A telecom hangover ...that won’t go away
Big borrowing, big spending and now big debts going unpaid
Infrastructure building, such as laying fiber optic cable, was an expensive venture for telecommunications firms, some of which have run into financial trouble in recent years.
By John W. Schoen
MSNBC
March 15 — After nearly $2 trillion of investment, the build-out of the information superhighway has run out of gas. The mountain of money invested by wannabe global telecom providers continues to go up in smoke. Though the smaller upstarts were first to pull the plug, major carriers like Global Crossing are now hitting bankruptcy court. And analysts say it could be years before the industry shakes off its debt hangover, absorbs a glut of capacity and begins to grow again.
NOT SINCE THE savings and loan debacle of the 1980s has so much capital been destroyed by overzealous investment.
Like the S&L mess, the telecom boom was fueled in large part by Congress, which enacted the Telecommunications Act of 1996 to change the rules of the telecom game and promote competition. The idea was to encourage smaller companies to take on the established giants like the Baby Bells and long haul carriers like AT&T and Sprint. But when dozens of would-be global players jumped in, there were just too many telecoms chasing too few customers.
From 1996 to the present, the telecom industry borrowed some $1.2 trillion from banks and another $630 billion through bond sales, as investors eagerly snapped up the stocks and bonds of little companies with big plans — names like XO Communications, McLeodUSA, Winstar, PSI Net and 360 Networks. Billions more were lent by equipment makers and other vendors.
But all that borrowing created huge interest payments that, it turns out, now can’t be covered by revenues. Despite heavy investment in everything from fiber optic cables to state-of-the-art data centers — most newcomers to the global telecom stage have become roadkill on the information superhighway.
As those shiny new assets are auctioned off in bankruptcy courts, they’re going for pennies on the dollar — when there are takers. Analysts say the unwinding could take years.
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“I think we’re only in the third or fourth inning of this game,” said Charles Ullrich, a telecom analyst at ABN Amro Asset Management. “A lot of companies have just started to go through the restructuring process and have just started to get bids for assets.
Those assets were bought during a roughly $500-billion capital spending spree that began in 1996. But heavy start-ups costs turned out to be just the beginning; signing up enough customers to break even took a lot more cash than expected.
Now, with the dot-com bubble burst and the unwinding of the telecom industry in full swing, new cash needed to keep money-losing providers afloat has dried up quickly, according to Susan Kalla, a telecom analyst at Friedman Billings and Ramsey.
“The banks have rolled up the welcome mat to telecom companies, and many of these companies are still in the infancy stage,” she said.
To add insult to injury, price wars have slashed rates and revenues generated from selling bandwidth have plunged. Network capacity that cost $100 in 1991, for example, sold for $1 by the end of the decade, according to Merrill Lynch. So even as overall demand grows, revenues are shrinking.
But demand hasn’t grown as fast as expected. The recession hasn’t helped. But phone traffic has also been cut, for example, by the rapid growth of e-mail — which takes up a fraction of the capacity needed for voice calls, and thus generates less revenue. Cheap, long distance wireless plans have also taken business away from wireline carriers.
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Meanwhile, capacity grew faster than expected. Huge advances in optical network equipment dramatically expanded the bandwidth carried by each fiber in the ground. The resulting glut of capacity has left much of the world’s long distance capacity unused — by some estimates, less than 10 percent of the fiber worldwide is carrying traffic.
The result is a colossal cash squeeze that is catching up with the industry’s biggest players. It has also raised questions about accounting practices on the part of companies that may have overstated results. Qwest Communications and WorldCom said Tuesday that the Securities and Exchange Commission has begin inquiries into their accounting.
While all this restructuring will ultimately help the survivors, it’s going to take a big pickup in demand to soak up all the excess capacity in the system, analysts say. In the meantime, even the biggest, established players like Verizon and SBC Communications — which generate piles of cash from local phone customers — are cutting back. Verizon said earlier this month it plans to cut another 10,000 jobs. (Last year, Verizon made a similar announcement but ended up shrinking its number of employees by 16,000.) SBC said last week it has cut 7,500 jobs since October and plans further cuts as part of a plan to cut operating costs by $1.5 billion a year within the next four years.
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Demand for high-speed, long distance bandwidth has also been hampered by the economics of delivering telecom services. Building out busy long-haul routes, such as the New York to Washington corridor, for example, offer the best potential returns. But expensive upgrades to “metro” switching centers — the facilities that steer traffic from one neighborhood to another — don’t necessarily offer the same payback.
And the cost of wiring up the “last mile” — the individual hook-up for each customer — can be tough to recoup in sparsely settled areas. Even in densely populated areas, converting customers to high-speed lines has turned out to be less profitable than many upstart providers originally expected. Local phone customers who connect to the Internet, for example, often maintain separate voice and data lines. Replacing those with a single, high-speed line doesn’t necessarily boost profits, according to Kalla.
“There’s not necessarily higher margins at higher speeds,” she said.
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The economics are different for cable television companies, which is a big reason they are signing up customers for high-speed Internet access faster than their phone company rivals. The number of subscribers to high-speed Internet service via cable rose more than 12 percent to 7.2 million in the fourth quarter of 2001, according to the National Cable and Telecommunications Association. More than 875,000 new customers signed up for cable-modem service during the last three months of 2001, up from 6.4 million subscribers at the end of the third quarter.
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Consumers have been slower to sign up for high-speed service via traditional telephone lines, known as digital subscriber line (DSL). The biggest DSL provider, SBC Communications, has 1.3 million subscribers while the biggest cable company, AT&T Broadband has 1.5 million cable-modem subscribers.
Cable companies are squeezing more profit out of local hook-ups because they can use existing lines — essentially charging twice for using the same wire. They’re also hoping to expand those profit margins by selling additional services — including telephone service. |
