[qi:026] Earlier this morning, Krish Prabhu, chief executive officer of Naperville, Ill.-based telecom equipment maker Tellabs (TLAB), resigned from the job. The company announced his departure along with a decision to embark on a $600 million stock buyback program. The news is a sad reflection on the true state of the telecom industry: Carrier consolidation has left equipment makers with little or no leverage.

It was less than a month ago when I spoke with Prabhu. The conversation had veered towards the power of the carriers and how they were getting the most out of their kingmaker status. Prabhu was pretty candid during our chat; he made it clear that he felt the only way Tellabs could grow its revenue was by going after independents and international players.

The problem is that everyone is thinking along those lines. My sources in the telecom business say the sniping amongst the bigger players — Ericsson (ERICY), Nokia Siemens Networks (NOK) and Alcatel-Lucent (ALA) — is reaching new levels, and as a result, profits are being slowly sucked from the system. The deflationary presence of Chinese vendors such as Huawei and ZTE Corp. is only adding to the pressure on the entire equipment ecosystem.

Prabhu said mid-sized companies such as Tellabs were bearing the brunt of “carrier consolidation.” In other words, there is little or no room for error. Even though Tellabs is a tightly run ship, when one of its larger customers, such as Cingular nee AT&T Wireless (T), scales back on its equipment purchases, its greatest nightmare becomes a reality.

Cuban’s Theory & Internet Infrastructure Problems

The telecom industry as we know it is rotting from the inside, and the carriers will continue to put pressure on vendors in order to keep their businesses running. And the vendors will have to play ball — at least for now. But the rot is deep-seated, as reflected by Deutsche Telekom’s (DT) mounting line losses. How long can they mask it by laying off thousands of people , as BT did today? The virtuous spinning of wheels is one of the reasons why not many VCs are willing to wager on network telecom-related startups. They realize the futility of it all.

As for Prabhu, I suspect that when his time is up next March he will go back to either being a VC or just helping a startup. Of course, there is a job opening at Sprint Nextel (S).