Hibernating During Telecom Winter

Wake me in about 15 months.

At a summit of the Federal Communications Commission in October 2002, analysts and experts wrung their hands in hopelessness and declared that the telecommunications sector will still be writhing in pain until at least a year from now, with some sectors left writhing more than others. Sure, there’s plenty of life left in wireless and local markets, but don’t bank on any recovery in a year or even two, experts say.

That’s not good news to many of us, especially telecom reporters. Not that telecommunications hasn’t had a history of roller coaster rides. When I first started reporting on telecommunications seven years ago, a lot of its geek speak and acronym jumbles didn’t translate well to the general public. If I found another telecom junkie at a social gathering, the two of us would chat in our techno-babble bubble, bringing on baffled looks and steps backward from the non-tech set.

Back then, with the Telecommunications Act of 1996 on the horizon, the rumblings of change were there, and for those who were observing it happen, it was an interesting—if somewhat socially unacceptable to discuss publicly—time. Competitors were cropping up, but they hardly seemed to stand a chance against the deep-pocketed incumbents.

Then, in the late 1990s, as the stock market embraced telecom as a surefire bet, those tech gabfest sidebars were like human catnip. Everyone from Aunt Bessie to neighbor Jack chimed in on technology conversations and spoke triumphantly of their own connections to the information superhighway. Suddenly, everyone wanted to talk tech. They rubbed up against any tech-talking reporter or industry insider and blinked in adoration. Technology and telecom had become apple pie, and everyone was asking for a second slice.

But somewhere along the way, hyperbole took over. Telecom services weren’t just about new technologies that might make life a little more convenient, they were wrought with exaggerations about changing the world. The hype couldn’t possibly satisfy ramped-up expectations. So now, with the long, cold duration of what John Perry Barlow, co-founder of the Electronic Frontier Foundation, calls a "telecom winter," that time of telecom high-fives feels like an airbrushed dream. After telecom stocks were collectively creamed and telecom services were proven fallible or worse, ho-hum, the topic of communications is once again banned from social conversation. Now those same telecommunications reporters who were trying to unravel the hype in the first place don’t even receive eye contact at social gatherings, if they even get an invitation in the first place.

Remember when unknown telecom renegades smiled successfully on the covers of business magazines? Now those same mugs are on shareholder most-wanted posters.

Telecom reporters are almost a breed hovering on extinction, because, well, there’s not much to write about and fewer folks who want to read it. Save for a few scrappy upstarts, the competitors that came into the market to challenge incumbents after the Telecommunications Act of 1996 are either licking their paper cuts from all the bankruptcy filings or still knocking on doors to ask for funding to keep their shoestring operations running. While some, like Williams (Tulsa, OK) and ICG (Englewood, CO) have emerged from bankruptcy, others have a way to go before they are allowed back in the game. And that leaves the incumbents free from looking over their shoulders, instead staring blankly ahead, still peddling the same old boring services.

Yawn.

Even the hype—more capacity! faster speeds!—that’s been a trademark of the industry isn’t as glaring.

It’s sad to watch the once-promising broadband-to-every-home "telecom revolution" morph into the reputation of "telecom revolting." But here’s a dose of reality: It wasn’t as good then, and it isn’t as bad now. Remember when unknown telecom renegades smiled successfully on the covers of business magazines? Now those same mugs are on shareholder most-wanted posters.

Bernie Ebbers is one example. The world applauded as he was able to snowball Long Distance Discount Service (LDDS), a small telecommunications venture which, according to folklore, he started on a paper napkin, into WorldCom, eventually competing against behemoths AT&T and Sprint. Now WorldCom shareholders see the irony in Ebbers’ being a member of the Promise Keepers.

WorldCom is the best example of a microcosm of the telecom industry. After the Telecommunications Act of 1996, there was a field of gold in competition. Ebbers had a scrappy company that wanted to compete with the incumbents on more than just price. Through a series of more than 70 acquisitions, he tried to land every piece of the telecommunications services puzzle to serve both business and residential customers. At one time, Ebbers company had some of the best talent and assets in the industry. UUNet, which he had acquired, was considered by many to be the leader in Internet technology and brainpower. When he acquired MCI, with its vast marketing prowess, Ebbers seemed to be unstoppable.

But being good wasn’t good enough. He wanted to do everything. Not just long-distance services, but Internet applications, hosting, and even wireless were all territories marked with the WorldCom stake. The bar got higher and higher as Ebbers had to answer to Wall Street demands of faster growth and better performance. Like many of its smaller competitors, WorldCom made mistakes, like making promises it couldn’t keep, building networks faster than it could sell, overpaying for assets, and losing its way when it came to actually integrating all the ambitious acquisitions into one cohesive business. By the end of his reign, Ebbers’ name was more synonymous with his $366 million in personal loans and creative accounting to the tune of $3.9 billion than for the mind-blowing telecom company he had built from the ground up.

There could already be some positive aspects in the WorldCom wake.

"The WorldCom cheating influenced a lot of activity in the market," says Judy Reed, president of Atlantic ACM Research, a research and consulting firm based in Boston. For one, business customers dependent on their service providers have learned to ask not only about a provider’s services and at what price, but about that provider’s own financial spreadsheets. And resale service providers have learned to ask not just about cost, how long their wholesaler plans to be in business and just what, exactly, does the CEO receive in perks and pay.

Robert Konefal, managing director at Moody’s, a financial research firm that rates the viability and health of companies, says while WorldCom’s accounting fraud "spooked the market," the positive side is it forced telecom providers to rethink their financial models. While the nature of telecom has always been to invest heavily in networks and potential new services before they are proven, now the move is in "more measured capital, where the success base is not way out ahead—it’s much more measured."

"It’s not ‘build it and they will come’ anymore," says Konefal. "It’s ‘build it when you’re sure they’re almost there already."

Another big change ahead is that providers wanting to survive, or come back from the financial dead, will have to compete on more than just price. Determining which applications will appeal to customers, and more importantly, which applications customers will pay for, should be at the top of the list, says analyst Melanie Posey at IDC Corp. Analysts point to Napster as an example of a killer app. Although the service was an infringement of rights and eventually failed, it "showed us that if you put together a service that meets a need, people will use the Internet," says Reed, adding that the service at one time accounted for almost 10% of total Internet traffic.

So in the next year and a half, as telecom companies get their financials together and their business models sorted out, there will be more victims that fall to the wayside, such as providers that made "me too" a business model. There will be a slowing of growth in even the healthier sectors, like wireless and local services, say analysts. Yet even the continued attrition will make the industry healthier when it returns. While the customer base may not be able to support five or six service providers in every market, assuming the economy returns and the services are useful, two or three service providers per market will survive.

So in the short term, experts say, it’s back to basics for telecom. The gold-plated, bloated CEOs will be replaced with brown-bagging it, coach-class techies. Even WorldCom has gone back to basics. WorldCom’s new leader, charged with pulling the company from bankruptcy by mid-2003, is Michael Capellas, former COO at Hewlett-Packard and self-professed tech geek. And boisterous press releases that used to champion the best new services in the world and astonishing growth rates will humbly announce "we’re still here" and consider that act of survival a new success threshold.

"Most of the carriers have become more realistic and sanguine in their outlooks," affirms Konefal. "Management teams have been beaten up, and they need to be more careful about being realistic."

And just as I’m setting my alarm clock for my long winter telecom nap and getting ready for a new world of realistic expectations and lack of hype, what happens to appear? A press release and rippling news reports that fiber to the home, that long-promised broadband connection that offered high-speed Internet access, will pass more than 1.4 million homes within a year and a half, according to market research firm Render, Vanderslice and Associates.

Wait a minute. That would be up from a lowly 72,100 homes passed today.

Could that be? Overblown expectations, already?

Ahhh, sweet signs of life. Sweet dreams.