Hairy Go-Round

Telcos deal with year of ups and downs

It was fun while it lasted. The "irrational" exuberance that comes with new discoveries and unlimited dreams has given way to a hard-headed realism that places profits ahead of prophecy. Weve debated the spiritual meaning of "telecosm"; now its time to get down to business and turn it into a money machine.

Who will make that transformation is anyones guess. What is likely, though, is that, come next year, few of the 50 companies included in Interactive Weeks Service Provider Survey will look like they do today.

Any student of human nature should hardly be surprised by the sudden cynicism infecting the world of high-speed communications. After all, it took only one moon landing to turn "gee whiz" into "so what?"

Still, space exploration continued, spawning legions of enterprises, from ultra-accurate mapping and weather forecasting to satellite broadcasting. Today, space is a business, as usual.

Perhaps the infinite universe is a better metaphor for global communications than the "land rush" mentality that swept the World Wide Web six years ago. If the Sooners who settled Oklahoma had had access to unlimited acreage, a rush to file a claim without a proper business plan might have looked foolish in hindsight. Like many of those early Okies, the dot-com pioneers learned that establishing a site can be easier than making it profitable.

So now we find ourselves in the midst of a shakeout. The greed that drove the financial markets last year turned to fear, sending dot-coms and telecoms into the dustbins of history. In a sudden reversal of fortune, companies that a few months ago bemoaned the shortage of employees cant get rid of them fast enough.

Is the Internet revolution a recurrence of "Tulipomania," that 17th-century craze that sent the price of tulip bulbs to extravagant heights? Possibly. But, remember that the Dutch still make a pretty good living selling tulip bulbs. So its a safe bet that the business of communicating via Internet Protocol will rock on, albeit in a less spectacular way. The question for investors is: Whose tulip plantation will survive the first land rush?

If youre looking for inspiration in a rapidly changing world, look no further than the worlds largest Internet service provider (ISP), now the worlds largest media company.

Like Indiana Jones dodging a tumbling boulder, America Online has repeatedly eluded deadly obstacles to capture the priceless artifact — in this case, media giant Time Warner. Now stocked with vast libraries of content and myriad links to consumers, AOL Time Warner embodies the promise of the new economy that fueled so much investor passion one year ago.

How did AOL survive? Despite the revolutionary tone of the times and its own missteps, the conservative online service adhered to some important business basics, such as customer service, communications, effective public relations and delivering value at the right market price point, experts say. And according to Chairman Steve Case, adding Time Warner allows the newly merged company to ride multiple channels into consumers homes without betting the farm on a single technology.

With AOLs worldwide membership beyond 29 million and customer usage of the online service up 6 minutes per day to almost 70 minutes, CEO Barry Schuler is unabashedly preparing for "the next Internet revolution," to be delivered via a growing broadband network.

While many executives of upstart enterprises share Schulers view that the Internet revolution is far from over, the embarrassment of riches from venture capitalists is kaput. Had the free money kept flowing, broadband purveyors such as Covad Communications, NorthPoint Communications, Rhythms NetConnections and Winstar Communications might still be shrugging off losses. But a land rush can be tough when your fuel tank is empty.

"The problem with the wholesale model is there just isnt enough margin there," says industry analyst Gary Kim, president of NxGen Data Research. "The fact that Digital Subscriber Line [DSL] rates are going up to $50 is a very good thing. Id be happier if it went to $70. All of us can make money at $70; none of us can at $40."

The collapse of NorthPoint illustrates how dependent businesses and ISPs have become on the so-called competitive local exchange carriers offering DSL. Thousands of businesses lost their vital e-mail and Internet connections, though some did not even know that their Internet service arrived via NorthPoint. The contract was with the ISP, not the carrier. Losing NorthPoint sent the ISPs scrambling for another conduit to the customer.

When resources are scarce, the strongest competitors emerge, and, right now, capital is the most vital element for growth, i.e. survival. For many observers of the telecom landscape, theres no question that demand for high-speed delivery of data will grow. The question is: Which technologies will survive the financial drought?

While the competitive carriers curtail spending or close their doors for good, the regional Bells roll on, sniffing out opportunities in video, data centers and international markets, setting up a potential battle of giants. When industries collide, you can expect to see a Bell DSL provider such as Verizon Communications challenging the turf of cable giants AT&T, Comcast, Cox Communications and Time Warner Cable. The battle is over services — video, telephone and data. How they reach the customer is a minor concern.

Will the innovative fixed wireless solution continue to reach niches where cable and DSL cannot? Look to bankrupt Winstar and you might have your doubts. Upon filing for Chapter 11, the fixed wireless upstart sued Lucent Technologies for $10 billion, claiming the supplier cut off the cash at a critical moment.

But you dont have to look far to see that the problems with upstarts are more systemic than a disagreement with a single supplier. Even the experienced leadership of former AT&T heir apparent Alex Mandl failed to keep fixed wireless provider Teligents stock above water; Mandl was ousted by the companys largest shareholder, IDT, and the company has filed for bankruptcy. That leaves struggling XO Communications carrying the ball for the upstarts, as Sprint champions the technology for the more established carriers.