From News.com...
Telecom players spend big, but win little
By John Borland
Staff Writer, CNET News.com
September 27, 2000, 11:50 a.m. PT
As the world's biggest telecommunications companies spend hundreds of billions of dollars on new technology, they
face a dangerous possibility: There might not be a pot of gold at the end of this particular rainbow.
From AT&T on down to the newest local network companies, telecommunications companies are in the midst of an
expensive shift to Internet-based technologies, wireless and data initiatives as the underpinnings of their networks.
Infrastructure spending for these networks has gone up by about 30 percent a year, as they see the traditional voice
business revenues wither in favor of data and wireless use.
A few analysts have crunched the numbers and are coming to the conclusion that the industry's investments and
realistic expectations of returns could be seriously out of balance, at least for the next few years.
The problem? The hard returns on these massive investments aren't materializing quickly. Already the data and voice
businesses are being made into commodities, with prices and revenues being driven quickly downward. Too many
companies are seeking investment capital to support too many networks, and this can't go on much longer, some
analysts say.
The market has attracted "too many companies spread too thinly," said Lehman Brothers analyst Blake Bath in a
recent report, laying out the potential imbalances in detail. The industry's return on revenues is at a miserable state,
and "we believe this situation will worsen before it gets better," he said.
Many on Wall Street agree. Across the board, telecommunications stocks are flirting almost daily with 52-week lows,
with the carnage concentrated in the long-distance sector.
Not all analysts are so pessimistic, however. Some caution that the huge investments made in times of technology
shifts are often slow to build back to ordinary return rates. But at the same time, the investments can ultimately
prompt entirely new--and wholly profitable--behavior by consumers.
"There has been investment in services that don't have proven rates of return," said Current Analysis
telecommunications analyst Jilami Zeribi. "But what (the pessimism) doesn't take into account is how innovative this
industry has been...We firmly believe that demand will catch up."
Lose some, lose some?
In a way, the industry is facing a classic damned-if-you-do, damned-if-you-don't investment decision.
It's critical for any company that wishes to remain competitive to upgrade to the latest Net-based, high-bandwidth
technology from the likes of Cisco Systems, Juniper Networks, Nortel Networks and Sycamore Networks, among a
slew of others, that will allow it to handle massive amounts of voice and data traffic more cheaply than old systems
did, according to analysts. Any company that stays with yesterday's technology will find themselves written out of
technology's history books, they say.
But the investment needed to keep up means tens of billions of dollars. In the past several years, access to capital
markets has been relatively easy and cheap, leading to many network start-ups funded by venture capital and IPO
cash.
That easy money is now drying up. Moreover, analysts say that the largest telecommunications players will likely
issue something like $75 billion in new stock by the end of 2001, driving out demand for smaller, riskier companies.
Nor is the return on the money that has been invested looking good, at least today.
Since 1996, industry capital spending has grown by an average of nearly 26 percent, according to Lehman Brothers.
Total revenue has grown just 10.5 percent.
That ratio is likely to take a sharp turn for the worse, as mobile phone companies are forced to spend tens of billions
of dollars next year for new wireless spectrum licenses, and install as-yet-unbuilt equipment for a new generation of
high-speed wireless Net access services. Lehman forecasts capital expenditure growth of a "staggering" 63 percent
next year, with revenue growth of just 13 percent.
Of course, any capital-intensive industry sees a lag time between investment and revenues. But some analysts are
increasingly saying that this lag time could stretch well into the future--a prospect that will likely cause considerable
pain in even the largest, most stable telecommunications companies.
Bulling ahead
The biggest companies in the industry say they're comfortable with their investment plans. Even from the depths of
stock lows, with investors questioning many of the companies' strategies, executives say it is critical that they invest in
the fastest-growing businesses such as data and wireless.
AT&T, for example, says it invested $13.5 billion in 1999, and is on track to invest between $13 billion and $14 billion
this year. The company's total revenues will be no less than last year's, a spokesman said.
"We're not trending as the (pessimism) is suggesting," said spokesman David Caouette. The company has
nevertheless scaled back its profit expectations, based on disappointments in its business services unit and falling
returns in the long-distance business.
Verizon Communications says it too is very comfortable with its investments, noting that revenues in its data services
business are growing by 30 percent a year. The company is investing a total of $18 billion in its infrastructure this
year.
"We've invested in the fastest-growing areas in communications," said spokesman Dave Frail. "We feel pretty good
about putting dollars there."
While the giants are worried about stock price, smaller companies are worried about their very survival. Several
younger network companies, such as PSINet and US LEC have seen their share prices tumble after profit warnings
and news of financial insecurity. Denver-based ICG Communications has been particularly hit hard, seeing shares fall
from almost $40 to below $1, and losing much of its top management as a result.
More mergers
What can the companies do make it though the dry patch while waiting for the returns and demand to catch up to
their investment? More of the same, but it won't be pretty, many analysts say.
The market has too many networks for the capital markets to support through a period of low profits. That means
more mergers, as struggling small companies sell themselves to the giants or to companies just another rung up on the
food chain.
The giants themselves will likely be engaged in more merger activity as they try to align themselves best with the
New World. Long-distance companies like AT&T and Sprint have seen revenues drop well below early estimates.
Sprint is still reeling from the collapse of its merger with WorldCom, while AT&T is reportedly considering mergers
and other combinations.
"They're already looking into that crystal ball and trying to get the best economies of scale they can," said Eliot
Hamilton, senior vice president of research for the Strategis Group. "They can see the handwriting on the wall." |
