Interesting post on the Last Mile Thread. Message 15482682
Looks like things may bode well for ILECs in future. NHC is targeting ILECs.
Interview continues to speak to wireless and cable issues as well.
<SNIP>
Telecom's Future
Washington-based analysts see industry shifts in the U.S. and globally
An Interview With Scott Cleland and William Whyman ~ The Precursor Group is just that: an outfit dedicated to
identifying trends and issues in industry, technology and policy that will have an impact on telecommunications
and technology long before others make the connection. Even better, it's an independent research boutique, based
in Washington, D.C., international in scope, from which its institutional clients take away not only the most
informed analysis around but also the most unvarnished. Founded by a couple of insiders' insiders, Cleland and
Whyman, Precursor's work offers a perspective missing from much that passes as research, drawing on the team's
experience -- including international communications expert Rudy Baca -- in government and industry as well as
on Wall Street. We caught up with them last week for a sense of what's on the horizon under the new
Administration and where investors can expect to find opportunities.
-- Sandra Ward
Barron's: What, if anything, changes for telecom policy under this new Administration and Federal
Communications Commission?
Cleland: The Administration will be much more deregulatory, much more skeptical of industry ownership caps for
cable, broadcast and wireless. This is going to be a consolidation-friendly Administration and an
infrastructure-friendly Administration for both the local telcos, cable, and the wireless providers.
Q: When you say infrastructure friendly, what are you referring to?
Cleland: They are going to want to encourage deployment of the incumbent cable and telephone communications
infrastructure by getting out of the way and not microregulating.
Q: What else should investors be on the lookout for?
Cleland: The change in the chairmanship of the House Energy and Commerce Committee. That's a huge shift
because the prior chairman was blocking a majority sentiment to reopen the 1996 Telecom Act. New Chairman
[W.J. "Billy"] Tauzin [Louisiana Republican] wants to reopen the Telecom Act and modify it in a way that would
encourage the Bells to promote deployment of DSL. There will be House legislation this year. It is going to catch
many investors by surprise. It will pass quite easily, potentially overwhelmingly, sometime this year. That will
change the dynamic, and it will force the Bush Administration to respond. It will also force the Senate to respond.
It is very difficult for legislation to pass, and so investors should not necessarily expect the Telecom Act to be
revised this year or next. However, they should realize that the House will pass legislation, which will change the
tenor and change the mood of the sector.
Q: This is an acknowledgment that the Telecom Act of '96 was a failure?
Cleland: It is an acknowledgment that the Telecom Act is seriously troubled. The Telecom Act has proven to be a
lousy investment thesis. Investors generally interpreted the competitive thrust of it to mean the incumbents would
lose and the insurgents would win. Incumbents have taken almost everything that the FCC and the CLECs
[competitive local exchange carriers] have thrown at them and they have done just fine. The CLECs, meanwhile,
are code blue.
Q: Is this because of a failure to enforce the act, or a failure of business models?
Cleland: It was a failure of the economic premise of the Telecom Act. The Telecom Act assumed that local
competition could emerge. The Telecom Act was supposed to lower prices for consumers. It raised prices for
consumers. It was supposed to encourage innovation. It hasn't, at least with regard to the incumbents. It was
supposed to encourage deployment of advanced services. It really hasn't accelerated DSL deployment much.
Q: Why is broadband deployment such a problem?
Cleland: Broadband deployment is driven by distance from the existing network. To understand where deployment
will occur you have to understand the geography of existing deployment. Where is the telephone company's central
offices? Where is cable? Wherever that is, broadband is being deployed. There are three distinct markets. In the
large business market, almost all companies that want broadband already have it. In the residential market, only
6% of residences have it and about 73% of that is being provided by cable and about 26% is provided by DSL.
Interestingly, the small- and medium-business market is almost exclusively DSL and it is not getting deployed at
all. That's because small and medium businesses tend not to be downtown, they tend to be geographically
dispersed, and because they are dispersed, they have a very high demand for broadband. Yet they are the least
likely to get it. This is important and relevant because the small and medium businesses traditionally have been
one of the greatest sources of employment and economic growth.
Q: What's hampering the deployment? Is it simply the Bells refusing to cooperate with the CLECs?
Cleland: People think broadband deployment should just happen because they have been hearing that convergence
is wonderful and convergence is a good investment theme.
Whyman: DSL costs a lot more, takes a lot more time, and is operationally more difficult to do. That's on the
supply side. On the demand side, there haven't been a whole lot of great applications out there for which people
are willing to pay. We are talking about price points of $40, $50, $60 a month. What are the great applications?
There aren't a lot that exploit and use broadband. Most time is spent on communications applications such as
instant messaging. We are not seeing tons of very intensive video conferencing or streaming media, or things like
that. There is no killer ap on the demand side.
Q: Was DSL oversold?
Cleland: Clearly. The Internet and the dot.com phenomenon made people perceive that broadband was just around
the corner. And broadband required a reconstruction, a re-engineering, of our two basic networks: The phone
network had to be powered up to a higher bandwidth, and the cable network had to go from one-way to two-way.
In many places, the telephone plant and the cable plant are abysmal. And so -- this is another reason for the
industry's hangover -- in addition to going on a regulatory binge, it went on an investment-banking binge where an
enormous number of lousy business models got funded. Too many competitors got funded for a high-fixed-cost
industry.
Whyman: The cluster of industries around IT [information technology] made up 30% of all U.S. economic growth
from 1995-99. They represent roughly 10% of the economy, yet they contributed three times their size to economic
growth. IT investments rose to 46% of all capital equipment investment by 1999. That was unsustainable.
Q: Let's get back to the legislation to be introduced this year. What's the goal?
Cleland: The goal is to spur local telecom investment, to deregulate the local telcos for data. If there is going to be
something that pulls this sector out of its funk, it will be the Clydesdales that are the Bells. They are going to be the
big horses, the ones that do the major spending and the major deployment. One of the fallacies in the market that
led to the euphoria in the past was that competitors -- small companies and next-generation carriers -- could carry
the sector. Yet they were generating a minuscule percentage of the overall revenues. Telecom is the land of the
giants. It's scale. We don't have eight or nine or 10 auto companies or large steel companies or large aluminum
companies. The economics of telecom demands scale. Very few niche players are going to prevail long term. They
don't have the gross-margin capability to make it work.
Whyman: The whole incentive structure of the Telecom Act is problematic. Why would one company sell the tools
to its competitors to beat it in its own game? The Bells are being forced to do that by regulatory fiat. Surprise,
surprise, they did it haltingly.
Q: Are you guys completely writing off the CLECs at this point?
Cleland: Yes. As an industry model, the CLECs are not a very sound model. The standard investment-banking line
is that a few will survive. That's because a few have private investors who will continue to subsidize their lousy
business models. I am highly skeptical of the CLECs.
<end snip>
Take it easy,
Ger |
