Bells Tolling

2001: A year of change in Telecom

This is the year Telecom turns down, then turns around.

Its the year that the matricidal mega-Bells begin sucking the life out of consumer long-distance, leaving AT&T, Sprint and WorldCom gasping for air.

Its the year the long-distance companies begin shedding the body armor of their core business, running for cover toward data centers, cable and wireless, only to find fierce competitors — chiefly the regional Bells — standing in their paths.

Its the year of disconnecting intricate communications machines that never quite worked as promised. When the dismantlings done, Chairmen Michael Armstrong at AT&T and Bernie Ebbers at WorldCom wont need a tracking stock to find the exits.

Its the year Wall Street stops running from the telco industry and begins shopping for value in the pile of surplus parts.

While plucky Sprint hangs tough — selling bargain bundles and polishing the tactical weapon of long-distance — suitors from as far away as Europe will likely come calling, if the imploding stock markets leave anyone with viable currency.

Sensing a stalemate in Congress and regulatory agencies, Deutsche Telekom and France Télécom may make their plays for a larger share of the U.S. market.

The enormous Bells need barely lift a finger to snuff the embers of wireline competition. With AT&T tied up in quadripartition, the death march of the competitive local exchange carriers continues through the desert where fountains of capital once flowed.

Survivors among the competitors could constitute a new superspecies, if they can endure the harsh environment. But even the strongest are taking devastating hits: Covad Communications has seen its stock dive 95 percent and plans to lay off more than 800 workers. NorthPoint Communications is slashing 19 percent of its payroll after suffering a credit downgrade from Standard & Poors and is suing Verizon Communications for calling off its plans to buy NorthPoint. After cutting 280 jobs, HarvardNet plans to quit the Digital Subscriber Line business altogether.

Competitive carriers are in "the fight of our lives," says John Windhausen, president of the trade group Association for Local Telecommunications Services.

Windhausen says he hopes local competitors will receive aid in their battle from the new Congress. Hes asking lawmakers to split the regional Bells into separate wholesale and retail operations, and to give the Federal Communications Commission more power to fine incumbent carriers for blocking competition. But with Congress politically balanced on a razors edge, Windhausens hopes for changes to the 1996 Telecommunications Act will likely go unfulfilled.

Nevertheless, the Bells are sure to find state regulators waving red flags over customer care in less lucrative ZIP codes. The companies are laying ambitious plans to roll out high-speed data lines even as service complaints continue to reach regulators in mega-Bell country, particularly in the stomping grounds of SBC Communications and Verizon. To lighten the load, Bells will continue to sell off rural phone lines while seeking new ways to light up their dark fiber.

Telecom analysts at RHK expect demand for optical equipment to grow 50 percent per year through 2004, regardless of what Wall Street thinks of powerhouses Fujitsu, Lucent Technologies and Nortel Networks.

For the first time since the dawn of the consumer Internet age, we may see how the communications industry responds to a slowing economy and a new president arriving in tandem.

To hear GartnerGroup Dataquest analysts tell it, President George W. Bush could turn out to be a tonic for an industry suffering a crisis of confidence. Because of his hands-off approach toward regulation, Bush could clear new paths for the spread of broadband and high-speed services, ignoring pleas for help from the competitive carriers.

"Each time the FCC has attempted to seize state regulatory authority or to dabble in local exchange offerings, the result has been the same: a failed policy that has held back the development of the telecom industry," says Ron Cowles, principal analyst in the worldwide telecom group at GartnerGroup Dataquest. "A Bush presidency is not likely to repeat the sins of the past, giving more weight to states rights in regulation and trusting market factors to stimulate the industry."

While the waves of change may have been diminishing at the end of 2000, nothing can hold back the tide, analysts say.

"The telecom economy is hell-bent for growth, and nothing short of a major disaster is expected to stop its surge and insatiable consumption of bandwidth," says Alex Winogradoff, vice president at GartnerGroup Dataquest.