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King customer holds the phone throne

Phone carriers are working to hold onto their existing customers rather than chase new subscribers, says a new survey. It could spell trouble for network gear providers.

Telephone carriers are cozying up to their customers, according to a new study--which could spell trouble for companies that supply network equipment.

The study, released Wednesday by IDC, found that since last year, traditional and wireless carriers worldwide have focused a larger portion of their budgets on keeping existing customers happy. Spending has increased for creating services such as Internet telephony plans or for improving how their networks operate, the market research firm stated.

The spending pattern is a 180-degree shift from the phone industry's strategy before 2000, when catering to customers took a backseat to expanding networks in order to reach new regions and subscribers.

Retaining existing customers has become a much bigger priority for carriers, mainly because now there's no room left for them to expand, according to Rena Bhattacharyya, a senior analyst at IDC. "Carriers have to rethink their investments," she said.

While that might be good news for billions of worldwide phone users, the study suggests that Nortel Networks, Lucent Technologies and other major providers of infrastructure for telephone networks will suffer over the next three years as a result.

That's because carriers that concentrate on adding new services don't spend as much money on new equipment as companies that are dedicated to building networks do. Some don't buy anything at all, preferring to tap a third-party company for their infrastructure needs, Bhattacharyya said.

As a result, IDC predicts that global spending by telephone companies on new infrastructure equipment will drop 6 percent in 2003, then 5 percent in 2004. "The market has not bottomed out," Bhattacharyya said.

For the study, IDC surveyed the spending patterns of hundreds of telephone companies worldwide between 1999 and the just-concluded first quarter of 2003.

A representative of Nortel Networks said not to count equipment makers out yet. "It's pretty obvious that capital expenditure is dropping," the representative said. "But most of the industry has started adjusting."