Telecom: The Long Morning After
Suppose the U.S. economy staged a recovery this year. Would that rescue telecom, the certified international basket-case of 2001? Not likely. This industry, which disgraced itself with wanton overinvestment in the late 1990s, is still absorbing excess capacity. The capital-funding problems, bankruptcies, job losses, and blown financial targets that roiled the industry last year are bound to drag on. "If anything, the general environment for communications will be worse during the coming year," says analyst Ken Leon, who follows telecom equipment for investment firm ABN AMRO.
In the hunt for early indicators, analysts and investors are scrutinizing capital spending--and don't like what they see. The industry is still recovering from a binge that culminated in 2000, when U.S. equipment spending by carriers rose 30% from the previous year, to $110 billion. Massive fiber capacity was put in place, but demand for services couldn't keep pace, leading to a backlog of inventories of communications equipment--and ultimately, to bankruptcies. ABN AMRO's Leon, whose team surveyed hundreds of telecom carriers worldwide, says there are more spending cuts to come. On a global basis, he says, capital expenditures actually declined only 1%, to $274 billion, in 2001--thanks to increases in China and Latin America. This year, cuts will be more widespread, leading to a global downturn of 17%, to $228 billion.
Decreased spending on gear will hurt equipment makers like Nortel Networks Corp. and Lucent Technologies Inc., which are already in the red. Lucent warned investors in December that revenue for the first fiscal quarter will be just $3.1 billion, about 30% below expectations. Lehman Brothers telecom-equipment analyst Steven D. Levy says Lucent, which has cut its workforce by about 50%, to 60,000 or so, could be forced to make even more cutbacks in 2002.
The downturn in telecom spending could also slow the recovery of the tech sector and the economy overall. Telecom companies are a big part of the tech food chain. Sun Microsystems Inc. got 36% of its 2000 revenue in the communications sector, for example. Tech companies will have a hard time posting strong growth without telecom. And the economy, in turn, is heavily dependent on tech: The sector drove about 30% of the nation's growth during the long bull market.
The availability of credit will also be a crucial issue in 2002. Credit windows were shut tight last year, pushing upstart voice and data carriers such as Winstar Communications Inc. and Teligent Inc. into bankruptcy. The window has opened a crack recently, at least for large companies. In the fall, for example, Lucent raised $1.75 billion in convertible stock and AT&T borrowed $10 billion, including euros. Even fiber-optics newcomer Ciena Corp. was able to issue debt. "Interest rates are at a record low, and the debt market is reasonably receptive to companies with a good story," says Bruce Hyman, a telecom analyst at Standard & Poor's Corp.
One bright spot should be the wireless industry, which will get a boost from the rollout of new data services. Upgraded wireless networks will match the speed of dial-up modem connections, allowing customers to surf the Web and exchange e-mail using cell phones and other mobile devices. AT&T Wireless will roll out these services by yearend. Sprint PCS, Verizon, and Cingular have similar plans. "We are going to make a serious push into data services, and you will start to see the `DoCoMo influence' shape our business model," says AT&T Wireless CEO John Zeglis. (NTT DoCoMo, Japan's wireless data pioneer, has a partnership with AT&T Wireless.)
Broadband access for consumers will grow, too. The total number of high-speed Internet subscribers nearly doubled, to about 11 million, in 2001. J.P. Morgan Chase & Co. says the number of households with broadband will increase about 50% in 2002, to 17 million.
The most important changes in telecom this year may be driven by Washington. Federal Communications Commission Chairman Michael Powell, a Bush appointee, has a more laissez-faire approach than his predecessor, William E. Kennard. So he may allow more Bells into the long-distance markets of many states. He may also be less aggressive about forcing the Bells to share their DSL equipment with rivals. That'll be a blow for competition--and could encourage the Bells to speed deployment of their own DSL services.
By Steve Rosenbush in New York