavy market, capital spending on network equipment is a good proxy for the industry. In the innovative, fast-growth, technology-dominated industry telecom is becoming, it’s not. That will strand vendors who depend on selling lots of expensive gear, but it will also create new opportunities for companies that had no place in the existing ecosystem. Smart vendors like Cisco have already shifted from trying hard to play in the old sandbox to positioning themelves to serve the new markets when they develop.

Telecom today isn’t just traditional phone companies, any more than interstate transportation today is just railroads. Companies in the sector may not realize that, but outside observers should.