CNET también está disponible en español.

Ir a español

Don't show this again

Mobile

Behind the telecom meltdown

While investors in the late 1990s remained oblivious to signs of trouble, it is clear in hindsight that the telecom bubble could not possibly have lasted.

The telecommunications business--from Lucent Technologies, AT&T and Nortel Networks to the many recent start-ups--is clearly in disarray. While investors in the late 1990s remained oblivious to signs of trouble, it is apparent now that the telecommunications frenzy could not possibly have lasted, according to a panel of telecom experts at the second annual Wharton Finance Conference.

"Back in 1996, when the Internet was getting more popular, you couldn?t predict the bandwidth you would need," said Blair Levin, managing director at Legg Mason and former chief of staff at the Federal Communications Commission. "Some people thought it would be infinite and they tried to build it out that way. We didn?t accurately predict the demand, so now there is a lot of empty fiber pipe."

The result has been a number of bankruptcies and the likelihood that more will come. "There are a lot of troubled telecom companies that are just out of leverage," said Paul Huffard, senior managing director in the restructuring and reorganization advisory group at The Blackstone Group. "Unfortunately, telecom has been a true growth area for the restructuring advisory during the last nine months or more." Or, as Levin put it: "It is much more pleasant being in telecommunications right now as a commentator than a participant."

Panelists agreed that companies like Verizon...will probably be buying up threatened companies or picking through the assets of bankrupt ones. Even those on the panel who are telecommunications participants were critical of their business over the last few years. There was too much free money, they said, and not enough foresight on how to use it. "You were penalized by the financial community if you didn?t grow your top line at 30 percent a year," said Tom Faulders, chairman and CEO of LCC International, a wireless design and management services company. "Now you have to be cash-flow positive or they will cut off your financial flow. It?s been crazy."

Neil D. Olson, assistant treasurer of the telecommunications giant Verizon Communications, remembers that when he joined the company 15 years ago, "everyone praised me for getting a stable job. It sure hasn?t looked that way lately. But I?m looking forward now to having a whole lot of interesting things going on."

Panelists agreed that companies like Verizon, with billions of dollars in cash on reserve, will probably be buying up threatened companies or picking through the assets of bankrupt ones. Even among large companies, the experts said, there will be consolidation and perhaps even mergers.

Bankers and analysts agree that "within 12 to 18 months, the long-distance and global telecom world will be collapsing into five or six big players," said Mitchell Theiss, managing director in the global communications investment banking group at Merrill Lynch. "You seem to have a different rumor every Monday. One week it was Bell South with AT&T. Then it was Qwest with Cable & Wireless. Then it will be News Corp. with DirecTV?You have to check your papers every Monday because all of these things seem to be announced on Sunday afternoons."

Gerald R. Faulhaber, Wharton professor of public policy and management and the panel?s moderator, said the byword phrase of the late 1990s telecommunications boom seemed to be "network effects." Companies, Faulhaber said, thought that if they brought on enough customers, they would eventually become profitable no matter what.

"Everyone thought they should get big as fast as they could. Customers would breed customers and you would succeed. In fact, ?network effects? companies are fairly rare. But it all fed this irrational exuberance (of seemingly endless funding) that eventually crashed."

Levin, who spent four years during the Clinton administration trying to streamline communications rules at the FCC, predicted that practically every major telecommunications restriction will be lifted during the Bush administration. "The restrictions on owning newspapers and broadcast stations in the same market will be gone. What cable companies can do with broadcast licenses, that will be changed. What the old Bell companies can do with Internet access and service, that will be gone. And, most importantly, limitations on how much of the wireless spectrum can be used for what, those will be gone," said Levin. "Every rule that has limited integration is already in the courts and it all may become moot. That will rush the consolidation of companies. I just hope people will think through the ramifications."

Individual European, even state-owned, telecommunications systems are working together as never before to keep their lead in wireless. The panelists were disappointed that U.S. companies in the wireless business have not picked an overall standard because it means they continue to lag behind Europe and Japan. And there seems to be no energy to change that. "Europe is tied politically and emotionally to moving onto the third generation of wireless services," said Foulders, adding that individual European, even state-owned, telecommunications systems are working together as never before to keep their lead in wireless. The United States, Foulders said, appears to be ceding that ground to them, although other competitors might also arise.

"China now has the largest number of users of cell phones, even if the quality is uniformly bad," Foulders pointed out. The fact that Beijing was chosen to host the Olympics in 2008 "will be driving spending there for infrastructure like you have never seen before. And Vietnam is a technologically advanced country as well. You could see some innovation there."

Despite the shakeout, however, the consumer has benefited at least to some extent from the enthusiasm of the telecommunications revolution of the late 1990s. "If you look back six years, you would see now that long distance rates are down and wireless rates are down," said Levin. "The Internet has many more service providers. There has been innovation and the quality of service has been much better. Even in areas with no huge consumer gains--like video--there has at least been" forward movement.

Huffard was a little more skeptical. "If that?s so, I still want to know why my cell phone always clicks off," he said. "There remains a long way to go. It will depend on who is left standing to see if (progress will occur) any time soon."

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.