Telcos in 2007 are expected to spend nearly $41 billion on equipment, the highest annual level since 2002. However, this spending will be up only 1.6 percent from $40.4 billion in 2006. In comparison, telco equipment spending rose by 10.7 percent in 2006 and by 8.3 percent in 2005.

"The major reason for the slowdown is focused spending and a 'pay-as-you'grow' strategy among telcos," said Steve Rago, principal analyst, IPTV, broadband and digital home research for iSuppli. "The marginal increase in 2007 spending is being driven largely by telcos' purchases of equipment to deploy Internet Protocol Television (IPTV) services. iSuppli estimates $9 billion will be spent on IPTV-related communications equipment in 2007."

"The major motivation for the telecommunications companies to invest in IPTV is the flagging fortunes of their core business in voice communications," Rago added. "The telecommunications companies have been losing an average of 4 percent annually from their subscriber base, and more than 4 percent per year from voice revenues. This phenomenon is universal, with no region and no telecommunications company unaffected."

Telcos in 2006 spent their funds primarily on access equipment. For 2007, iSuppli expects carriers to continue access-equipment spending at 2006 levels, while significantly increasing investments in their core networks. This shift will be necessary to provide the bandwidth and quality of service necessary to support IPTV growth.