Low Prices Force Telecom Strategy Shift
By Jessica Hall
PHILADELPHIA (Reuters) - Telecommunications companies that spent billions
building fiber-optic networks to move data, voice, and video at lightning speeds
now must find another way to make money or risk failure, analysts said.
A 50 percent drop in prices for transmitting voice and data over the past year
already has forced companies such as PSINet Inc. and 360networks
(Nasdaq:TSIX - news) into bankruptcy and others such as WorldCom
Inc.(NasdaqNM:WCOM - news) to lay off workers by the thousands.
``We think the current state of financial upheaval will only be intensified as many
product-centric companies find themselves increasingly unable to compete in a
services-driven world,'' said J.P. Morgan analyst Tod Jacobs.
Since prices are expected to fall by half again in the next year, companies must
move quickly to shift strategies and find new sources of revenue, analysts said.
``The ability, for instance, to deliver managed data services ... allows
more-developed carriers to compete for greater share of wallet at the (corporate
customer) level,'' Jacobs said. ``In addition, services, as opposed to products, also
provide one of the few areas of refuge from severe price erosion.''
Providing services to large companies, however, requires more expertise,
engineering, and sales and marketing. Plus, the sales cycle for sophisticated
services tends to be longer and more complex than selling high-speed
transmission alone.
DARK FIBER
Industry experts blame the drop in broadband prices on everything from a dearth
of local network access to overly exuberant capital markets that funded risky
upstarts.
They also point to a lack of ``killer applications'' or must-have software that would
prompt companies and consumers to do more business over the Web.
Network builders and telephone companies spent about $90 billion over the last
four years on fiber-optic networks in the United States, which now has 39 million
miles of glass fiber.
Analysts say less than 5 percent of that fiber is ``lit'' -- or has the electronics,
amplifiers, and software needed to carry information. Credit Suisse First Boston
estimated less than 1 percent of the fiber in the ground is used. Qwest
Communications International Inc.(NYSE:Q - news), which built a national
high-speed network, estimated that for every dollar of capital invested in laying
the fiber in the ground, another $1 or $2 is needed make it available for service.
``Fiber does not equal capacity,'' said Thomas Soja, president of T Soja &
Associates, a consulting and market research firm in Boston.
THAN SHINY GLASS STRANDS
Falling prices for basic transport services have already prompted companies such
as WorldCom, Qwest and Global Crossing Ltd. (NYSE:GX - news) to add
sophisticated services over their networks.
Higher-end services range from helping corporations run simple Web sites that
provide general company information, to high-end sites that offer online shopping
with personalized frequent shopper accounts, or complex business-to-business
exchanges that bring together buyers and suppliers over the Internet.
Upstarts, however, lacking the deep pockets to expand their product lines and
expertise, will likely not even finish their networks before running out of cash.
Some companies -- such as 360networks, Northpoint Communications, Winstar
Communications and PSINet -- filed for bankruptcy protection. Others, such as
Level 3 Communications Inc., curtailed expansion plans or changed strategies.
Part of the problem lies with lack of high-speed local networks, analysts said.
Optical networks are needed in the local markets to handle services such as
video-on-demand, streaming media and broadcast-quality Webcasts.
Although companies have built the network equivalent of slick superhighways,
the entrance ramps are out of date and unable to handle large volumes of traffic.
As a result, limited traffic flows across the long-haul networks and fiber remains
underused.
The Baby Bells have been working to upgrade their networks and move fiber
closer to customers' homes and offices, but that process has taken time and could
slow to a crawl now that many competitors have gone out of business.
``The last-mile issue is the age-old issue. Most Bells aren't moving that quickly to
replace and upgrade decades-old copper (telephone lines). Also, most of the
competitive companies who tried to drive broadband into local markets have
gone belly up. They're not a driving force anymore, so there's no competition to
put pressure on the Bells,'' said Rob Rich, executive vice president with
consulting firm The Yankee Group.
A KILLER APPLICATION
The incentive to build high-speed networks also is closely tied to the
development of next-generation products and services, Rich said. If companies
don't have lucrative applications to offer over their networks, they can't justify the
cost of building them.
``If the Bells were assured that there were killer applications out there that
companies would pay for, they might speed up their network push. But
companies aren't willing to pay for services that look choppy over today's
networks. It's a vicious cycle,'' Rich said.
Despite the recent concern about a glut of fiber, falling prices, and cutbacks in
spending, most industry expects agree that the telecommunications industry will
grow over the long term.
``All the things that companies are trying to do -- people want. They want
high-speed access, they want data and video services, it's not going away,'' Soja
said.
``We're not going to go back to pencil and paper.'' |
