Text of NYT article -- Telecom sucks big time :
June 18, 2002
Telecom Outlook: First the Bad News, Then the Bad News
By SIMON ROMERO
The turmoil continues in telecommunications, making the long-awaited turnaround increasingly difficult
to call. Indeed, in light of a wave of bad news last week and through the weekend, some analysts say
the industry's problems could actually become worse before they become better.
News over the weekend that Joseph P. Nacchio was leaving the beleaguered telecommunications company
Qwest Communications International and that the fiber optic carrier XO Communications would file for
bankruptcy protection came in the wake of more bad news from two more established players. Lucent
Technologies, the large maker of communications equipment, said last week that its sales would decline
much more than expected, about 15 percent this quarter, as its main corporate customers reduce spending.
Sprint, meanwhile, had its debt rating lowered to a notch above junk status as it said it would sign up fewer
wireless customers.
This confluence of negative news, combined with the languishing bankruptcy proceedings of Global
Crossing and persistent concern over giants like WorldCom, have prompted some analysts to forecast a
more severe crisis in the industry, which has already endured the erasing of an estimated $2 trillion in the
market value of its constituent companies since the telecommunications slump began about two years ago.
"I foresee a near total collapse as the endgame," said Susan Kalla, a senior telecommunications analyst at
Friedman, Billings & Ramsey. "I've become more reactionary in the last month as it becomes clear that
almost nothing is working in the industry's favor."
The industry's problems have gathered force through a cascading effect that began with the dot-com
implosion in the first half of 2000, which was of a much smaller scale than the telecommunications
meltdown. With fewer dot-com buyers intent on creating high-traffic Web sites, makers of optical
components for advanced communications networks were among the first companies to feel the market go
soft.
Next to tremble were Lucent and Nortel Networks of Canada, the large providers of switches and other gear
for phone systems. As orders fell, both companies dismissed tens of thousands of employees without
succeeding in returning to even modestly improved sales growth.
Then came the bankruptcies at several competitive local exchange carriers, known as CLEC's (pronounced
SEE-lecks), that were unable to compete profitably with big incumbent local phone companies.
Problems at long-distance carries, like AT&T, that had an erosion of revenue because of intense competition
and then at hybrid companies, like Qwest, that provide a variety of communications services, compounded
the industry's difficulties.
Now, even the prospects of staid local phone companies like SBC Communications and Verizon
Communications, which benefit from a relatively steady stream of revenue from residential customers, are
being questioned. Investors are focusing on the climbing cost of borrowing money for these companies and
the loss of customers to wireless companies, which themselves are under financial pressure as they try to
renovate and expand their networks.
"The magnitude of the problem is enormous," said Scott Cleland, chief executive of the Precursor Group, a
Washington research firm. "The industry's overall revenue is imploding, while debt is exploding and profits
are disappearing."
In fact, it is becoming increasingly clear that part of the quandary of the telecommunications industry is that
the crisis is not a zero-sum game in which one company's loss necessarily translates into another's gain.
Instead, the tumbling of sales at one company often reverberates throughout the industry, leading to weaker
prospects at its competitors and suppliers.
For example, if a local phone company loses customers to a wireless carrier, the wireless company does not
necessarily profit. That is because intense competition and a glut of long-haul network capacity is forcing
each carrier to provide its service at cut-rate prices.
Citing the industry's "extraordinary interdependence and mandated interconnectedness," Mr. Cleland, whose
analysis is widely respected, predicts that 24 of the nation's 29 top telecommunications companies that have
not yet filed for bankruptcy are at risk of doing so in coming months.
Only a few companies — among them Verizon, Cisco Systems, SBC and BellSouth — are relatively free
from the risk of toppling into insolvency, according to a research model analyzing debt levels and revenue
designed by Precursor. At greater risk of bankruptcy, in the view of Mr. Cleland, are companies with
once-solid reputations like AT&T Wireless, Lucent, Qwest and JDS Uniphase. Any additions to the
bankruptcy fold could add to industry pressures created by concerns like Global Crossing, Williams
Communications and 360Networks, which, since filing for bankruptcy protection, have flooded the market
with assets that further depress the prices of goods and services.
A test of how market forces will deal with the growing heap of distressed telecommunications assets may be
seen in the flailing effort by Global Crossing's creditors to sell it out of bankruptcy. Those efforts continue,
after the decision last month by Global Crossing's initial suitors, Hutchison Whampoa of Hong Kong and
Singapore Technologies Telemedia, to withdraw from an agreement to acquire it.
Global Crossing's management said yesterday that it extended the deadline — originally set for this week —
by three weeks to give potential bidders more time to assemble offers. No concrete offer has yet materialized
for Global Crossing's network, which spans 100,000 miles across 27 countries.
Some analysts are now calling for a Darwinian approach, letting many companies fail as quickly as possible
without buyers' bailing them out at fire-sale prices. Such an outcome might improve the prospects for the
companies still standing.
"Let the ailing networks rot, let them mothball," said Gabriel Lowy, an analyst at Crédit Lyonnais Securities.
"We now know that the Internet and data traffic were overhyped. It's now time to sort out the survivors so
the recovery takes a few years instead of many years."
Copyright 2002 The New York Times Company |
