Phone companies' new calling
Cutting-edge technologies--perhaps more than deregulation--are proving to be catalysts in creating "new" telephone companies.
The group includes start-ups such as Qwest (QWST), the Internet Telephony Exchange Carrier, and Level 3 Communications, and nontraditional telcos such as WorldCom (WCOM).
Microsoft (MSFT) is getting into the act too--not as a telco, per se, but in an effort to make its dominant Windows operating system part of the telephone infrastructure.
Many nontraditional telco providers, not just the AT&Ts and Sprints of the world, are touting themselves as "one-stop shops" for communications--offering phone and Net access, for example. Their claims point to what is one of the biggest promises of telco reform, but they have been slow to materialize.
Deregulation was supposed to spur new competition in the telephony space, but more than two years after the Telecommunications Act of 1996 was signed into law, telecom carriers and federal regulators still are fighting over opening new markets and allowing Baby Bells to get into the long distance telephone business.
But technology is not standing still, and the convergence of technologies for carrying voice and data over the Net already is happening.
Once criticized for their low-quality, voice-over-IP (Internet protocol) networks are gaining steam. Net phone calling's chief benefit: lower-cost calls. Little-known companies now are offering phone calls via the Net for less than 10 cents per minute.
Other efforts include creating new software interfaces for telephony. Microsoft, for example, is demonstrating a technology for Windows-based computer telephony.
The traditional telcos, notably AT&T spin-off Lucent Technologies (LU), are not standing on the sidelines. They also are implementing many of these new technologies but have been finding that the competition is getting tougher along the way.
Some examples of the "new" telephone companies include the following:
• Qwest. It took a technology outsider such as Philip Anschutz, who became a billionaire by running oil and railroad businesses, to see the potential of competing against the telcos with a fiber network that carries voice and data traffic. He used railroad right-of-ways to help build the network, as well as money raised from an IPO last year and talent recruited from AT&T (such as CEO Joseph Naccio), to help energize the company.
Qwest has been on a rapid expansion binge, capped by yesterday's buyout of LCI International (LCI) for about $4.4 billion. (See related story ) According to Qwest, the merger will create the nation's fourth-largest long distance telephone company. It gives Qwest access to sales and marketing expertise, as well as distribution channels. Combined, the companies had revenue of $2.3 billion last year and served more than 2 million business and residential customers.
Wall Street has taken a liking to Qwest. Its stock is hovering at a 52-week high of about 37, up from about 13 when it went public last summer. In its short life, Qwest's market capitalization has come to stand at $7.5 billion.
• Microsoft. The company's mission to meet lofty profit expectations by expanding into new, software-dependent businesses is well-known, but little attention has been paid to its foray into telephony. Despite his $1 billion investment in cable giant Comcast (CMCSA), Microsoft CEO Bill Gates says he has no plans to buy a telco.
But that hasn't stopped the software giant from getting into the business. Last week, Microsoft demonstrated features for the first time that will let companies use the Windows operating system for both traditional and Net telephony applications. The features of its upcoming Windows NT 5.0 release will make it easier for data, voice, and video to coexist across the same network. (See related story)
In addition, Microsoft has been teaming up with telcos to promote high-speed Net access over copper wires, dubbed DSL. It has joined Intel and Compaq Computer, as well as a consortium of telcos, for this so-called copper renaissance.
• WorldCom, one of the fastest-growing telcos. It is no start-up, but its recent buyout binge, which saw it take ownership of the likes of CompuServe's network and MFS Communications, has catapulted WorldCom into the ranks of the major leaguers in long distance.
WorldCom has grown so fast, in fact, that some of its deals, such one pending with MCI, now are drawing the close scrutiny of regulators. They worry that the company may dominate the Internet backbone. (See related story) WorldCom denies that, however, and has said that it is confident its deal with MCI will win regulatory approval by midyear.
Led by hard-charging CEO Bernard Ebbers, WorldCom is mapping a highly aggressive growth strategy. WorldCom, MCI, and Spain's Telefonica yesterday announced a three-way alliance to offer telephone service to the Americas. WorldCom's stock is trading at near a 52-week high of about 38.