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As Spending Drops, Networkers See the Sky Falling

Cisco, Lucent and Nortel brace for another round of cutbacks at the big telcos.

Tech overspending is like binge drinking: For every night of reckless pleasure, there's a corresponding morning of agony when it's over.

And in case you hadn't heard, it's over.

Lower capital spending projections from Lehman Brothers and others Tuesday set off another crying jag in the networking sector. Spending next year will drop at least 19% from this year, according to Lehman's Blake Bath, who last year was among the first on Wall Street to predict the current slowdown. Blake had forecast an 11% spending slump for 2002.

And with network gearmakers like





(LU) - Get Lufax Holding Ltd American Depositary Shares two of which representing one Report

already beaten down to around $6, Wall Street bears are now afflicting the less-afflicted names, such as optical networker


(CIEN) - Get Ciena Corporation Report

and Internet router specialist


(JNPR) - Get Juniper Networks Inc. Report

. Ciena dropped $1.80, or 11%, to $15.32, a 52-week low; Juniper slid 45 cents to $13.55, also a 52-week low.

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The reduced targets

come as little surprise as phone companies like








try to bring high costs in line with falling sales.

Harder They Fall

Last year marked the end of an era, capping off three years of the biggest equipment spending in history. Now the retreat is in full force.

One thing's certain: Spending won't improve until

phone service providers start to mend. Heavy debts, perpetually free-falling long-distance pricing and abundant competition are just a few of the challenges facing the telcos. And there's little to suggest those problems won't grow worse.

Recall that the new pack of hyperambitious network builders such as

Level 3


Williams Communications


Global Crossing

fueled competition with better tech and lavish investor support. But as those outfits run short on cash, the evaporating competition will allow the incumbents to go back to hoarding their resources and focus merely on collecting their monthly communications service fees.

In fact, it was just over

a year ago that Williams came up $1 billion short of its 2000 spending plan. For the first time since the great Internet buildout began in the late '90s, the capital markets started saying no.

And as Lehman's Bath pointed out a year ago, once funding got tight, attention soon returned to sales, and that turned a glaring light on the unsustainable ratio of spending to selling. With as much as $5 going out for every $1 coming in, many of the telcos had to borrow more and more money just to complete their networks.

That's brought us to our situation today. Phone companies are now killing big-ticket tech projects and shelving network expansion efforts. While these cuts will surely reduce telcos' red ink flow, the spending backlash will continue to reverberate painfully among the equipment suppliers.

"A new round of cuts from the regional Bells will be tough to digest," says a Boston-based buy-side analyst who has no positions in Lucent, Nortel, Ciena or Juniper. "This could get uglier. Like momentum stocks, only the wrong way."