For a few stellar years, telecom and technology were the passports to cultural relevancy. The Internet had already taken popular culture by the throat, and its impact was rippling. Any technology that supported, delivered, relied on, accelerated, or made broadband access more compelling was fair game. Whatever aspect of the telecom industry you knew about—the financials, the technology, the markets, the business case—could be parlayed into a somewhat colorful conversation. All the hot technologies of the day were traced back to telecom roots. The buzzed-about new start-up was in the communications space. To provide full disclosure here, I became accustomed to having dinner-party conversation that would be interesting to at least someone at the table.
Then it stopped. Dead.
I felt like everything I had ever known about telecom was sent into a black hole. Billion-dollar companies existed one day and were gone the next. Rock-star CEOs once proclaimed as born geniuses were banished to oblivion. The cheerleading financial analysts that covered it all were led away in handcuffs. Was it all just a dream?
No one talked about their new broadband connection anymore, because it seemed like they had it forever. No one talked about their cool, new mobile phone, because they couldn’t afford to upgrade, or they hated their operator who was sending them erroneous statements due to snafus in billing systems brought about by lack of integration from acquisitions, or they were annoyed with the operator’s telemarketing campaigns to get them to sign two-year contracts—even before the LNP (local number portability) mandate, which let you keep your phone number as you churned to another bad provider, came and went. Sure, the new satellite radio services, the occasional synching of a PDA or even (to quiet the deafening silence in a desolate trade convention hallway) getting "Blue-jacked," where someone sends an unwelcomed message to your mobile device via Bluetooth connection to send something to a printer, came up and satiated the technology hunger pangs momentarily, but let’s face it—those applications just didn’t have the same pizzazz as their predecessors. The thrill was gone.
But now, it’s in air again.
In the first quarter of 2004, there were multiple signs of hope that the telecom sector was budding again, and stock charts were starting to look more like the profile of an up escalator than a staircase to the basement.
Consider the case of Cisco, the mega-star of the Internet era. The networking giant reported this February that it experienced a jump in sales for the second quarter of its fiscal year of almost 15%. The company attributed its new product additions to service providers deploying new services again. Cisco saw its stock price slowly rise to the high 20s—the highest number it achieved in three years.
In the first quarter of 2004, there were multiple signs of hope that the telecom sector was budding again.
Soon after, another networking player, Juniper, picked up Netscreen, a security solutions company, in a deal valued at nearly $4 billion and aimed at getting the enterprise to feel confident in secure networks. Reading about the deal in the Wall Street Journal made me (almost) not require my usual morning caffeine boost. There’s nothing like those big, audacious, late 1990s-like deals to get the telecom juices flowing again.
Although Ericsson experienced a similar slight revenue dip during this past February, it showed a fourth quarter profit. We’ll take that. But it was the CEO’s stand that the mobile infrastructure market had stabilized and would remain stable or grow slightly in 2004 that inspired glowing reports and sent shockwaves of optimism through the financial markets and business media.
Then, of course, the biggest news in the wireless sector in years hit like a thunderbolt when after weeks of speculation, Cingular outbid U.K.-based Vodafone for AT&T Wireless. The price tag was a cool $41 billion, even though AT&T Wireless had been plagued with customer service problems and complaints about its LNP processes and software glitches. Because Cingular and AT&T Wireless shared a common blueprint based on GSM (global systems for mobile communications) technology, and had a common enemy in Verizon Wireless, the number-one U.S. service provider, the marriage was no surprise.
Rumors of what carrier-scorned Vodafone would do with its 45% share in Verizon Wireless, and its interest in the U.S. market, continued to receive coverage. Finally, the long-predicted consolidation in the wireless service provider sector had begun. But a faint cloud loomed over the mega-merger. While the deal, expected to close at the end of this year, fetched AT&T Wireless shareholders $15 per share, it had Cingular’s parents, SBC Communications and BellSouth, likely staring down a cash crunch. BellSouth, a 40% Cingular stakeholder, would have to pony up $16 billion for the property. The cash would come from a combination of cash on hand, cash generated from operations prior to the closing of the deal, plus potential asset sales, one of which proved to be the operator’s Latin American operators, sold off for $9.5 billion to Telefonica in March, the telco said in SEC filings. The rest of the company’s "external funding" requirements would come from the public debt markets. Suppliers to the company squelched concerns about having one less operator in the market to sell to and instead extolled the new mega-pocketbook of the new carrier. But the purchasers will likely be hamstrung by a cash crunch before they can make good on plans to build out and expand the new combined network.
The first quarter of 2004 also rekindled the content-over-broadband flames again. Although cable operator Comcast’s $54 billion play for Disney was rejected outright, it led pundits to point to the broadband pipe as power, and controller of the content that rides on it.
2004 has provided good news for the telecom sector right from the start. The year kicked off with January’s news from Verizon Communications that it would allocate $1 billion to its high-speed wireless service offering, using equipment from Nortel Networks. Verizon Wireless’ announcement followed AT&T Wireless’ investment into its own high-speed wireless network in November. Verizon also planned to apportion another $1 billion to Internet protocol services. Other providers with nationwide roll-out plans, like Qwest and AT&T, announced commitments to voice over Internet Protocol (VOIP) investments.
The long telecom winter had strangled the spending of many operators, who were just trying to stay afloat, never mind expand on their networks and upgrade services offered to customers.
"Carriers never stopped spending, but they cut back significantly in the last few years," says Jeff Kagan, an industry analyst. "But the clouds seem to be clearing and we’re hearing upbeat forecasts at all the analyst meetings and talk of increased cap-ex spending. This is music to the ears of companies like Ericsson who live and die based on cap-ex spending."
With service providers talking about increasing their investments, the future does look bright, says Kagan. "But we’re not going to snap back overnight," he says. "It’s going to be a moderate, but hopefully steady, growth curve."
After quarters of teetering on insolvency, equipment companies would be more than happy to take those curves. And technologies that will benefit from the spending sprees include services like VOIP, and more wireless networking solutions, like Wi-Fi. There’s also been advancement on broadband wireless as a means to compete or compensate for DSL and cable. Service providers, like AT&T, Nextel, and Covad are taking an interest in broadband wireless technologies, and Nextel recently launched a limited free trial of the technology in North Carolina. Intel, too, is pushing broadband wireless, supporting a standard, called Wi-Max, which provides blanket coverage through base stations communicating to receivers, and is expecting to launch its product by the second half of the year.
The need for wireless networks is being fueled by users’ demand to access data on the go. Users are commonly obtaining their Internet access through laptops that are increasingly wireless-enabled. Thanks to Intel’s Centrino, chips that can talk to wireless networks, now Wi-Fi and down the road WiMax and others, will be in end-user devices to enable applications like video streaming and multimedia messaging. According to ABI Research, 58 million users will have wireless access from their laptops by 2009. Users want more places to access their networks and the Internet. So Wi-Fi networks access points, or hotspots, have appeared in Starbucks, McDonald’s, and airports. And even cities, like Cerritos, CA, are deploying wireless networks for public access.
"That’s the most interesting thing going on with wireless—to get hotspots where techies go," says Greenstein. And, one day, even where the non-techies go.
Another good sign? At a major wireless trade show held in February, the increased attendance plus the sense of the U.S. economy’s rebound helped provide a supportive forum for operators’ plans to trial and roll out so-called third-generation (3G) wireless services. Although 3G has been more hype than substance during the past few years, industry watchers say the technology is likely to gain traction this year.
On the device side, already ubiquitous camera phones are paving the way for widely available video phones. While these mobile phones with cameras embedded cause some privacy blow-ups (picture this: camera phones in gym locker rooms…enough said), they are being embraced by the younger set. As counterintuitive as it seems, U.S. service providers have not embraced interoperability required for users not only for sending and receiving photos on different networks, but talking via walkie-talkie or push-to-talk methods as well. That a customer from, say, Sprint can’t send a photo to a Verizon customer defeats the purpose of multimedia messaging technology, which has quickly become popular outside the U.S. because of this very interoperability. But photo leader Sprint gave a glimmer of hope that multimedia messaging will mirror short message services and success overseas when it announced an interoperability agreement on photo sending with Canadian provider Bell Mobility. If it works with photos, expect video clips to follow.
Will providers be sure not to overextend themselves financially, not to overhype services they just can’t deliver, remains to be seen.
That’s a pretty good start for the telecom sector, but some turbulence is expected this year. Greenstein and others, for instance, see a potential meltdown at the national infrastructure level.
"There’s too much long-distance capacity for data," he says, so companies like Level 3, Sprint, and Quest are on his list for mergers, acquisitions, or fall out. The need for broadband has not yet reached that huge demand predicted years ago, where everyone would want and need a T1 line to their home, so on the applications side, development needs to occur.
"We’re still seeing growth, just not doubling every year," Greenstein says. Will providers be sure not to overextend themselves financially, not to overhype services they just can’t deliver, to ignore the needs of customers by rolling out services based on technical prowess rather than actual need and demand from customers and revisit those dank doldrums seen in telecom past remains to be seen.
Until then, I choose to enjoy the technology rebirth all around. Non-techies now consider un-wiring their homes an essential. Even though the photos can’t be sent to other operators just yet, many people are toting their new, cool camera phones that are morphing into PDAs. Wireless-enabled PCs are being shopped to go with the already commonplace LCD screens that accompany them. Mergers and acquisitions are occurring. Strong financial statements are being reported in many instances. Industry executives who made a name for themselves on one (now defunct) company marquee are again passing out their raised-ink business cards. The telecom industry is again percolating.
"There is finally light at the end of the telecom dark tunnel," says Kagan. "And for the first time in several years, it’s not another train."
Still, my enthusiasm for seeing the telecom we knew come back again was dampened recently when I encountered a telecom consultant and market investor in March. Four years ago, he was a paper multimillionaire, set to retire at an early age. As the tech market crashed, his worth followed. So now that tech and telecom are blooming again, and he’s getting business contracts once more, is he back in the market?
"Yeah, but his time I’m gonna do it right. I’m investing in something with huge margins," he told me. "Women’s shoes."
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