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Telco newcomers look for pot of gold

A new breed of telcos is banking on bandwidth demand to drive sales, but some analysts wonder whether they're just looking to be bought out.

    A new breed of telecommunications companies is banking on an unquenchable thirst for bandwidth to drive sales, but some analysts wonder whether these companies are just speeding toward a short-term pot of gold.

    Qwest Communications International recently announced plans to expand into Europe while Williams Communications has decided to float a public stock offering to fuel its network expansion--two moves aimed at improving the reach of the two emerging carriers, while simultaneously making them more attractive buyout targets.

    Some experts speculate it's only a matter of time before the industry consolidates--much like the Net's portal players--as baby Bells swallow smaller carrier players as needed.

    Carriers such as Qwest or Williams--in addition to Level 3 Communications and IXC Communications--could be the dominant telcos of the future. These companies rely on new fiber optic, IP-based networks to transmit voice and data traffic at far lower prices than traditional circuit-based schemes. But only if that's what they intend to do; especially since many of the leaders in the industry have a history of selling off their networks to larger companies.

    Expanding Their Reach
    Last week, Qwest announced a $700 million joint venture with Dutch telecommunications company KPN to expand service to Europe.

    In another ambitious play, natural gas pipeline company Williams said it will spin off its Williams Communications telecom business in an initial public offering.

    The IPO, expected to be filed with the Securities and Exchange Commission during the second quarter of 1999, would help raise money to fund the capital-intensive job of building a national network.

    But Williams Communications, backed by the monetary muscle of its natural resource-oriented parent, would seem to be on more solid financial footing than some of the other emerging carriers.

    Built to Sell?
    Some of the industry leaders have a history of selling off their networks.

    Level 3 Communications' chief executive Jim Crowe sold his MFS network to WorldCom in 1996. Now he's frantically building a new network with plans to complete it within four to six years.

    Likewise, Williams' WilTel communications unit once operated 11,000 miles of fiber, playing in the wholesale data market in the late 1980s and early 1990s. The company then sold the bulk of the capacity to WorldCom in 1995. A three-year non-compete clause expired in January and now Williams--and it's soon-to-be-public communications business--are building out 32,000 miles of fiber. More than 18,000 miles will be completed by the end of the year, according to the company.

    Some analysts have pegged Qwest as a prime takeover target, pointing to the company's shiny new network--the envy of many telecommunications companies--along with an accompanying lack of name recognition in the consumer market.

    Owning capacity in both the United States and Europe makes Qwest more attractive to larger long distance and local phone companies, analysts said.

    "It's a necessary evil to expand internationally but I think it's with the idea of being taken over," said Philip Wohl, a telecommunications analyst at S&P Equity Group. "That's what they're doing here."

    Wohl sees a larger telecommunications company acquiring Qwest as a technology purchase, as a means to access a fiber-optic IP-based infrastructure.

    The company said it is only doing what it needs to do to expand.

    "We're about building shareholder value," said Jack McMaster, a senior vice president at Qwest. "And that means we need to take the lead in Europe as well."

    Other analysts don't know what to believe.

    "If someone's going to come in and pay a ridiculous amount I'm sure some of those companies would jump at it," Langner said.

    Williams maintains it is committed to being the "carrier's carrier" by offering other companies access to state-of-the art network capacity on a wholesale basis.

    "We don't build networks solely with the plan to sell them," said Williams spokesman Gil Broyles. "This is not to be construed as the first step in an exit strategy."

    Still some say there is not much difference anymore.

    "It's very hard to tell an exit strategy from a long-term stay in strategy," Koppman said. "The best strategy for selling out is probably also the best strategy for running a good business."

    Falling Prices
    But analysts said a pricing squeeze will lead to competitive pressures once the various networks have been completed.

    "If you stay in the wholesale business, eventually you'll get pushed up against the wall," said Mark Langner, an analyst at investment bank Hambrecht & Quist. "The bandwidth guys will all get played against each other for lower prices."

    "I think some of these companies will be around long term and some of them will be acquired," said Steve Koppman, a senior analyst at market researcher Dataquest. "The question is whether there will be enough demand to justify all the bandwidth that is being created. It seems like there's going to be such a glut of capacity."

    Analysts said the emerging carriers might have to spend millions on marketing and promotions in order to grab significant market share away from the entrenched telecommunications companies.

    "They may be able to take a few customers, but AT&T is huge; it's pretty hard to crack that," Koppman said.