Telecom carriers: the next generation [Nice ASND customer list]
cbs.marketwatch.com
By Jeffry Bartash, CBS MarketWatch
Last Update: 8:24 PM ET Oct 6, 1998
NewsWatch
WASHINGTON (CBS.MW) -- Investors looking for a younger, more
energetic telecommunications company than AT&T or Sprint have plenty
of choices these days.
Several companies hold out plans to build networks of the future -- ones
that can move data, video, sound, even whole computer applications, just
as quickly as traditional phone carriers transmit voice today. And at far
cheaper prices, to boot. But while they exhibit grand visions of the future,
most have little to show, for now, in the way of profits and revenues.
The companies making the biggest splash so far: Qwest International
Communications Inc. (QWST) and Level 3 Communications (LVLT).
Both are run by brainy executives who've spent time in the higher reaches
of the companies they're now trying to topple -- Qwest boss Joe Nacchio
at AT&T, Level 3 chief Jim Crowe at WorldCom. Both have strong
financial backing and the nearly universal adulation of Wall Street. And
both are rolling out nationwide digital networks based on Internet
Protocol packet switching, a far superior method of sending information
than the old circuit-based technology used by established long-distance
providers.
"Basically, companies like Qwest and Level 3 are valued as much on their
idea as on their infrastructure," said Boyd Peterson, a telecom analyst at
the Yankee Group, a research firm in Boston.
Qwest for the best
Denver-based Qwest is probably in the best position at the moment,
though analysts caution that the industry is young (barely more than a year
old) and subject to lightning-fast change.
Although it only had $697 million in revenue in
1997, Qwest earlier this year managed to pull off
the acquisition of LCI International, with $4.4
billion in annual sales, to become the nation's
fourth-largest long-distance provider. To help
finance construction of its 16,000-mile network,
Qwest sold rights to surplus capacity to GTE
(GTE), Frontier (FRO) and MCI WorldCom
(WCOM) for more than $1 billion. A few months
ago, the company struck a deal under which US West (USW) and
Ameritech (AIT) were to market Qwest's long-distance services to their
local-service customers.
Though the courts recently struck down that arrangement as a violation of
federal rules banning Baby Bells from providing long-distance service, it
certainly is exhibit A of the gusto with which Qwest is challenging the big
boys.
Qwest shares fell 13/16 to 31 3/16 Tuesday.
Level 3 has not been as aggressive in marketing its products, but it's also a
strong contender. Founded by James Crowe, a former board member of
Qwest (don't invite him and Joe Nacchio to the same party), the Omaha,
Neb.-based company is planning to erect a 23,000-mile network
extending to three continents.
Like Qwest, Level 3 has sought out innovative means of funding, getting
telecom visionary Craig McCaw and two of his offspring, Nextel (NXTL)
and NextLink (NXLK), to fork over $700 million for 25 percent of the
capacity on Level 3's long distance U.S. lines. The company also raised
$2 billion through a junk-bond offering in June, at the time the largest such
issue ever.
Perhaps just as important, Level 3 in April acquired XCom Technologies,
an obscure but important company that developed a method of making
packet-switched phone calls connect just as quickly as traditional
circuit-based ones. That gives it an edge over Qwest, which uses a
clunkier process that results in slower connections.
While it builds its network, Level 3 has struck a deal to lease space on
Frontier fiber lines.
Level 3 had $332 million in revenue in 1997.
Oligarchs vs. opportunists
Aside from Qwest and Level 3, other next-generation carriers
commanding attention include NextLink, IXC (IIXC), Williams Networks
and Frontier. NextLink is focusing on local service to businesses; IXC
and privately owned Williams are concentrating on the wholesale market.
While it seems as if these companies are all in competition for a piece of a
finite market for telecom services, that's not necessarily the case. Most
have arrangements with each other to lease capacity -- what analysts call
"co-opetition" -- and top executives are adamant that the demand for new
bandwidth will soar and new uses for it will arise.
The bigger battle, analyst David Cooperstein of Forrester Research has
predicted, will be between the "oligarchs" (AT&T, MCI WorldCom and
the Baby Bells) and the "opportunists" (such as Qwest, Level 3,
NextLink).
The reigning telecom giants aren't going to sit on their behinds while the
young upstarts grow, but the AT&Ts of the world have stockholders to
please and earnings targets to meet, and they're trapped by a reliance on
old, circuit-based technology, on which they have lavished billions of
dollars. It'll take longer for them to build new packet-switching networks.
"They have to serve their existing customer base, their existing
technological base," Cooperstein asserted.
Up stream?
The opportunists, meanwhile, are fast at work building their high-tech
networks. That would drive down prices, potentially allow them to steal
the most lucrative business customers from the oligarchs, and undercut
their revenue streams even as the giants shift to doing battle with the
upstarts.
Even if the upstarts fail to break the grip of the telecom giants, Wall Street
analysts speculate, the upstarts will possess tremendously valuable
capacity and will likely become ripe takeover targets. Either way, they
figure, investors win.
The Yankee Group's Peterson, however, is not entirely convinced. "All of
this is highly speculative. It's a complex industry. ... There's no easy
answer for investors," he said. "In the end, you are going to be judged on
the ability to grow revenue streams."
Jeffry Bartash is a reporter for CBS MarketWatch.
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