Sep 16, 1998
Silicon Valley: Montgomery Extra: It's Qwest Time
By Jeffrey Hoffman
Staff Reporter
SAN FRANCISCO -- Joe Nacchio, the tough-talking Brooklyn-born chief executive of Qwest Communications (Nasdaq:QWST - news) , knows how to put on an impressive show at conferences. Now can he execute?
Denver-based Qwest, the most aggressive of the new-wave telecom companies, is building an 18,500-mile national fiber optic network that Nacchio says is on schedule to be completed by mid-1999.
"This is going to create enormous problems for the incumbents," Nacchio told a packed presentation room. "We built the network to take advantage of a major change in communications ... images will be key. We're going to be moving images the way we move voice now."
This year, the company will have $3 billion in pro-forma revenue and $400 million in earnings before interest, taxes, depreciation and amortization. That's dwarfed by the $51.32 billion in revenue and $4.57 billion in profits earned last year by telecom behemoth AT&T (NYSE:T - news) . But Nacchio -- who spent 26 years ascending the AT&T corporate ladder, eventually running its consumer long-distance business before a less-than-amicable departure in 1996 -- isn't shy about his desire to take on and whip his former employer.
At lunch with analysts and investors on the second day of the NationsBanc Montgomery Investment Conference, Nacchio mocked AT&T's plodding management style, its voice network and its proposed merger with TCI (Nasdaq:TCOMA - news) . At the request of a Qwest investor-relations official, those comments won't be repeated verbatim in these pages.
His basic contention: Qwest's brand-new network will have far greater carrying capacity at a much lower cost than those of established rivals. Older voice lines rely on "circuit switching" that ties up a whole line for a call, much like reserving an entire highway for a single car. The new "packet switching" networks break voice, data, video and images into chunks and send them down the same line. That could significantly drive down the cost of voice, which still provides the lion's share of income for established telecom companies. But in the Internet era, revenue from data traffic is growing much faster than that for voice.
And soon, data traffic, including the transmission of images, will be dominant. Those images he says, will require 1,000 times the capacity of current networks. They'll include bandwidth-intensive applications like electronic commerce, telemedicine, video-on-demand and distance learning. The market for those applications, which is virtually nonexistent now, will be worth $80 billion per year in 2002, says Nacchio.
Qwest is not alone in the race to construct high-capacity networks. Austin, Texas-based IXC Communications (Nasdaq:IIXC - news) is also on track to complete a 15,000-mile fiber network next year, and Omaha, Neb.-based Level 3 Communications (Nasdaq:LVLT - news) plans to finish a network in early 2001. Not to be outdone, AT&T and Sprint (NYSE:FON - news) are upgrading their networks for data, and both have announced plans for high-speed, integrated voice-data services.
The threat of all of this new capacity coming on line in the next few years has some investors concerned. "I don't get the feeling people are asking Joe [Naccio] to show them any new razzle-dazzle," says Mike Mahoney, who manages four funds for AIM that collectively hold 500,000 shares in Qwest. "It's much more of a focus on execution of the business plan. In the current market, companies are getting knocked for doing anything too aggressive.
"The worst risk [for Qwest] is the question of a fiber glut," continues Mahoney of AIM. "What happens if data traffic slows down? If data slows down in a meaningful way, then we've got to ask the question of what happens to pricing. Bandwidth could be given away."
But Nacchio says such worries are overblown. "We've heard this forever. We see no diminution of demand," he says. "If you have affordable bandwidth, you'll redesign the way you make applications." Nacchio and others have compared this phenomenon to the growth of computing power, noting that as rapidly as Intel (Nasdaq:INTC - news) has created faster chips for personal computers, software developers have written more sophisticated programs to soak up the power. Not surprisingly, the Qwest chief is spending a lot of time these days in Silicon Valley meeting with companies that are developing bandwidth-hungry uses for his network.
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Regards
Neil |
