This is a very interesting article. the company Agere stands out. CIEN's Nettles quoted.
Partying While the Phone Business Burns
By Tiernan Ray
July 6, 2001
THEY CAME, THEY SAW, they said some amusing things. Last month, I took a trip down to Atlanta, to the airless rat warren known as the Georgia World Congress Center, where with 70,000 others I traipsed by the booths of 800 networking-equipment vendors showing off the latest gizmos for improving the phone network. And do you know what? Although the S&P Telephone index is off 11.7% year-to-date, and 9.5% in the last 52 weeks, delegates to the biggest phone-company trade show in America, Supercomm 2001, seemed genuinely giddy. Never mind that some phone stocks are down as much as 90% or more since January; to hear conventioneers tell it, the next few years could be some of the brightest in recent memory for these companies. Sure, there was a little gallows humor. During a panel talk on next-generation networking technologies, Dr. Pat Nettles, the chief executive of equipment vendor Ciena (CIEN), quipped that if the Telecommunications Industry Association, the trade body sponsoring the show, really wanted to fix the phone business, it might have invited four fund managers to the panel instead of four Ph.D.s.
But the most amusing comments came from the man inside the Beltway who holds the keys, the newly crowned Federal Communications Commission Chairman Michael K. Powell. Powell vowed that the FCC would cut the Baby Bells some regulatory slack. "We were charged [by Congress] to make sure the Bells were effective wholesalers, and that's all," said Powell. The implication? The Bells merely have to open their networks to rival local carriers; they don't necessarily have to demonstrate that those rivals amount to effective competition in their markets before they're allowed to venture into long distance. Mostly, though, Powell was a cheerleader on stage for half-an-hour. The phone business is "on a great journey," he said, as it turns into an Internet business. And Powell encouraged weary telco execs: "Sometimes settlers fall victim to perils along the journey," he observed, but "nimble entrepreneurs will find the path to success."
The delegates trolling the halls at Supercomm hardly needed Powell's pep talk. Having made a killing regardless of the market's recent travails, venture capitalists and telco execs were talking more like chastened teenagers who knew they'd gone a bit too far during last night's all-night rave. The party may be more subdued now, said one of them, Ellen Hancock, CEO of Exodus Communications (EXDS). But it's far from over. "Just as Web surfers are not going to give up AOL because they can no longer shop at Pets.com, businesses will not stop investing in networking technology," she reassured the crowd.
None of this tambourine-shaking would convince anyone who's been skeptical about the phone companies as an investment that the good times are here. I've never recommended phone-company stocks in this column, mainly because I've always felt that Qwest Communications (Q) and Verizon Communications (VZ) and Genuity (GENU) and Cable & Wireless (CWP) and Williams Communications (WCG) et al., are all trying to figure out how to put Humpty Dumpty back together — meaning Ma Bell. None of them has come up with a solution. And as Chairman Powell pointed out, these companies are in the throes of tremendous technological change. Tremendous change is not usually a period during which old companies get their act together; it's usually when they become more confused. In the weeks since I attended the conference, Williams announced layoffs of up to 10%, WorldCom (WCOM) revised its 2001 profit outlook downward by about 10 cents, and Ernest Hollings, newly crowned head of the Senate Commerce Committee, inaugurated some grim proceedings against the bill proposed by Reps. Billy Tauzin (R., La.) and John Dingell (D., Mich.) meant to free the Bells to compete in long distance.
Actually, what Supercomm convinced me of is that once again, the most money will be made, not by the folks running the phone network, but rather by the ones who are building it — namely the networking-equipment vendors that have extensive intellectual property and therefore barriers to entry in their markets.
But first, here's how I think things will play out for the phone companies. The Bells, now freed of the competition that made them consider DSL, will probably lapse back into sloth. Or they may seize the opportunity of their newfound freedom to go on a merger binge with long-haul carriers, or roll out DSL in earnest, or both. SBC Communications' (SBC) Chairman Ed Whitacre predicted at Supercomm that he and the other Bells are "about to make broadband connections to the Internet the standard product we sell to our customers." We'll see.
But I'll tell you something: DSL isn't the new stuff. It's a decades-old digital-modem technology. Ditto cable modem. There may yet be billions to make off selling millions of lines in this still-young broadband market for the carrier with the right mix of services and pricing. But for the tech investor, it's better to seek the new.
Third-generation mobile-wireless networks are new, and there's probably a good haul for the carrier that manages to hook up 56 kbps or better service to the right kind of hand-held device. My money is on the phone companies using GSM technology and its successor, WCDMA, including carriers in this country such as Voicestream and the BellSouth (BLS) joint venture Cingular Wireless. However, it's still possible that carriers like Sprint (FON) and Verizon, which are pursuing a competing technology, CDMA 2000, could make an end run around them. Some of the things that Nextel Communications (NXTL) is doing with Motorola's proprietary iDEN network are intriguing, too. Fixed broadband wireless, which I wrote about a month ago, is not new either, but like DSL, it will probably milk the unmet demand for high-speed data, provided companies that still have cash are willing to take a chance on the technology.
What's really intriguing is unlicensed wireless technology. These are wireless networks that operate without the private, costly licenses the government auctions off. Starbucks (SBUX) is planning to install such technology in its stores this year, for the coffee generation to laptop-away. But you could imagine individuals putting up base stations around neighborhoods, for community Internet access. Such a grassroots wireless-networking effort could be similar to the way that UUNet kicked off the race to provide dial-up Internet access 10 years ago. (UUNet is now the Internet-services arm of WorldCom.) It's not clear whether the interference-prone bands of unlicensed frequencies can compete with the very rich licensed bands bought by XO Communications (XOXO) and the rest at a cost of billions of dollars. But Chairman Powell could help the wireless homesteaders by freeing up some much-needed spectrum.
All these high-speed access technologies, however, pale beside the really new stuff, which is fiber optics. As you may have heard, billions have been sunk into the ground laying fiber, and some companies may themselves end up in the ground for it. But the technology involves real innovation. On the show floor at Supercomm, a company called Atrica of Santa Clara, Calif., was showing off router equipment that will transmit 100 billion bits per second over fiber, 10 times the fastest pipes in today's fiber links. The chip spinoff of troubled Lucent Technologies (LU), Agere Systems (AGR.A), was almost everywhere on the show floor, having built chips or circuit boards or both for not only Atrica but almost every other young equipment vendor there.
Contrary to what you may have heard, a strand of silica glass carrying 100 billion bits of data every second is not the same thing as a steam locomotive. And yet that's just the sort of analogy both the New York Times and The Wall Street Journal made a couple weeks back in comparing the telecom mania of the last few years to the railroad bubble of the late 19th century. I think these folks are missing the genuine technological breakthroughs being accomplished by companies like Atrica and Agere. True, in a tough tech market, it's going to be a lot harder to sell equipment of this kind. Nonetheless, I think it's the cutting-edge equipment that the surviving phone companies will need as they try and figure out the magic business model in the next few years. |
