For Whom The Bell Rings
By SIMON ROMERO, NY Times, June 18 2002.

The turmoil continues in telecommunications, making the long-awaited
turnaround increasingly difficult to call. Indeed, in light of a wave of
bad news last week and through the weekend, some analysts say the
industry's problems could actually become worse before they become better.

News over the weekend that Joseph P. Nacchio was leaving the beleaguered
telecommunications company Qwest Communications International and that the
fiber optic carrier XO Communications would file for bankruptcy protection
came in the wake of more bad news from two more established players. Lucent
Technologies , the large maker of communications equipment, said last week
that its sales would decline much more than expected, about 15 percent this
quarter, as its main corporate customers reduce spending. Sprint,
meanwhile, had its debt rating lowered to a notch above junk status as it
said it would sign up fewer wireless customers. This confluence of negative
news, combined with the languishing bankruptcy proceedings of Global
Crossing and persistent concern over giants like WorldCom , have prompted
some analysts to forecast a more severe crisis in the industry, which has
already endured the erasing of an estimated $2 trillion in the market value
of its constituent companies since the telecommunications slump began about
two years ago. "I foresee a near total collapse as the endgame," said Susan
Kalla, a senior telecommunications analyst at Friedman, Billings & Ramsey.
"I've become more reactionary in the last month as it becomes clear that
almost nothing is working in the industry's favor."

The industry's problems have gathered force through a cascading effect that
began with the dot-com implosion in the first half of 2000, which was of a
much smaller scale than the telecommunications meltdown. With fewer dot-com
buyers intent on creating high-traffic Web sites, makers of optical
components for advanced communications networks were among the first
companies to feel the market go soft. Next to tremble were Lucent and
Nortel Networks of Canada, the large providers of switches and other gear
for phone systems. As orders fell, both companies dismissed tens of
thousands of employees without succeeding in returning to even modestly
improved sales growth. Then came the bankruptcies at several competitive
local exchange carriers, known as CLEC's (pronounced SEE-lecks), that were
unable to compete profitably with big incumbent local phone companies.

Problems at long-distance carries, like AT&T, that had an erosion of
revenue because of intense competition and then at hybrid companies, like
Qwest, that provide a variety of communications services, compounded the
industry's difficulties. Now, even the prospects of staid local phone
companies like SBC Communications and Verizon Communications , which
benefit from a relatively steady stream of revenue from residential
customers, are being questioned. Investors are focusing on the climbing
cost of borrowing money for these companies and the loss of customers to
wireless companies, which themselves are under financial pressure as they
try to renovate and expand their networks. "The magnitude of the problem is
enormous," said Scott Cleland, chief executive of the Precursor Group, a
Washington research firm. "The industry's overall revenue is imploding,
while debt is exploding and profits are disappearing." In fact, it is
becoming increasingly clear that part of the quandary of the
telecommunications industry is that the crisis is not a zero-sum game in
which one company's loss necessarily translates into another's gain.
Instead, the tumbling of sales at one company often reverberates throughout
the industry, leading to weaker prospects at its competitors and suppliers.

For example, if a local phone company loses customers to a wireless
carrier, the wireless company does not necessarily profit. That is because
intense competition and a glut of long-haul network capacity is forcing
each carrier to provide its service at cut-rate prices. Citing the
industry's "extraordinary interdependence and mandated interconnectedness,"
Mr. Cleland, whose analysis is widely respected, predicts that 24 of the
nation's 29 top telecommunications companies that have not yet filed for
bankruptcy are at risk of doing so in coming months.

Only a few companies — among them Verizon, Cisco Systems, SBC and BellSouth
— are relatively free from the risk of toppling into insolvency, according
to a research model analyzing debt levels and revenue designed by
Precursor. At greater risk of bankruptcy, in the view of Mr. Cleland, are
companies with once-solid reputations like AT&T Wireless, Lucent, Qwest and
JDS Uniphase . Any additions to the bankruptcy fold could add to industry
pressures created by concerns like Global Crossing, Williams Communications
and 360Networks, which, since filing for bankruptcy protection, have
flooded the market with assets that further depress the prices of goods and
services.

A test of how market forces will deal with the growing heap of distressed
telecommunications assets may be seen in the flailing effort by Global
Crossing's creditors to sell it out of bankruptcy. Those efforts continue,
after the decision last month by Global Crossing's initial suitors,
Hutchison Whampoa of Hong Kong and Singapore Technologies Telemedia, to
withdraw from an agreement to acquire it. Global Crossing's management said
yesterday that it extended the deadline — originally set for this week — by
three weeks to give potential bidders more time to assemble offers. No
concrete offer has yet materialized for Global Crossing's network, which
spans 100,000 miles across 27 countries.

Some analysts are now calling for a Darwinian approach, letting many
companies fail as quickly as possible without buyers' bailing them out at
fire-sale prices. Such an outcome might improve the prospects for the
companies still standing. "Let the ailing networks rot, let them mothball,"
said Gabriel Lowy, an analyst at Crédit Lyonnais Securities. "We now know
that the Internet and data traffic were overhyped. It's now time to sort
out the survivors so the recovery takes a few years instead of many years."