Telecom future put on hold
Experts pinpoint lag in demand
07/01/2001
By Vikas Bajaj and Jim Landers / The Dallas Morning News
RICHARDSON – Five years of competition and billions of dollars in investment later, the telecommunications industry is waking up badly beaten and with a brutal hangover.
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Companies built boundless optical networks, expecting that the first to hawk warp-speed Internet connections would dominate the marketplace. The bottom fell out this year when it became clear that few customers wanted such wares, had access to them and were willing to pay a steep price for them.
The industry now waits for demand to catch up with its multibillion-dollar overhang of investments in cable, fiber, cell towers and the like, according to The Dallas Morning News Board of Technology Experts.
More bankruptcies, consolidations and job cuts are ahead while debt burns through balance sheets, the nine board members said.
"The emperor has no clothes, in my view, is what's happened in telecom," said Anne K. Bingaman, chairwoman and chief executive of Valor Telecommunications LLC in Irving.
Companies that expect to survive are glumly pledging that next time, they'll give customers products that solve real problems.
"This won't be the last time in financial history we will see something like this," said Royce Holland, chairman and chief executive of Dallas-based Allegiance Telecom Inc. "We are going through a Darwinian cleansing of the gene pool."
Last week's meeting was the third for the technology board – a panel of business and academic experts that convenes periodically to discuss technology trends. Unlike the first two sessions, though, this one focused on just one broad theme: telecommunications, an industry that ran up wildly during the 1990s and crashed thunderously this year.
The nasty fallout rains particularly hard on North Texas, home to the U.S. headquarters of foreign giants Nokia, Nortel Networks Corp., Ericsson and Alcatel SA, and hundreds of equipment makers, service providers, consultants and other specialists.
In a lively 21/2-hour breakfast meeting at a Telecom Corridor hotel, the panelists tried to dissect the collapse and predict what's next for the industry.
Mr. Holland, whose company sells phone and data services to businesses, said the telecommunications industry has stabilized for the time being.
"I think we've bottomed out," he said. "I think we're going to bounce along on the bottom for a while to the end of the year."
Alcatel SA's chief operating officer, Krish Prabhu, said the turnaround could take longer because of heavy debt burdens carried by many telecommunications service providers.
Board members agreed, however, that the industry will come back and could again boom if companies can figure out the "killer application" that gives consumers what they want.
"It isn't higher speed access to the Internet that is the value, and voice is not going to be the value proposition for broadband, either," said Timothy P. Eckersley, Nokia Networks' senior vice president of customer operations. "There is some other service proposition that is on its way that will deliver the services that these consumers are willing to pay money for."
Meanwhile, the shakeout is leaving thousands of telecom workers unemployed, ruining investment portfolios and sending high-profile start-ups to bankruptcy court. Nortel Networks Corp. is cutting 30,000 jobs, and Cisco Systems Inc. has let go 8,500 employees in an effort to bolster the bottom line.
"There will be a lot of pain," said Guy Hoffman, a Dallas-based partner at TL Ventures. "There will be a lot of jobs lost. And I guess Darwin is showing his teeth, if Darwin has teeth at this point."
Major investments
Like previous boom-bust cycles, the retrenching follows a wild run-up in investments driven by changes in government regulation and technology.
In 1996, Congress began deregulating the phone business and allowed new entrants to sell local phone service by leasing "last mile" lines that serve businesses and consumers. Hundreds of firms entered the business to sell phone and high-speed Internet services.
Few entrepreneurs fully understood that building a successful telecom business required huge capital investments that took years to recoup as customers came on line, Ms. Bingaman said. Her company, Valor, sells phone service in parts of Texas, New Mexico and Oklahoma.
"The truth is, venture capitalists, by and large, lost their nerve last September and October and started saying, 'Boy, the pay out is too long. The question is do I keep putting hundreds and hundreds of millions in my company A?'" she said.
The negative answer that followed doomed many start-up phone companies and equipment makers. Wall Street developed a similar aversion to service providers and slowly turned against big equipment makers such as Nortel and Cisco.
Regulations blamed
Some members of the board blamed government enforcement of rules governing telecom competition for the failure of the start-ups and an overall slowdown in the industry. Others said the "build it and they will come" strategy of major investments should continue, this time with taxpayers chipping in capital and tax breaks.
Abha S. Divine, SBC Communications Inc.'s vice president of corporate strategy, blamed regulations for a slump in deployment of the high-speed Internet access technology known as DSL, or digital subscriber lines. It's a view shared by other Baby Bell companies, who sought federal legislation this year to free them from having to share interstate DSL phone lines with smaller competitors.
"Regulation has hindered progress," she said. "We think there is a big difference between the delivery of voice services and the delivery of data services and Internet services."
But Ms. Bingaman countered that regulations haven't seemed to make a dent on SBC's ability to invest in new technology.
"SBC is doing just great," she said. "If you look at SBC's stock price compared to most other telecom companies, it is real hard to get a sense that SBC has been hampered terribly by regulation."
A solution to the industry's current troubles may be to get government more involved in funding broadband networks, Mr. Prabhu said. The urgency may be heightened if foreign governments such as China take big telecom pipes to every home.
"How much should the government intervene if the VCs [venture capital providers] have an attention span of a 5-year-old and want a return in two years, and this infrastructure takes 15, 20 years to build out?" he asked.
The point may be academic, Ms. Bingaman said, because the Bush administration does not seem interested in interfering with the market and has no money to spend on big infrastructure products. "It's just not going to happen," she said. "You can argue all you want to about it."
Other panelists said the industry's problems had more to do with the industry's fascination with new technology for its own sake.
"It's not about technology," said James Janicki, president and chief executive of Plano-based MetaSolv Inc. "It's what is the service you are going to deliver, and that's the piece that no one is solving."
Too many companies built fiber-optic and DSL networks, thinking that America's voracious appetite for information would consume the capacity. They failed to check whether the market could support so many players, Mr. Hoffman said.
"How many megaplayers can any industry support?" he said. "How many airlines do we have, how many automobile manufacturers, how many networks? Everybody likes to say the Internet failed. Well, we've got two or three portals. How many more portals do we need?"
The euphoria over new technology was contagious, and even large companies were drawn to products that wouldn't be pursued as aggressively in more rational times, Mr. Prabhu said.
"As they poured a lot of money, we suppliers developed a lot of technology that we threw at the network," he said. "Of course, some of it stuck, and some of it didn't stick."
To gain expertise in newer technologies, vendors spent billions to buy hot start-ups, many of which had little if any in the way of revenue and profits. The purchases also gave firms such as Nortel and Cisco access to each other's markets, optical networking and Internet routing respectively.
But now the firms are writing down the value of those acquisitions, conceding in a way that the deals were overpriced and aren't contributing to the bottom line. Huge losses and low share prices are pressuring industry giants to consider mergers as Lucent Technologies Inc. and Alcatel did recently.
"The pie isn't growing as fast as it needs to support these companies," Mr. Prabhu said. "You will see consolidation. You will see retrenchment and you will see the shredding of certain sectors, and I think that's exactly what you're seeing right now."
Carriers' deals
Carriers also have been buying each other, and their profligate spending is coming back to haunt them.
AT&T Corp. bought two large cable firms – Tele-Communications Inc. and MediaOne Group – so it could own direct connections to homes. The strategy was sound, but the firm paid an average of $4,000 for each customer, said Hasan Pirkul, dean of the University of Texas at Dallas' management school.
The deals cost more than $100 billion and gave AT&T the $60 billion debt that is forcing it into a three-way breakup. The firm has also had to spend billions of dollars upgrading cable systems to accommodate two-way traffic needed for high-speed Internet and phone services.
"Who is going to pay for that?" Dr. Pirkul said. "AT&T and others just made a whole bunch of people very, very wealthy by doing that, and now they have to recover those costs."
In a global marketplace, the U.S. telecom slump would be inviting to European or Japanese firms eager to gain a foothold here. But in Europe at least, many of the telecommunications giants have amassed their own debt mountains by bidding wireless spectrum prices sky high at government auctions.
The auctions were to launch a new wireless technology – 3G, or third-generation – that promises to move data at speeds rivaling DSL and cable.
U.S. auctions have moved much more slowly and were thrown into confusion in June when a federal appeals court blocked a $17 billion auction of spectrum reclaimed by the Federal Communications Commission from a bankrupt company, NextWave Telecom Inc.
"That basically puts an arrow through Verizon, Cingular and AT&T and some of the smaller guys even," said Keith Shank, vice president of strategic development at Ericsson Inc., the giant Swedish phone and network equipment maker with U.S. headquarters in Plano.
"It's going to be a mess. This is going to be something that's not fun to work through unless you're a lawyer."
Mr. Holland said the federal fumbling had done U.S. companies a favor.
"If you take a look at all the European telcos and how they're now awash in debt as a result of paying $100 billion for 3G spectrum in Europe," he said, "it's hard to construct a business plan to see where you're ever going to get a payback."
Formidable debt and flaccid demand make it easy to get pessimistic about telecom today, but Mr. Hoffman said technologies that are on the horizon will fuel a new, more sustainable boom.
"We're all sitting here burned," he said.
"It will be very slow to trigger, and then at some point a whole bunch of people are going to get frothy again, throw everything to the wind and do this all over again, and we'll go through another boom." |
