From the Washington Post.........
Telecom's Disconnect
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By Robert J. Samuelson
Wednesday, February 27, 2002; Page A23
The recession, say most economists, is over or soon will be. Whether or not they're correct, one giant sector remains flat on its fanny: telecommunications. Hardly a day passes without more bad news. In January Global Crossing -- a big Internet network -- declared bankruptcy. Shipments of cell phones dropped 5.1 percent in 2001. WorldCom and Qwest are both struggling with lowered debt ratings. Last week Ciena -- a major equipment manufacturer -- reported that sales for the past three months were 54 percent below the same period last year. Its forecast for the next three months is a 76 percent decline.
One response is political: the Tauzin-Dingell bill, named after its sponsors, Reps. Billy Tauzin (R-La.) and John Dingell (D-Mich.). It promises a telecom revival by encouraging the wiring of homes for high-speed Internet services. The bill is hugely controversial, because it favors some telecom companies over others. The House debates the legislation this week, but even if it becomes law, it won't single-handedly resuscitate this industry.
The telecom sector subdivides into two parts: carriers -- companies such as AT&T, WorldCom, AOL Time Warner, Verizon -- that transmit voice, cable-TV and data signals; and manufacturers -- Nokia, Nortel, Ciena, Lucent and the like -- that make cell phones, fiber cable and network equipment. Both face two problems.
The first is glut. Because communications traffic isn't growing as rapidly as expected, many carriers overexpanded and can't pay their bills. After the Telecommunications Act of 1996, which sought to encourage competition, telecom carriers borrowed immense sums. From 1998 to 2000, debt rose $320 billion, report Thomas Duesterberg and Jeremy Leonard of the Manufacturers Alliance/MAPI, a trade group. Carriers that can't service their debts are toppling like dominoes. Global Crossing alone borrowed $12.4 billion to build a fiber-optic network connecting the United States, Europe, Asia and Latin America.
No one knows the glut's size. Based on a survey of 20 carriers, the consulting company RHK estimates that 34 percent of the North American communications network is being used, says Melanie Swan of RHK. But this figure covers both voice and data. The glut is concentrated in long-distance Internet networks.
The basic mistake "was to assume astronomical and unrealistic growth rates for Internet traffic -- the mythical 'doubling every three to four months,' " says Andrew Odlyzko, director of the Digital Technology Center at the University of Minnesota. He thinks that Internet traffic -- measured in data flows, not dollars -- is doubling every year. By contrast, a doubling every three months would mean that traffic increases annually by a factor of 16. A company believing a projection like that would have vastly overexpanded.
Less noticed is the industry's second problem: mounting costs to consumers. They are buying so many telecom services that the total expense is beginning to bite. This means it's harder to sell new services and people are cutting back some of the old. Anyone with a typical set of services also has a hefty bill. The table below shows average household payments in 2000 for a land-line phone (local and long distance), a cell phone, cable TV and Internet dial-up. The figures come from the Federal Communications Commission and industry sources.
Monthly
Annual
Local Phone
$35
$420
Long Distance Phone
$18
$216
Cable TV
$38
$456
Cell Phone
$45
$540
Internet Dial-Up
$22
$264
The total is $1,896. Ouch. People economize. More long-distance traffic is diverted to cell phones (with flat monthly fees or high allowances for nationwide calling) and e-mail. A recent USA Today/CNN/Gallup poll found that 18 percent of cell phone owners regard it as their main phone. Some are canceling regular phone service. In 2001, Verizon lost almost 1.5 million normal phone lines, a 2 percent drop.
Inevitably, telecom carriers have reduced investment. They can pay for investment only by borrowing, selling stock or relying on cash flow (after-tax profits plus depreciation). But it's hard or impossible to borrow and sell new stock -- and profits are dropping. In 2001, operating profits from AT&T's consumer long-distance business declined 29 percent, from $6.9 billion to $4.9 billion. Lower rates, more competition and diversion to cell phones and e-mail have devastated the long-distance business. Last year, AT&T's long-distance revenue from consumers was nearly 40 percent lower than in 1996.
Salvation seems to lie in more "broadband" Internet lines -- offering faster connections -- to homes. By mid-2001, almost 8 percent of households had high-speed cable-modem or DSL connections, reports the FCC. Although that had doubled in a year, the Tauzin-Dingell bill assumes that growth suffers because FCC rules discourage local phone companies (Verizon, BellSouth, SBC and Qwest) from selling DSL services. The assumption is wrong. The rules may or may not make sense, but they're not crippling broadband. Customers simply wonder whether the extra cost ($20 to $40 a month) is worth what the Internet offers.
During the boom, Americans thought new technology offered only bright promises and high profits. In reality, it also creates huge uncertainties, miscalculations and losses. Perhaps an economic recovery has started, but the boom's lingering aftereffects counsel against premature celebration. Indeed, telecom's plight is an extreme case of a common condition: Lots of American companies have huge debts, ample unused capacity and cloudy sales outlooks. Hold the champagne.
© 2002 The Washington Post Company |
