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Is Qwest still all talk?

The company's ads exhort customers to "ride the light" to a world of high-speed data and video networking, but the company still depends mostly on traditional long distance voice services.

In spite of its futuristic image, a key part of Qwest Communications' strategy may be rooted firmly in the past.

That is because the telecommunications upstart, perhaps the best-known company in a pack of young carriers deploying next-generation networks, is willing to buy older communications companies with many customers and solid revenue, rather than build a following from the ground up.

For all of the company's talk of building new fiber-optic networks for revolutionary data and video transmissions, Qwest's bottom line is still supported largely by its older, circuit-switched long distance voice business--the fruit of a recent acquisition.

And judging by its most recent acquisition talks, Qwest seems to be continuing farther down that path.

Qwest is eyeing as takeover targets two more established telecommunications companies, US West and Frontier, which have networks that are largely relics of telecommunications' yesteryear. Qwest is embroiled in a bidding war to assimilate the companies into its envisioned world of advanced data services.

The strategy stands in stark contrast to the company's reputation--cheered by Wall Street--as a fast-growing telecommunications predator that, based on its technological advantages, hungrily consumes the customers of its supposedly weaker competitors that employ inferior technologies.

Qwest's perceived advantage is based on a state-of-the-art, 18,500-mile fiber optic network, which is slated to be finished any day now. Advances in fiber optics--hair-like glass strands that carry voice, video, and data as pulses of light at blazing speeds--allow companies such as Qwest to rapidly expand capacity and build a more efficient network, thereby offering cheaper service than its older brethren. With the latest technology, the company hopes to be a leader in the telecommunications industry for years to come.

As such, Qwest's ongoing advertising campaign suggests that businesses and consumers will sign on with the company to "ride the light" in order to enjoy "the bandwidth to change everything."

Those promises have led to a high-flying stock price, which helped Qwest entertain a purchase of US West and Frontier in the first place. Qwest's stock is up roughly 80 percent since this time last year.

But even as its customers begin to "ride the light," the company continues to embrace traditional sources of communications revenue and lust after seemingly outmoded competitors.

Paying the bills
According to analysts, more than half the company's revenue comes from LCI International, one of the nation's largest long-distance voice carriers at the time Qwest acquired it last year.

Data accounted for roughly 10 percent of the company's network traffic in 1998, according to a spokeswoman. Qwest expects about 20 percent of its network traffic will handle data this year, she said.

Analysts say the market for Internet Protocol data services will be huge, and Qwest is well-positioned to take part in the boom. But long-distance voice traffic will continue to bring in the majority of the company's revenue for some time.

About $2.5 billion--or two-thirds--of Qwest's $3.7 billion in revenue this year will come from its long-distance voice business, essentially LCI, according to Tom Friedberg, a financial analyst at Janco Partners. Friedberg expects Qwest's long distance revenue to remain flat at about $2.5 billion in the 2000 fiscal year while other sources of revenue will grow to $2 billion--about 44 percent--from $1.2 billion this year.

"The bulk of [its revenue] is boring, long distance voice to the small- and medium-sized business market," said Mark Winther, group vice president for worldwide telecommunications at International Data Corporation, a market research firm. "But if you're on your way to the bank and there's money laying there on the way, you're going to stop and pick it up."

The long distance revenue, although not glamorous, has allowed Qwest to continue funding its ambitious construction project.

Some analysts said Qwest's acquisition of LCI, and its proposed purchases of another long distance competitor, Frontier, as well as US West, a local phone carrier, is a sound strategy that gives the company a pool of customers to sell its advanced services to when the market is ready.

"You have to have customers to migrate to a next-generation network," said Blaik Kirby, a principal at Renaissance Worldwide, a Boston-based consulting firm. "It's hard for a new guy to come in and gain brand recognition unless they have a large incumbent customer base to draw from.

"They've got to get a bigger installed base that's on a legacy system," Kirby said.

Acquiring talent?
US West has the least-desirable geographic territory and demographics of the Baby Bells, and Frontier has aging local networks in upstate New York.

Some analysts and investors, who are unclear of how they'll fit into the mix, have been critical of Qwest's abrupt, unsolicited takeover offers for Frontier and US West.

"If they buy a [Baby Bell], it's going to look a lot like a [Baby Bell]," Janco's Friedberg said, noting the local phone giants are known more for their slow growth and predictable returns on investment than the high-flying Internet companies that abound today.

"I think what Qwest may be afraid of is if the telecommunications industry becomes an oligopoly, they're going to have to have last-mile connections to have other carriers keep their networks open to Qwest," Friedberg said.

But others argue that Qwest's moves give it the scale to compete.

"The name of the game is you've got to be big or you're not going to survive. And [Qwest chief executive Joe] Nacchio is nothing if not ambitious," Winther said.

And US West and Frontier have huge existing customer bases, a fact that has Qwest's sales force licking its chops, analysts said.

Although some parts of US West's and Frontier's businesses are unattractive, other newer divisions hold much promise, Winther said.

Most analysts believe that US West leads all the Baby Bells in residential digital subscriber line (DSL) deployments. Coupled with Qwest's backing from BellSouth and its investments in other DSL startups, Qwest could be poised for an end-to-end local and national network over DSL lines, Winther said.

Plus, in terms of corporate culture, US West is not necessarily a typical Baby Bell. Its enterprise data services group has an Internet-oriented culture much like Qwest's, Winther said. "Of the [Baby Bels] US West has been the most innovative in its data services," he said.

Separately, Frontier has come a long way from its Rochester Telephone roots. The company has assembled a booming Web-hosting business, called Frontier GlobalCenter. The unit hosts Web sites for some of the Internet's largest players.

Analysts believe GlobalCenter is the key to Qwest's desire to nab Frontier. But Frontier is still one of the nation's largest long distance carriers and owns some profitable, if not exciting, local voice networks.

Qwest hopes its investments in new technologies, and a slew of acquisitions and alliances in the Web hosting, ISP, and digital subscriber line (DSL) markets, will soon net it huge sums of money.

In the meantime, voice--not the data services executives have boasted about--will continue to fill Qwest's coffers.