Wall Street Transcript
Enhanced Communications a key topic of Wall Street Transcript Technology Issue
Thursday September 15, 12:00 pm ET
67 WALL STREET, New York--September 15, 2005--The Wall Street Transcript has just published a special edition for the 2005 Kaufman Bros. Technology Conference. This report offering a timely review of the technology sector to serious investors and industry executives. The 165-page document features expert industry analysis in the major sectors of technology with 7 research analysts, and a unique insight into the industry through in-depth interviews with top management from 43 firms. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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Topics covered: Homeland security - Pentagon resources - IT spending - Off-the-shelf tech products - On-site software licensing - CLECs - Consumer demand in communications - Cable TV - VoIP - Sarbanes-Oxley compliance - Broadband penetration - EMS and embedded systems industries .
Analyst Interviews with Kaufman Brothers analysts: National & Homeland Security Technology: Michael French; Communications Software: Peter Jacobson; Enhanced Communication Providers: Ari Moses; Enterprise Communications Equipment: Manuel Recarey; Internet & Digital Media: Sameet Sinha; Security Software Applications: Alan Weinfeld; EMS & Embedded Systems: Brian White.
CEO Interviews (average 2,500 words): Top management from 43 sector firms examine the outlook for their firm and sector. Firms interviewed include: RCN Corp., Ace*Comm Corp., Aladdin Knowledge Systems, ARRIS Group, Avaya, AXS-One, Brightpoint, C-Cor, Did-it.com, ECI Telecom Ltd., Flextronics International, Floodgate Entertainment, Force 10 Networks, F5 Networks, GeoTrust, Gigabeam Corp., HouseValues, iBasis, ILD Telecommunications, InfoSonics Corp., InfoVista SA, Intervoice, Inter-Tel, Intrado, Lightbridge, Massive Incorporated, MicroMuse, MICROS Systems, Mobius Management Systems, Multi-Fineline Electronix, OPNET Technologies, Performance Technologies, Plantronics, RAE Systems, Raindance Communications, Sonus Networks, SRS Labs, SSA Global Technologies, Talk America Holdings, Time Warner Telecom, VASCO Data Security International, Wipro Limited and WorldGate Communications.
In the following brief excerpt from the 165 page report, Ari Moses discusses surviving CLECs and other focused network providers that complete with established networks, and also provides an outlook for investors.
TWST: As you look at this space, where are the opportunities?
Mr. Moses: Over the last several years, the industry has gone through a real shakeout. Right now, you have got a lot of companies that are still public, but small, that have been under the radar, that were highfliers back in the telecom boom early in the decade. People have written them off, ignored them or just weren't paying attention. And some of these companies are now leveraging the fact that they survived or leveraging the money they spent several years ago. So they now have unique infrastructure and unique assets that others today couldn't afford to replicate because the capital market is different today than it was several years ago; the access to the capital to invest has just changed. So you have these companies that are re-emerging.
TWST: What are some of the things that they put money into that are now valuable?
Mr. Moses: For example, two of the companies that I cover fall under the old label of CLECs, the competitive local exchange carriers. I am currently not defining either of them as a CLEC largely because I think that term just has a negative connotation to it. The two companies are Covad Communications (DVW) and Time Warner Telecom (TWTC). Both of them spent the money several years ago to build out networks, which is becoming a unique asset, and not just networks, but national footprints, which is also very rare. You have guys that have regional footprints, various other CLECs that have regional footprints, but what you don't have is a lot of national providers.
The three really that can be talked about are Covad, Time Warner Telecom, and XO Communications (XOCM). Again, none of them has a full nationwide network. In fact, there really is no such thing, but they have probably the most extensive networks. These companies are leveraging their networks and their footprints to deliver a lot of value both to customers and to partners. And most important, these assets, as I said, can easily be replicated. Covad has a presence in 2,052 central offices around the country that it has built up over the last 10 years. A competitor today cannot easily come in and replicate that. Now, there are debates today as to how valuable network is. Some people say network is no longer necessary because with voice over IP providers, you have providers now that are offering services without having a network, and therefore, you don't need it. I would actually argue that it's the opposite. The more of those providers you have, the more important the network becomes. At the end of the day, the minutes and the voice have to go someplace. It has to be carried on someone's network. Yes, you don't have to own that network to be the provider, but the person who does own that network is very well positioned to benefit from all these other players emerging.
TWST: As you look out at the industry, is this the trend that you see going forward?
Mr. Moses: Yes. I see these companies that have them are recognizing the need for them and the value of them. So, for example, both Covad and Time Warner Telecom have signed agreements with what will be the combined SBC/AT&T entity. What the agreement says is that, post-merger of that entity, they will have a relationship going forward for supporting out-of-region services. SBC (SBC) has stated, "We want to be more competitive out of region," but they don't have local facilities out of region, local assets, local network out of region. In their region, they have very deep network. AT&T (T) has an extensive national network, but they don't have the local, they can't terminate all the way to the customer. Therefore, you need partners to help you do that. Time Warner and Covad are both partners to that, Time Warner more on the enterprise and business marketplace, Covad more on the residential and the small business marketplace. MCI/Verizon, they don't have any such stated agreement with them, but there is certainly the potential for that because MCI (MCIP) and Verizon (VZ) are also going to need out-of-region facilities. MCI has a relationship, I believe, with both those entities, and they are going to need that as well. So they may pursue it. It is unlikely that MCI/Verizon will go to SBC/AT&T or vice versa to get local services. They are going to be competitors. If they are competing, they'll not be likely to share with each other. And therefore, these neutral third-party network providers become very well positioned to assist. By the same token, they are both potentially takeout targets as well, because some of these providers may say, "Hey, we need the network. We need to buy this network, we can't afford the capital or the time to build it. So, why don't we just buy what's out there?"
TWST: As this goes on, does this continue to put pressure on pricing across the board for a while?
Mr. Moses: Pricing is, I think, at a real transition point here because of what you've had over the last several years. Pricing also becomes very difficult to talk about in a general context because you've got pricing between carriers. So you've got minute-type pricing, then you've got consumer pricing, then you've got pricing for all the various services, which is driven by different dynamics. One of the big questions with all these mergers going on becomes full competitive and anti-competitive. In some ways, the big mergers are argued to be anti-competitive because now the power of course comes to be in the hand of a single provider instead of multiple providers.
On the other hand, when you start bundling services together, these companies are able to offer discounted pricing to consumers that they weren't offering or couldn't offer before. A prime example there in the marketplace right now is Cablevision (CVC) with their $90 Triple Play offering. They offer you $90 a month voice, video and data, and the way they describe it is $30 for voice, $30 for video, $30 for data. I actually like to think of that as $45 for video, $45 for data and free voice. The reason for thinking of it that way is voice can by argued to be an application, a data-based application. But whichever way it's thought about, the fact is that two years ago you could not get those three services for $90 anywhere, and suddenly you can today. And so, in a way, I think the providers won't see so much pricing pressure in the sense that, on any individual service, their prices may fall, but the aggregate revenue per customer starts stabilizing and/or going up because they start selling more to the customer. And from a consumer perspective, I end up getting the same services that I have today, I end up getting a discounted rate going forward. The difference becomes I am giving all that money to a single provider and not dividing it among multiple providers. So you can actually benefit both the consumer and the provider.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 165-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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