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Telecom's Bright Spot: Broadband

Bill Rouhana, former CEO of Winstar Communications, knows the ups-and-downs of the telecommunications industry as well as anyone. In 1994, he founded the fixed wireless broadband industry, to provide an alternative to costly underground fiber. The idea took off, and so did his company, recording $759 million in sales in 2000. However, it burned through $175 million a month that year to feed its rapid expansion.

When the capital markets began to lock down, Winstar's luck ran out. The company defaulted on its debt and went bankrupt in 2001. Its core assets were sold last December to international long-distance company IDT (IDT) for just $42.5 million.

That failure was one of many to rock the telecommunications industry in the past year. A number of companies are struggling with price competition and the overcapacity that resulted from the fast growth of prior years. Rouhana says such problems can't be solved easily, and the industry could continue to suffer for the next several years.

He recently spoke with BusinessWeek Online Correspondent Olga Kharif about the problems plaguing the industry. Edited excerpts from their conversation follow.

Q: Do you think the worst is over for the telecommunications sector?

A: I don't. There are still some very high-profile companies that have big issues that they need to deal with, [such as high debt].

Q: Why are big debts more of a problem now than before?

A: These companies don't necessarily have a way of repaying their debt. And if the financial markets stay the way they are, I believe you'll have the requirement of further consolidation among the remaining players, and/or further default by them. That's why I think it's going to be some time before the impact of what's happening is over.

Q: What are the worst sectors to be in?

A: The long-distance business and the mobile wireless business. Long-distance pricing is continuing to be pressured by this glut of capacity and, now, by the entry of the regional Bell operating companies into the long-distance business.

In the mobile wireless business, customer-acquisition costs and churn [remain too high]. So long as there are six mobile carriers that are aggressively competing for people's business, it's just going to be too many companies to effectively operate, given the costs inherent in that business.

Q: Do you see any bright spots in telecommunications?

A: One really big bright spot that underlies all of this -- on a very long-term basis -- is demand for delivery of data over telecom networks. People are increasingly dependent on their computers, and computers are increasingly dependent on the network.... That underlying trend is still there.

Q: Before founding Winstar Communications, you were a venture capitalist. Would telecommunications be an area you'd even look at today?

A: Yes. I'd focus on places where there's still a huge scarcity, which is in the local broadband network. The other place where, I think, there are opportunities is in the use of the existing broadband networks to deliver services like easy-to-use, cost-effective video-conferencing and collaboration.

By developing these services, you take advantage of the glut of capacity. Implicit in your success is the low cost of obtaining that broadband connection.

Q: You are essentially talking of the business that Winstar was in.

A: Clearly, since we ran into problems just like everybody else, we didn't get it quite right. But I still believe the basic concepts that drove our business plan [providing fixed wireless access to businesses as a cheaper alternative to fiber connections] are the right ones. And if you look at today's landscape, there really is an absence of local broadband service.

Q: Do you like IDT's strategy with the Winstar business?

A: I think IDT made an incredible buy when they bought what was the last part of Winstar. By integrating it into their business and trying to drive it to profitability, they are trying to take what is a good, long-term value and to begin to recognize something out of it as quickly as possible. They want to put as little stress as possible on their balance sheet and income I think they're doing the right thing.

Q: Do you think the analysts are doing the right thing by starting to recommend some telecommunications stocks?

A: My guess is analysts who make [those] recommendations think we may be near a bottom, but I don't believe that we are. However, I do think there are good investment opportunities in the telecom industry, on the service side in particular.

The kind of companies where I see opportunities are the biggest ones, the regional Bell operating companies, because I think they're undervalued as a result of the dismal series of events that happened to the industry and everybody else. I think they're going to reemerge, effectively, as monopolies, with less competition than they've had since the breakup of AT&T. Their earnings power is going to be enormous in the future.

The job of analysts is to look into the future and to make an educated guess about what's likely to happen, and then to articulate for those who read their reports the basis of that guess. Can they give us facts? Yes. Can they do reasoning for us? Yes.

Can they add some value? I think absolutely, because they're thinking about the issues involved in the industry, they're asking good questions. But we all have to be realistic about what it is that we look at.

Q: What about your own future?

A: Most of my activities today focus on the not-for-profit organizations that I was involved with over the past couple of years, the biggest one being the Humpty Dumpty Institute, which I co-founded with several other people. It's very heavily involved in land-mine removal, as well as the relationship between the U.S. and the U.N. It's good stuff to do while I'm looking around for another business to be in. I don't know when that will come, exactly what form it will take, but I'm looking at lots of things. There are many opportunities out there.

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