The Post, BW +: "Telecom's Future" + ...
...http://www.businessweek.com/technology/tc_special/telecom.htm
...http://www.businessweek.com/technology/content/may2002/tc2002051_0981.htm
"Fiber-Optic Overdose Racks Up Casualties"
washingtonpost.com
"Is there still an investment overhang, and if so, should we worry about it?"
chicagofed.org
Analysis--selected links:
...http://www2.barchart.com/sectors.asp?sec=0250.sec&hlt=WCOM&level=2&title=SIC%2d4813+Telephone+Communications%2c+Except+Except+Resellers+W
...http://www.bullsector.com/telecom.html ...main link courtesy "sleepless bobby" (someone i know?)
...http://stockcharts.com/gallery?$XTC
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>>> Fiber-Optic Overdose Racks Up Casualties
By Steven Pearlstein
Washington Post Staff Writer
Thursday, May 2, 2002; Page A01
This ought to be a glorious moment for the telecommunications industry. Around the world, people are spending record amounts of money to use its networks to talk and e-mail and exchange gobs of information. The pace of technological innovation is positively breathtaking. Trillions of dollars have been invested in its growth.
Instead, the industry is in the midst of a financial meltdown. The ouster this week of founder Bernard J. Ebbers as chairman of WorldCom Inc. is but the latest twist in a saga that almost certainly will involve more resignations, more bankruptcies and a period of painful industry consolidation.
The ripples from the telecom implosion extend well beyond the industry. It has become a significant factor holding back the economic recovery, not just in the United States but also globally. The stock market's current funk stems in significant part from concern over telecom stocks, which drove the late-'90s rally but since their peak have generated paper losses of more than $1 trillion, by some estimates. The amount of telecom debt and equity investments already written off by banks, bondholders, venture capitalists and private equity funds approaches $500 billion and continues to rise.
"Without expectations of robust growth in this debt-ridden, risky, increasingly competitive sector, the economics of the telecom sector simply don't work," declared Scott Cleland of the Precursor Group research firm in Washington, who sees no revival in sight.
In the boom years, there seemed no limit to telecom's prospects. Success bred success, confidence led to more confidence, growth produced growth. Now the same feeding-on-itself dynamic is at work in reverse, dragging with it not only weak companies but the strong as well.
The problem traces its origins back to Wall Street, where lenders and investors, eager to get in on the next Microsoft, simply provided too much money to too many companies to build too many competing networks.
"We may have put 80 years' worth of capital into the ground," said Vince Tobkin, director of the technology practice at consulting firm Bain & Co., referring to a massive installation of underground fiber-optic networks.
Considered separately, the plans for each of these businesses may have been defensible. What few realized, however, was that with so many companies following roughly the same strategy, it was unlikely that all that capacity would be needed or that any one company would achieve the critical mass necessary to survive and prosper.
In desperation, companies began to try to "buy" market share by cutting prices -- unlimited minutes for $39.99 a month, free phones, no roaming charges, long-distance priced the same as local. In time, however, everyone was forced to do it, creating a price war that eventually left many companies with barely enough revenue to pay operating expenses, let along interest on their huge mounds of debt.
For a time, companies were able to camouflage their problems by reporting financial results in terms of "EBITDA" -- earnings before interest, taxes, depreciation and amortization -- which conveniently ignores debt service or the costs of expanding and modernizing equipment. That and other accounting policies are now the subject of a wide-ranging investigation by the Securities and Exchange Commission.
In time, however, Wall Street and the banks began to realize that the telecom overcapacity was so profound (less than 10 percent of all that fiber-optic wire is being used, for example), and unit prices were falling so fast (the cost of a cellular minute fell 25 percent in a year), that it was unlikely anyone was going to make any money anytime soon. New loans were being used not simply to build out the new networks but also to pay interest on the old loans. Suddenly, in the fall of 2000, the financial spigot closed.
"The financial markets forgot what we'd told them" about how it would take several years before profits materialized, said Chuck McMinn, founder of Covad Communications Group Inc., expressing the industry's sense of betrayal. "We were completely caught off guard."
The consensus among industry executives and analysts was that only the weak companies -- those with the wrong technology or insufficient cash on hand -- would fail to survive the industry shakeout. But as it turned out, nobody was spared as the hypercompetition spread across traditional industry boundaries.
Customers realized they could save money by using their cell phones rather than their land lines to make local or long-distance calls. And why, they asked, add a second line at home for Internet access when upgrading a line to high-speed service would do just fine?
Satellite firms that once had a monopoly providing businesses with worldwide phone links suddenly found themselves competing with companies desperate to sell underutilized undersea and underground fiber lines at any price.
Local phone companies, meanwhile, began taking significant market share from long-distance companies by offering all-distance packages.
Suddenly it wasn't just the upstarts that were in trouble -- the Teligents and the XOs and the PSINets, to name some local examples -- but veterans such as AT&T, Qwest Communications and WorldCom as well. Then, as profits eroded, these companies cut in half their orders for new routers, switches and optical fiber from once highflying companies such as Cisco Systems Inc., Lucent Technologies Inc., Nortel Networks Corp. and Ciena Corp.
According to industry executives and analysts, things are likely to get worse before they get better. As more companies "restructure" their finances under the bankruptcy process, they will be able to reenter the competition with their balance sheets wiped clean of most of their debts, allowing them to offer even lower prices than competitors still trying to make their interest payments. To remain competitive, the non-bankrupt companies will have to match the lower prices, putting them on the path to bankruptcy.
Telecom wouldn't be the first to go through such a boom-and-bust cycle. During the railroad boom of the late 1880s, so much money was invested building so many parallel tracks -- or tracks to places that would never support profitable service -- that the entire industry went bankrupt. Much the same story is told of the airline industry, which because of so many losing years has yet to turn a net profit.
If the history of these other industries is any guide, telecommunications is in for a protracted period of consolidation that will produce a few dominant players, each offering a broad array of services. These surviving giants will compete aggressively, but never to the point of lowering prices so much that they can't continue to pay their lenders and provide a modest profit to their owners. And, as Bernie Ebbers discovered, they are likely to be headed by executives who never promised Wall Street more than they could deliver.
Staff writer Yuki Noguchi contributed to this report.
© 2002 The Washington Post Company <<< |
