Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Global Crossing - GX (formerly GBLX) -- Ignore unavailable to you. Want to Upgrade?

To: jopawa who wrote (12109)	6/20/2001 1:49:21 PM
From: jopawa	Read Replies (1) \| Respond to of 15615

An Ongoing Qwest for Dominance By Cody Willard Special to TheStreet.com 6/20/01 1:39 PM ET In the old world, before The Breakup, AT&T (T:NYSE - news - commentary) owned and operated all three segments of the telecommunications network. However, the government broke up Ma Bell into a long-haul (long-distance) company, now known as AT&T, and several metro/access companies, a.k.a. the Baby Bells. For several years, companies fit into one of two categories: long-distance, like AT&T, Sprint (FON:NYSE - news - commentary) and WorldCom (WCOM:Nasdaq - news - commentary), or local, like Verizon (VZ:NYSE - news - commentary), SBC (SBC:NYSE - news - commentary) and BellSouth (BLS:NYSE - news - commentary). Consumers had to buy voice services from two different companies. Then came along the Telecom Act of 1996, and suddenly, long-distance companies were able to offer local services and local companies could offer long-distance services. Start-ups could offer both services, too. Meanwhile, the Internet was taking off, and the volume of data on the network became a hopeful new source of revenue for everyone. In the ensuing gold rush, anyone using the words "advanced communications" could get their hands on billions of dollars from the capital markets. The markets were particularly enthralled with companies that did two things: Expanded geographically the quickest. Thus, companies like Winstar and Covad sought to build a presence in every major metro in the U.S. Focused on specific segments of the network. Thus, companies like Global Crossing and 360Networks sought to cover the far reaches of the globe with fiber. Level 3 (LVLT:NYSE - news - commentary), in particular, built its entire business model on a vision of this network segmentation. The company envisioned a world where many, many start-ups would be offering services and would need vast amounts of long-haul capacity over which to send their traffic. But, alas, the land-grab that most start-ups went on left them overleveraged, both financially and pragmatically. Building an access network is complicated enough without trying to build 20 or 30 networks simultaneously across the country. And now the access start-ups have pretty much all faltered. Finding the Value I must have said this a million times, but I'll say it again: The greatest value of the telco network is in the hard assets of the access segment. It's the physical connection over which the traffic flows that is key. Long-haul has been built out by many companies, and even if there's no glut, it's very difficult to differentiate oneself in the long-haul. The assets simply don't have the same value when seven different companies have similar assets. It's the same with the metro buildout that's going on right now. These guys simply end up commoditizing themselves, as multiple carriers will inevitably offer the same services from carrier point-of-presence to carrier point-of-presence. Despite the markets' blindness, not everyone lost of sight of the value of the access assets. While Level 3 and Williams were out borrowing billions upon billions to expand their networks, Joe Nacchio took the market cap with which his long-haul business had been rewarded, and he bought one of the Baby Bells. That single decision, more than anything else, is why Qwest (Q:NYSE - news - commentary) will be the biggest winner of all the long-haul network builders. Qwest took over those access assets when it bought U S West, and with all the access assets, it also got the end-users of those assets: the customers. Those customers are generating billions of dollars in cash flow for Qwest now. Issues at Hand The scathing Morgan Stanley report about Qwest's accounting methods raises a couple of potentially damaging issues. The two real issues -- the write-down of adjustments of purchase price allocation and particularly the software cost capitalization questions -- are troublesome and will need to be addressed by Qwest before any concrete conclusions can be drawn. The other two points in the report are nonevents. Qwest will most certainly have to deal with the value of KPNQwest. But I don't believe the company has anything undisclosed here. It simply will have to write down the value of its investment probably sooner rather than later. The biggest problem facing Qwest now is a credibility issue. The company continues to be bullish in the face of so many of its competitors' talk of tough times. Even the other incumbent local exchange carriers, or ILECs, have guided numbers down, and they talk of slackening demand. However, U S West was the worst-run and most poorly maintained network of all the Baby Bells and thus has the most potential to improve. This improvement of U S West's operations and network is precisely what Nacchio has been so focused on. It's the reason U S West can continue to grow revenue and earnings despite a slackening of general demand. Will Level 3 be able to service all of its debt and eventually be the giant long-haul company that it wants to be? What about Global Crossing or Williams? From an investor's standpoint, it doesn't matter. If you want to own a telecom service provider, buy an ILEC. SBC, Qwest, BellSouth and Verizon have won this war, and it'll be many years before anyone will have the guts -- or the capital -- to take them on again.