Capital expenditures (capex) remain the most closely watched metric for determining the direction and level of investment that telecom carriers are making in network equipment and services. Equipment suppliers base their sales plans on it. Investors in both carriers and suppliers base their decisions on analysts’ predictions of it.

The problem is that capex is never linear in its behavior. Predicting what the carriers are likely to spend on their networks is a black art, at best. Billions of dollars are in play. The risks are enormous.

When you get right down to it, a carrier’s capex is driven by the combination of two primary factors: the number of customers served by the carrier, and the numbers and types of services used by each of those customers.

Take wireless. Today, the base of wireless customers in the U.S. is nearly 260 million, double the base of about 130 million wired customers. Numbers of wireless customers continue to grow and is now over 80% population penetration, while wired access lines are declining 7 to 8% a year.

As consumers of wireless services, our collective usage now averages around 700 minutes-of-use (MOU) per month. With large blocks of flat-rate minutes now offered by the carriers, customer usage is trending towards 1,000 MOUs.

More important, the mix of usage is changing from voice calls to data streams for texting, emails, file transfers, picture sharing, and video downloads. Wireless carriers must invest billions in new cell sites, packet switches and routers, and high-speed backhaul to handle this run-up in mixed traffic volume.

So, you might think that wireless capex should be increasing every year. On the other hand, you could surmise that wireline capex should be dropping as the telcos lose access lines. Not so! That may have been true a decade ago but this is the Internet age. Today, telcos, cable companies and wireless carriers alike are trying to satisfy a big ‘need for speed’ that is driving massive network transformations. Customers want the triple play. Carriers of all types must make high-speed broadband connections widely available, or risk losing business. And the business they’ll lose if they don’t invest is not just MOUs, it’s streams of data!

How much and how quickly the carriers will invest depends on the size and condition of their installed networks, their customers’ demands, competitive threats and access to capital.

With that in mind, check these numbers. Aggregate 2007 capital spending among 53 U.S. wireline and wireless publicly held carriers reached $63.9 billion, up +1% over the $63.5 billion spent a year earlier. Since 2005, aggregate capex has grown at a +3% CAGR.

Wireline capital expenditures for 2007 were $42.9 billion, a +13% increase over the $38.1 billion spent in 2006. Major broadband initiatives led by AT&T’s Project Lightspeed and Verizon’s Fiber Optic System (FiOS) helped boost the wireline capital spending.

By contrast, wireless capex tallied $21.1 billion in 2007, down -17% from $25.4 billion in 2006. The single biggest reason for the drop is that AT&T Mobility completed much of the Cingular and the former AT&T Wireless network integration activities in 2006 and so was able to scale back its 2007 capital spending.

These data show that capital spending is not linear and varies each year among individual carriers and by different product categories. Still, spending continues to shift dramatically from legacy, circuit-switched systems to new broadband capacity and service growth projects that support the triple-play. Among the RBOCs, for instance, broadband capex accounted for 44% of their 2007 budgets, up from 16% in 2004.

U.S. carrier capital spending has stabilized since the bubble burst in 2000, when aggregate capex peaked at $125 billion. Now, carriers follow a “success-based” model where network infrastructure is built as demand dictates versus a “build it and they will come” mentality back then.

The 2008 outlook is positive. Guidance at year-end 2007 puts aggregate wireline and wireless capex for 2008 at $65.0 billion, up +2% over the $63.9 billion spent in 2007. Wireline expenditures will increase +1% to $43.4 billion from $42.9 billion. Wireless capex projections are up +2% to $21.6 billion from $21.0 billion last year. Through 1Q08, the full-year guidance is holding.

The question is: What piece of the $65 billion capex budget are you going to get?

John M. Celentano is President, Skyline Marketing Group, a Baltimore, MD-based telecom market analysis and consulting firm, and publisher of the CapEx Report™. He can be reached at john@skylinemarketing.com.