The Three Stooges of Long-Distance Telecom
By Cody Willard
02/13/2002 15:20
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Ever since I started writing for RealMoney.com a year ago, I've been railing against the long-distance heavyweights.
Just take a look at the charts for the big three: Sprint FON , AT&T T and WorldCom WCOM . Tough times for shareholders, indeed.
What's up with these long-distance companies? Are they really the three stooges that their stocks make them out to be? In a word, yes. But, believe it or not, they're headed higher from here. The contrarian in me wants to turn bullish on them now. However, while they may be headed for a serious bounce, I just can't get over the management at these companies. Let's examine some of the blunders that they've pulled off in the past few years.
Mistaken Promise
Sprint plowed at least $2 billion into a little idea called Integrated On-Demand Network, or ION. Despite the cool name, its premise of paying for bandwidth based on usage never caught on with users. It killed part of what makes the data-service-providing business so profitable: charging subscribers for dedicated bandwidth and then oversubscribing the network. Oops, did I just let that secret out?
Sprint Loses Steam Its ION didn't quite catch on
Perhaps you've read my take on a technology called "fixed wireless" before. Fixed wireless uses microwave technology in the hopes of bypassing the incumbent local exchange carriers' copper connection to provide services. There are two types of fixed wireless: a robust and high-capacity kind called LMDS and a lesser version called MMDS.
Sprint quietly put lots of effort, time and money into MMDS. Then the company halted it, realizing that the technology just wasn't ready. The only possible saving grace: There's talk that it could use the bandwidth for third-generation mobile-wireless services. I'm not holding my breath.
Then, of course, there's AT&T and its CEO, Michael Armstrong. This company plowed billions -- I mean, billions , as in more than 100 -- into building a cable empire that would save AT&T from long distance's decline. Hey, at least it saw the decline coming, right?
Taking the T Plunge AT&T slips south over the past year
Alas, it was a day early and a dollar long in that move, way overpaying for the subscribers and cable assets. AT&T was then forced to sell those assets at a loss to Comcast (which paid a fair price for them) when it realized that the technology for providing voice telephony over cable was, like Sprint's fixed-wireless technology, not quite ready for prime time.
I know AT&T has spun the press and most analysts on the tale that it actually made money on this cable transaction. I'm here to tell you: It didn't. No way.
Where the Winners Are
Also, AT&T's single-rate calling plan is a joke. I expect it to be less successful than MCI's old Friends and Family plan. The 7-cents-per-minute long-distance price is nice, but the $19.95 fixed-price point is too high. In the highly competitive long-distance world, most consumers can't even remember if they use AT&T, much less who among their friends and family does.
The plan, however, is another sign that retail long-distance rates are stabilizing. That's huge for the big three interexchange carriers -- but more so for the ILECs, which are and will continue taking the long-distance world by storm. Companies like Verizon VZ and SBC SBC are getting into the long-distance business at a time when they can buy wholesale long-distance capacity at increasingly cheaper rates, but they'll be able to charge stabilized retail rates.
As WorldCom Turns Its stock has sunk pretty steadily
WorldCom has done the best job of not blowing billions of dollars on bubbled concepts. That's rather surprising, given that CEO Bernie Ebbers can't seem to manage his own finances very well. Granted, the company did mess around with MMDS, but less so than Sprint. And WorldCom's done a fantastic job of going after small- and medium-sized enterprises as well as major corporations. So what's the problem? Somewhat like AT&T, WorldCom spent way too much money acquiring way too many so-so companies. Now its balance sheet is a wreck.
The real sadness of this mess? If these companies had been less aggressive at the top of the bubble and had paid more attention to their balance sheets, they could now be rolling up the bankrupt, soon-to-be-bankrupt, just-struggling or nothing-left-but-hard-assets competitive local exchange carriers (like AT&T did on its NorthPoint asset acquisition or like IDT did with its Winstar acquisition) that are ripe for the taking. Too bad. Maybe someone else will figure out how to raise the capital to do that, 'cause these guys sure can't.
After all that, I can't deny that these stocks, particularly WorldCom, are likely due for a nice bounce here. Long-distance retail prices are stabilizing, and these companies have a few more quarters before the ILECs eat them for lunch (or buy them out!).
If you're looking to invest in some good ol' telecom service providers, you gotta go with the winners: the ILECs. My money's on the two most aggressive and best-run ILECs: Verizon and SBC.
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