A move by AT&T to eliminate 4% of its workforce may only be the beginning of a torrent of staff reductions and spending cutbacks in the $1 trillion telecom industry.
AT&T (T), the largest U.S. telecom services provider, said on Dec. 4 that it will slash 12,000 jobs, citing a shrinking economy and consumer spending reductions. AT&T is also considering a reduction in the amount it spends on network upgrades next year. Verizon Communications (VZ) cut 2,700 employees in the third quarter, and Sprint Nextel (S) has laid off 4,000 people.
Fewer telecom purchases
As customers rein in spending on communications services, more staff reductions and capital spending cuts are probably on the way for telecommunications providers, moves that would probably hurt telecom equipment makers. 'Telecom will be one of those sectors of the economy that gets hurt more than other parts [of technology],' says Susan Eustis, CEO of consultancy WinterGreen Research.
As Americans lose jobs and struggle to make mortgage payments, more people are disconnecting their landlines, TV channels, and even Internet connections. Evidence of the cutback is emanating from unexpected sources, including an October study from researcher ComScore (SCOR) that showed that the fastest-growing segment of buyers of the Apple (AAPL) iPhone is people who earn less than $50,000 a year. Many in that demographic are looking for the wireless phone to replace landlines and Web connections, according to ComScore. Already, some 20% of Americans have done away with traditional copper-wire phone connections and the pace has accelerated as the economic crisis has worsened, according to consulting firm Farpoint Group.
Forecasting low to no growth
AT&T didn't say what impact the economy would have on next year's revenue, but some analysts say it and other telecom companies may need to settle for minimal if any growth. Christopher King, an analyst at Stifel Nicolaus, says his prior forecast of 3% overall revenue growth for AT&T 'may be too aggressive,' adding that 'it's clearly possible that estimates across the board for the Baby Bells continue to worsen.' To retain subscribers who are looking to trim their budgets further, even wireless service providers may need to cut prices and face a drop in their per-user revenue, says Craig Mathias, founder of Farpoint Group. Wireless revenue per user has risen every year but one for the past decade, according to wireless industry association CTIA.
To stabilize margins amid the sales slump, carriers are expected to make substantial cuts to capital expenditures. North American carriers may slice spending on landline and TV-related networks 34%, to $23 billion, in 2009, says John Lively, vice-president for forecasting at consulting firm Ovum.
He may revise the projection further, depending on the length and depth of the recession. 'This is not the absolute worst case,' Lively says. 'It's driven by sentiment. Companies don't want to be stuck with a lot of committed investment, because they don't know how bad it's going to get.' Ovum expects major carriers' spending on wireless networks to remain flat following last year's dip.
Fallout for gearmakers
That's bad news for companies including Nortel (NT) and Alcatel-Lucent (ALU), which make much of the gear used in telecommunications networks. It also bodes ill for companies such as Cisco Systems (CSCO) and Juniper Networks (JNPR), which make networking gear.