Here is the broadband carrier article in full text. Interesting estimate contained therein suggests 3 to 4% of all internet traffic is Napster.
Broadband Carriers May Face
Shakeout Amid the Tech Slump
By Mark Heinzl
Dow Jones Newswires
For big phone and data carriers, getting the money to build high-capacity fiber-optic networks crisscrossing the globe was the easy part. Now, the hard part is finding enough paying customers to produce profits.
Over the last few years investors eagerly threw tens of billions of dollars at a group of young companies laying fiber cables across the Americas, Europe and Asia. But these companies haven't been spared in the recent tech bloodbath, as many of their stocks have crumbled to well below half their levels of earlier this year.
Investors' amazement over the promise of fat pipes delivering Internet music, video and other applications has been replaced by a sober analysis of the network operators' ability to generate substantial revenue and earnings and pay back their often huge debt.
"There is an incredible amount of capacity coming on as these networks complete their buildouts" over the next six to 12 months, says John Page, who follows these so-called broadband carriers as a senior analyst with Moody's Investors Service in New York. Whether the flood of new capacity will swamp demand or be rapidly absorbed by new Internet applications is "a complete conundrum" the industry is grappling with, he says.
Many of the companies building large fiber-optic networks are running substantial losses even as their revenue grows quickly. These companies -- which include Global Crossing Ltd., Hamilton, Bermuda; Level 3 Communications Inc., Broomfield, Colo.; 360networks Inc., Vancouver, British Columbia; and Williams Communications Group Inc., Tulsa, Okla. -- are targeting big corporations, other big data and phone carriers, Internet service providers and regional phone companies as customers. They generally offer bandwidth, or data-carrying capacity, as well as related network services such as computer-server management.
Some fear the massive installation of fiber-optic networks around the world has haunting similarities to the dawn of the railroad age over 150 years ago. Investors lined up to finance upstart railroad companies laying track every which way, often overlapping with competitors' lines or going places with no economic justification, while share prices in the new companies skyrocketed. Those shares later plummeted as many railroad companies collapsed in the 1870s, unable to pay back their obligations. The industry survived, of course, but first endured a painful contraction.
Adding to the skeptics' concerns are signs that Internet traffic may not be growing as robustly as some believe. A recent survey by PricewaterhouseCoopers found the average U.S. Internet user was online 4.2 hours a week this year, down from 5.3 hours last year. The firm cited "the medium's maturity."
Further, while industry analysts and executives often state that Internet traffic is doubling every three or four months, a researcher at AT&T Corp.'s research division disputes that claim. Andrew Odlyzko, head of mathematics and cryptography at AT&T Labs, says his recent studies of commercial and academic networks indicate traffic is doubling about every year. That is still substantial, but not the furious pace many believe.
"I suspect there will be a shakeout," among broadband carriers, Mr. Odlyzko says. Rapidly improving optical technology means a single fiber strand can handle ever-increasing amounts of data, reducing the need for carriers to have many fiber lines, he notes. And although Mr. Odlyzko believes that over the long term there will be enough bandwidth-hungry applications, such as downloadable movies, to put supply and demand of bandwidth roughly in balance. He says the "big question" for the nearer term is "will there be enough revenue?"
"At some stage Wall Street will start asking: Can you really pay back the investment?" he says. Worries are already increasing: Yields on debt issued by some broadband carriers have climbed several percentage points in recent months, recently reaching 15% and higher, as prices on the securities have fallen.
Meanwhile, prices for the broadband carriers' main product, bandwidth, are plummeting. Susan Kalla, a telecom analyst with the securities firm Bluestone Capital in New York, says she recently surveyed several bandwidth brokers and found prices for transmitting data between New York and London have sunk 45% over the past six months or so, and are forecast to drop a further 65% next year. "New carriers have lower cost structures than their predecessors, which allows them to break even on plummeting price, but for how long?" Ms. Kalla writes in a recent report, adding that she thinks the industry will undergo consolidation. "I think there's a lot more pain" to come for carriers, she says in an interview.
PSINet Inc. is one company that has already felt the pain. Shares of the Ashburn, Va., international Internet service provider have collapsed to below $1 from above $50 early this year. The company announced a wider-than-expected loss for the third quarter, and said it is seeking to sell assets and reduce capital spending. PSINet Chairman and Chief Executive Officer William L. Schrader said in a release, "Current market conditions are quite challenging, as the slowdown in Internet spending becomes more apparent every day."
Others are struggling as well. Shares of RCN Corp., the Princeton, N.J., residential broadband provider, continued their downward spiral last week when the company announced wider-than-expected anticipated losses and reined in its building plans. Shares of wireless broadband providers Teligent , Vienna, Va., and Winstar Communications Inc., New York, have also fallen this year amid continued losses.
Still, other players say the future looks bright. 360networks, for example, recently forecast cash flow from operations of $2.5 billion to $2.6 billion for next year, more than 40% above analysts' expectations, and cited "tremendous interest" in its network services. The news has done little for the company's stock price, however, which remains below its April IPO level of $14.
Carriers are betting that steadily increasing numbers of high-speed Internet users tapping into a host of high-bandwidth applications will eat up, and pay for, all the new bandwidth.
"The killer [application] that we're identifying right now is Napster" Inc., the online music exchange, says Ford Cavallari, executive vice president of Boston telecom research firm Adventis Corp. Napster alone accounts for 3% to 4% of Internet traffic, he estimates, and users often sign up for high-speed Internet access primarily for Napster. "All you need is a couple dozen [applications like Napster], and all of a sudden you have no bandwidth" excess, Mr. Cavallari says.
Napster's service, however, remains free of charge, and it remains to be seen what will happen if they begin to charge. Mr. Cavallari says he expects online music and movie services like Napster will evolve into successful pay-per-use businesses, as long as the quality is high. The popularity of Napster-like services is a key reason that Adventis, which had long predicted an oncoming bandwidth glut, recently changed its view. It is now projecting that the supply of bandwidth will be in line with demand.
Write to Mark Heinzl at mark.heinzl@dowjones.com |
