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Commentary: The sky is not falling

If you've read the telecom news during the last week or so, you can be forgiven for thinking that the whole industry is collapsing.

By Bob Hafner, Jay Pultz and David Neil, Gartner analysts

Accounting questions and other bad news have hit many telecommunications carriers and equipment companies lately. Some individual players may succumb, and the crisis will test the nerve of enterprises.

See news story:
Accounting puts telecoms on defensive

If you've read the telecom news during the last week or so, you can be forgiven for thinking that the whole industry is collapsing. Here's a sample of what's happened in the past few days:

• Cable and Wireless announced it had booked as revenue the total value of lease agreements with other carriers for using its capacity, although some of the leases run for 20 years.

• U.S. authorities are probing Global Crossing's accounting practices, which could delay or derail its bankruptcy settlement.

• Qwest Communications International came under scrutiny for an off-the-balance-sheet partnership with KMC Telecom Holdings that may have lifted Qwest's earnings artificially.

• KPNQwest said 15 percent of its revenue comes from capacity-swapping agreements with other carriers.

• Nortel Networks said it may miss its first-quarter earnings targets because carriers continue to limit spending.

• Qualcomm's share price fell amid concerns about its accounting practices.

• Standard and Poor's lowered WorldCom's rating because slack revenue and earnings growth will make it more difficult for WorldCom to repay its debt.

• Carrier1 International, a European wholesale carrier, filed for bankruptcy, and its stock was delisted.

• Optus, Australia's second-largest carrier, restated its 2001 earnings after authorities investigated its accounting practices.

The above is just a partial list and doesn't reflect persistent troubles such as the ongoing struggles of Lucent Technologies or Cisco Systems' sluggish network service provider (NSP) business. This incredible spasm of bad news follows one of the worst years ever for the telecom industry, 2001, in which revenue growth stalled, competition intensified and carriers bent under enormous debt loads.

Gartner believes that at least some NSPs aggressively reported revenue to present the best possible face to investors. In the wake of Enron's collapse, such practices have come under harsher scrutiny than ever, and investors may punish stocks on the mere suspicion of irregularities.

Nevertheless, Gartner believes the telecom market won't collapse. Many carriers that expanded rapidly in the late 1990s spent 2001 working to get out from under their debt, with some success. Revenue growth won't pick up speed very quickly, but the worst declines are probably over. Many carriers have begun to develop additional services with higher profit margins and faster growth potential.

When the smoke clears, a few carriers will have suffered serious damage, but most will survive. In fact, some consolidation will make the survivors stronger, depending on the carrier and segment. However, the industry's reputation has suffered damage that will last a long time.

(For a related commentary on Global Crossing's problems, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.