The red Lincoln Town Car idled in the rain near 51st Street and Lexington Avenue in New York City. It was 8 p.m., and driver Pargav Asatrian was waiting for a customer, a Philip Morris Co. employee bound for tony Montclair, N.J. The customer was already half an hour late. So Asatrian picked up a stylus and dashed off an e-mail on the keyboard of a tiny computer protruding from the dashboard. The device, connected to the Internet with a wireless modem, zapped the message to a dispatcher at Citicar Transportation in Queens. The response arrived a moment later: "Job canceled."

The installation of this system reflects the force that swept through the telecom market in 2000. Drivers say they prefer it because it is quieter and actually faster than the old radio. In a pinch, headquarters can even e-mail a map to a driver.

Demand for new services based on wireless technology and the Internet is growing. But the transition is wreaking havoc throughout the market. William Yip, the 42-year-old chairman and principal owner of Citicar, didn't rely on a traditional telecom vendor such as Motorola Inc. (MOT) when he ordered his $1.3 million dispatch system. Citicar's fleet of 170 vehicles is equipped with devices made by computer powerhouse Hewlett-Packard Co. (HWP), a new player in the telecom market. Competition is rising as the lines between telecom, computing, and data-networking blur.

The number and variety of threats facing telecom players exploded in 2000. A slowdown in economic growth and a March meltdown in Internet stocks created a profound change in market psychology. The public markets slammed the capital windows shut, and cash-strapped carriers found it difficult to raise money. Investors who had tolerated years of losses from startups suddenly put a new premium on profits. Meanwhile, revenue growth slowed. AT&T (T) and WorldCom Inc. (WCOM) missed targets, and their stocks fell 60% or more. Carriers began to cut back on capital spending, which crimped the outlook for equipment vendors. Manufacturers such as Lucent Technologies (LU) worried that loans to troubled customers wouldn't be repaid. Telecom carrier ICG Communications Inc. (ICGX) filed for bankruptcy protection. Lucent CEO Richard A. McGinn was fired.

Beneath the turmoil, a new industry model has emerged. The consolidation that created "one-stop shops" in telecom has slowed. The value of telecom deals for the year through Dec. 19 was $469.05 billion, down from $656.23 billion in full year 1999. There are few buyers because the volatile market makes it too difficult to value a takeover target. "Focus" is the new mantra, and the new leaders are companies such as Vodafone (VOD), which concentrates on wireless. That's why AT&T is breaking up. "We're less of a soup-to-nuts supplier as we grow," says John A. Roth, CEO of vendor Nortel Networks Inc. (NT)

No one is immune to telecom turmoil. Players in the high-growth wireless market and carriers in the dying long-distance phone business are both at risk. Some analysts go so far as to predict that during the coming year, only a handful of well-positioned, well-funded, and well-run companies will thrive.

On a global basis, telecom revenue growth will slow. There was an explosion of demand after a global wave of telecom deregulation in 1996. Services revenue rose 26% from 1998 to 1999, according to Merrill Lynch & Co. But last year growth slipped to an estimated 12.7%, according to Merrill, and it will be only 8.6% in 2002. Meanwhile, carriers are clamping down on capital spending, causing shares of equipment makers to tumble. After soaring 31.3% in 2000, capital spending will decline 1.1% in 2001.

RISKY OUTLOOK. As for long-suffering long-distance carriers, many analysts feel they have already hit bottom. "We believe that the incumbent long-distance players offer value," says Merrill telecom analyst Adam Quinton, although he thinks that the longer-term outlook is still risky. AT&T says revenue in the consumer long-distance unit shrank about 10% in 2000. That figure will reach the mid-to-high teens in 2001, increasing the pressure on new ventures such as high-speed Internet access. AT&T also faces a mounting challenge from the Bells, which are sure to enter the long-distance market in more states in 2001.

The outlook for the rival Bells is just as tough. True, they are taking share from AT&T and others as they enter the long-distance market. But prices and margins are dropping.

Meanwhile, the Bells are having a rough time deploying high-speed digital subscriber lines. SBC Communications Inc. (SBC) was expected to miss its yearend target of 1 million customers for this high-speed Internet access service by 150,000. Cable-modem sales rose, however. "I believe that 2001 is the year that broadband cable will really enter the mass market," says Byron Smith, chief marketing officer of high-speed Internet service Excite@Home.

The Bells will face more competition in 2001 from rivals offering high-speed office connections that bypass their local Bell networks. The optical revolution that began transforming the long-distance network in the 1980s is about to go local. Telseon Inc. of San Francisco and Yipes Communications Inc. of Denver are offering 10-megabit local lines for about one-third the price that the Bells charge for slower connections.

The prospects for most of the startups that compete with the Bells, however, are not so cheery. Nearly 40 of these carriers have been launched across the U.S. since the 1980s. But fully one-quarter of them, strapped for cash and unable to raise fresh capital, could end up in bankruptcy court during the coming months.

Among the upstarts in local and long distance, a few select companies such as Qwest Communications (Q), XO Communications (XOXO), McCloud, and perhaps Global Crossing (GBLX) will maintain the confidence of investors. WinStar Communications Inc. (WCII) expects to turn cash-flow positive in 2001. CEO William J. Rouhana Jr. says data revenue is doubling every five months and will account for 60% of its total revenue of about $800 million in 2000.

Wireless revenue growth, though still strong, will slow this year. Globally, the industry soared 50%, to $128.9 billion, in 2000, Merrill says. But it sees 23% in 2001. Having spent $100 billion on spectrum licenses in Europe, carriers are preparing to spend an equal sum to build high-speed networks. "There's no question that high-speed wireless services will arrive. The question is whether anyone will ever make a profit selling them," says Graham M. Wallace, CEO of Cable & Wireless PLC (CWP). C&W opted to sell its wireless businesses.

The industry will carefully watch the initial deployment of high-speed third-generation, or 3G, wireless networks, which are many times faster than dial-up Net connections. Japan will be first, and Europe will follow in the second half of the year. A somewhat slower version of these high-speed services will appear in the U.S. The hitch will be the availability of handsets, Nortel's Roth says. He expects sales of 3G gear to start contributing to revenues in 2001 and 2002. Deployment will get a boost in the U.S. from NTT DoCoMo's $9.8 billion investment in AT&T Wireless (AWE) and by Deutsche Telekom's (DT) acquisition of VoiceStream (VSTR).

As new wireless and Internet services enter the market, they will continue to shape the way people live. Just ask Citicar's Yip. For the first time, dispatchers can communicate with more than one car at a time, eliminating repetitious tasks. In some cases, customers can can even dispatch cars themselves on the Web. The result? Citicar's productivity has soared 25%. Who says the telecom revolution is over?

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