The wild card in telecom restructuring

Since the technology bubble burst, only the dot-coms have fallen further than telecommunications companies.

Big telecom players such as WorldCom are bankrupt. Others are drowning in debt. Price wars are socking even solid companies, as they fight for customers amid a surplus of communications lines and services. Equipment makers like Lucent Technologies and Nortel Networks are struggling to return to profitability.

During the boom, "the attitude was: 'Build it, and customers will come,'" said Mike Reuschel, president of the global communications industry at Unisys in Blue Bell, Pa. "Everybody went to the venture capitalists...who said, 'Wow, you've got as much money as you want.' But this is not the 'Field of Dreams.' They built it, and people didn't come."

The result: Too much capacity, too little revenue. "This is the worst it's been in 10, maybe 15 years," he said.

How can the ailing industry be fixed? A panel of experts gathered at the 2003 Wharton Technology Conference in late February in Philadelphia to try to answer that question. Their consensus: Time and tough medicine.

It will take a combination of the natural shakeout of an industry in trouble (the weakest companies will close, taking price pressure off survivors), better financial discipline among the survivors, continued product innovation by the strongest companies, and more consistent rules from federal and state governments.

"One of the problems has been overfunding of capital equipment--just throwing money at the space," said Frank LaPlaca, a venture capitalist with OCG Ventures, which has offices in Maryland and California. "The operational models will benefit from lower spending." It's one of the basics of business: A company can't make money if its expenses exceed its sales.

"The companies that are going to make it are the ones with a consumer base and a recurring revenue stream to invest in new plants and equipment," added Steve Gaus, a U.S. director of sales for Siemens, the German electronics and electrical-engineering giant.

Even so, he said, the industry--which has already lost about 600,000 jobs--won't again see the employment levels it did during the boom. For survivors, the most promising areas for expansion are broadband services such as DSL and video-on-demand. As Reuschel noted, "If you make people's lives more productive or more fun, you'll find customers."

Another growth area should be the wireless sector. Despite current problems, its potential remains substantial.

"One of the problems has been overfunding of capital equipment--just throwing money at the space." --Frank LaPlaca, venture capitalist, OCG Ventures

"Ten percent of the population uses a wireless line as their principal line today, and that will continue to grow," Gaus said. "If you've got three teenagers, they all need their own cell phone. They all need their own laptop. And they all want to be on the Internet at the same time."

Regulators, for their part, can help the industry by providing more consistent rules, said Tom White, vice president of marketing for telephony services at Comcast, a Philadelphia-based cable company. Federal regulators have begun to clarify their rules for industry deregulation, but the state rules are still a crazy quilt. "There would be a real benefit in going back and trying to clean that up because the patchwork of rules adds a lot of cost to the business," he said.

As John Baker, executive director for business and market development at Verizon Communications in New York, put it: "There isn't any coherent road map to follow."

The Federal Communications Commission swept away some of the uncertainty with a Feb. 20 ruling on industry deregulation. But the decision was a political compromise that ignored commercial realities, according to Baker. The commission, for example, said that local phone companies such as Verizon have to lease their local lines to rivals at discounted rates. That was an effort to shore up ailing long-distance companies. "It's bad from the standpoint of our firm's profitability," Baker said. "And we believe it's bad for the telecom industry because there's no incentive to invest in local infrastructure."

He conceded that another part of the ruling benefited companies such as Verizon by sparing them from having to charge the same cheap rates for their broadband networks. That has disappointed the long-distance companies.

For the future, the cable industry poses the biggest threat to telecom companies, the panelists agreed. "The cable guys are in a great position because there's been a tendency to ignore them," LaPlaca said.

But that's no longer true, at least not at Verizon, which sees cable services as the obvious alternative for its consumers, according to Baker. "Their strategic vision is a triple play of video, data and voice. Ours is local service, high-speed data and wireless."

A wild card as the industry restructures is Wi-Fi, which allows for a wireless connection to the Internet. The data moves over the airwaves, via radio frequencies, to antennas installed in computers. The signals are low power so computer users generally have to be within a few hundred feet of a transmitter. An area reached by a transmitter, or series of transmitters, is known as a hot spot. Some airports and hotels are already equipped for Wi-Fi usage.

"If you make people's lives more productive or more fun, you'll find customers." --Mike Reuschel, president, global communications, Unisys

Cellular services regard Wi-Fi as a threat to their data services, though Wi-Fi signals don't travel as far as cellular ones and are more easily obstructed.

Wi-Fi is both "a threat and an opportunity," Comcast's White said. "If it's free, you lose revenue. But if there's a way to put together a business model that works, it creates opportunities for new products and services and additional growth."

Wi-Fi is such a growing area, one of the few pockets of optimism on the tech scene today, that the Wharton conference presented a panel devoted to discussing its potential.

"At IBM, we believe Wi-Fi is a disruptive technology, with tremendous opportunities and risks for wireless carriers," said Dan Papes, vice president for IBM's North American wireless division. "We did about $2 billion in wireless services last year, and a quarter to half of that was related to Wi-Fi. Intel already has embraced the technology. By the end of this year, every laptop PC will have Wi-Fi capability."

Peter Stanforth, chief technical officer for MeshNetworks in Maitland, Fla., put it more simply: "We've let a monster out of the box, and now we've got to tame it."

Someone with just a little technical know-how "can go down to RadioShack and, for a few hundred bucks, build his own wireless network," he explained. And private hot spots already have begun to spring up. But for Wi-Fi to become widely available, phone and wireless providers will have to embrace it. And they're still figuring out how to do that, said Naveen Dhar, vice president for marketing and business development at Mobility Network Systems in San Jose, Calif. "Today, the economics don't allow it to be offered in a standalone way," he said. "Nobody's willing to put up a complete $100 billion network. But they're willing to extend what they have. They want to get the return on investment in two years, not eight."

In one area, private networks, the technology has already taken hold, with giants such as FedEx and BMW deploying it, for example, to extend their internal networks. Such applications account for most of IBM's Wi-Fi sales, Papes said.

These kinds of uses raise questions about where private Wi-Fi networks end and public ones begin, noted Ron Reich, director of strategic investments for Intel Capital's wireless networking sector, a division of Intel in Santa Clara, Calif. As companies extend their private networks, they will start to reach into public spaces to communicate, for instance, with employees who are traveling or outsiders with whom they need to share information. That will blur the distinction between private and public Wi-Fi.

The panelists agreed that wireless companies face the greatest risks from Wi-Fi competition, although they couldn't agree on how serious that challenge is. Mobility's Dhar and IBM's Papes saw Wi-Fi as supplementing cellular services because both technologies have strengths and shortcomings. Cellular signals have a greater reach, Papes pointed out, but Wi-Fi can operate at higher speeds and is often cheaper, especially indoors. Dhar predicted that Wi-Fi would trump cellular for in-building uses, but cellular would remain dominant outdoors.

Stanforth, in contrast, predicted that Wi-Fi would prevail: "The short answer is, the cellular carriers are hosed."

 
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