Interesting article from the Boston Globe. Scroll down for a section pertaining to GENU.
Excess haunts Internet sector
oversupply, debt plague telecoms
By Peter J. Howe, Globe Staff, 7/29/2002
boston.com
The restructuring now ripping through the Internet sector with the bankruptcies of WorldCom, Global Crossing, and a legion of other Net service providers is often compared to the waves of consolidation that have swept through the railroad industry over the last two centuries.
American railroads went on a spree of track-laying in the 1850s, and again between 1880 and 1920, that foreshadowed telecommunications carriers wrapping the globe with fiber optics in the 1990s. But then the railroad industry endured bankruptcies, mergers, federal bailouts, and abandonments that contracted the US rail network from nearly 250,000 miles in 1920 to under 145,000 today, dominated by just four mega-railroads.
Where the railroad-Internet analogy falls short, however, is the scope of overbuilding in the Internet sector.
If the railroads built twice as many routes as could be economically sustained, the telecom companies easily built 20 times. And they did it in a matter of just four or five years, not decades.
An even more crucial difference involves technology. A railroad that runs, say, five trains an hour quickly reaches capacity and a new track has to be built. But through the wonders of ''dense wave division multiplexing'' and lasers that transmit 10 billion blips of light per second (soon to be 40 billion), equipment suppliers such as Alcatel, Nortel Networks, and Lucent Technologies have enabled carriers to run the equivalent of about 10,000 trains an hour down each track, fostering ruinous price wars for bandwidth capacity.
Events of this year have made it excruciatingly clear that the whole telecom industry is grappling with a epic problem of oversupply on ''Internet backbones'' and hundreds of billions of dollars worth of debt that will take more than a few bankruptcies to clear up.
Already, the list of Internet carriers that have fallen into Chapter 11 bankruptcy protection is huge, including WorldCom, Global Crossing, 360 Networks, Williams Communications, PSINet, Enron Broadband, Teleglobe, and, locally, NEON Communications of Westborough.
Last week, Woburn-based Genuity was pushed closer to joining that list after Verizon Communications backed out of a deal to take control of Genuity, which it spun off two years ago as a condition of the Bell Atlantic-GTE merger that created Verizon. Genuity was formerly GTE's Internetworking unit, a 17,500-mile global Internet carrier that also provides corporate Web and Net services under its Black Rocket brand.
With ample alternatives to Genuity for the high-capacity, long-haul networks Verizon needs to provide voice and data services, the New York-based Baby Bell concluded it didn't need to take back Genuity and its $1.9 billion in debt. Facing something like the choice of buying an office tower that would require a $1.9 billion mortgage, or renting the same space somewhere else far more cheaply, Verizon opted to cut Genuity loose, driving Genuity shares down to 45 cents Friday from a split-adjusted $220 when Genuity was spun off in May 2000. Hundreds of Genuity workers and retirees in Massachusetts have seen tens of thousands of dollars in wealth evaporate.
Genuity is now just one more arguably surplus Net carrier in a glutted market, without the Verizon life ring that was keeping it afloat on Wall Street. Many analysts called a Genuity bankruptcy inevitable once it starts to chew through the $700 million in new bank loans it took out hours before Verizon announced its plans to abandon Genuity.
In Europe, meanwhile, KPNQwest has begun actually shutting down its 15,500-mile network after no one bid for it at an auction. Its move is the kind of blunt capacity reduction many analysts say the US industry needs but has yet to really see, and may not if WorldCom and others can come out of bankruptcy with lightened debt loads.
Wall Street seems to be betting things could get worse before they get better. Shares of Qwest Communications International, the Denver-based Net carrier that also owns former Baby Bell US West, were down to $1.50 a share at Friday's close. Broadwing, another hybrid that owns a long-haul network and a cash cow local phone franchise, Cincinnati Bell, slipped to $2.10.
''Technology is, in some ways, its own worst enemy,'' said Bruce Claflin, chief executive of 3Com, the networking equipment provider. ''Technology has created [Internet] capacity far ahead of the ability of it to be used.''
But, Claflin said, ''the fact is that the capacity is getting used up,'' with Internet traffic continuing to grow 25 percent a year.
What remains to be seen is when the Internet industry will reach any kind of supply-demand equilibrium. Predictions in the 1990s that millions of Americans would upgrade to ''broadband'' home Net connections that would gobble up core network capacity have raced far ahead of reality. Only about 13 million homes have signed up.
As Hollywood and the music industry have largely failed to figure out how to sell movies and music over the Net without engendering massive piracy, millions of Americans see no compelling reason to spend the $40 or $50 a month for broadband - leaving the prospect of a near-term, consumer-driven solution to the Net glut remote.
Even if demand doubles every few years, network capacity can be quickly, cheaply increased by factors of 10 and 20 just by sliding new circuit boards into telecom switches that squeeze new streams of traffic over existing fibers, creating relentless downward pressure on prices.
As a result, big phone and Net companies say bandwidth has quickly become a commodity whose price is racing to zero. Their focus is on the package services built around Internet capacity, such as managing corporate data networks and Web operations. It's comparable to how phone companies that sell dial tone for $10 a month make their real profits from $1 and $5 add-ons like voice mail and caller ID, and by using customer service and marketing to distinguish themselves from competitors.
In an interview last month, AT&T president David Dorman said Ma Bell's business customer base - not its network - ''is our most critical competitive asset,'' and AT&T's recent construction of 18 data centers, including one in Watertown, and development of new ''managed services'' offerings are the company's top priorities.
''We're clearly taking this not on a `build it and they will come' approach,'' Dorman said, but adding the new services in response to anticipated customer needs. ''I think that approach of `build it and they will come' has been a disaster for the industry. I don't think we're ever going to see it again.''
Peter J. Howe can be reached at howe@globe.com.
This story ran on page C1 of the Boston Globe on 7/29/2002.
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