NEWSWEEK why Size does Not Matter! Telco Article>>>
In the fast-changing world of telecommunications, cutting-edge technology is what really counts
By Michael Meyer
A week after their big deal, Bell Atlantic and GTE are showing all the bounce of a deflated beach ball. Both stocks are trading well below their year's highs. AT&T isn't faring much better. After it announced its merger with Tele-Communications Inc. last month, the company's shares fell by 15 percent. They've since recovered, though not thanks to the alliance with British Telecom. Wall Street greeted that with snores, too.
Contrast this with the new rising stars of the industry. Worldcom has nearly doubled its stock price since November, when it proposed to marry MCI. Shares of Level 3, a young upstart that's using the Internet to offer supercheap telecommunications, have more than tripled so far this year. Qwest Communications, a builder of high-speed networks, has gained nearly 40 percent this year, while rival IXC Communications is up by 60 percent or more. None seems to worry much about the couplings of the biggies. "I haven't lost one hour of sleep over any of these deals," says Joe Nacchio, a former top AT&T executive who jumped ship 18 months ago to head Qwest.
What explains this remarkable lack of concern? Technology. Telecom's upstarts are well into building their futures with cutting-edge stuff, while the big guys are just getting started. Qwest is laying 18,449 miles of high-capacity fiberoptic cable linking 130 cities nationwide. Instead of old "circuit" technology, where we speak over a single dedicated line, its network is modeled on the Internet. Computers break conversations into zillions of digitized "packets" and cram them through all available lines. Faxes, e-mail, video and other digitized data can be woven into the stream. The result: faster and more efficient communication at far lower cost.
Less well known is a newer but no less revolutionary technology: wave-division multiplexing. It's a technologic sleight of hand whereby engineers splice different frequencies of light through a cable, immensely boosting capacity. Tweaked this way, each of Qwest's 48 fibers, coiled into a single cable, can transmit half a million conversations. That's 10 times what a regular fiber network can carry. Qwest famously boasts that it can zap the entire Library of Congress across the country within half a minute--and the day is not far off when a single strand of glass will be able to carry as much traffic as the entire Internet does today.
Level 3, IXC and the Williams Cos., among others, have spent years and billions of dollars building similarly advanced networks. Like Qwest, they're already selling directly to major corporations around the country, as well as to rival phone companies, such as Worldcom, US West and GTE. Their share of the retail market is still slender--no more than 2 percent--but with the explosive growth of the Internet, that figure could easily grow to 15 percent or more over the next three to four years. Small wonder the likes of Bell Atlantic, AT&T and Sprint are investing heavily to catch up. But James Crowe, chief executive of Level 3, questions how quickly they can. As he sees it, the old telecommunications companies are saddled with "legacy systems" that cannot easily be meshed with emerging technologies. Operating costs, and prices, will be higher than those of their smaller rivals. With the world changing so fast, says Crowe, "it's far better to start with a blank piece of paper."
Not everyone agrees. Mark Bruneau, a chief analyst at Renaissance Worldwide in Boston, notes that the bigger companies enjoy some weighty advantages: millions of customers, brand names that people trust--and the money to buy their way out of trouble. The more successful Qwest or Level 3 becomes, he suggests, the more likely they are to be bought by technology-hungry giants. "That's when it gets scary," Nacchio says--adding that, sooner or later, the giants will have to do just that. Maybe that's another reason these stocks are such high fliers.
Newsweek 8/10/98 Business/Why Size Doesn't Matter |
