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Tuesday, February 26, 2002 |
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• Global Crossing, Qwest Face Challenges • Comcast Enters Multiple ISP Game • BT Cuts Wholesale Broadband Charges • Job One For Nortel: Get Through 2002 • Broadband Bill Would Beef Up Frail Economy
Global Crossing, Qwest Face Challenges The times continue to be unkind for telecoms. Reports are Global Crossing Ltd.'s bankruptcy reorganization plan is running into opposition, even as Qwest Communications International faces a stockholder lawsuit claiming the carrier artificially inflated its stock prices. Global Crossing, which filed for Chapter 11 bankruptcy Jan. 28, has secured a $750 million cash infusion from two Asian companies. Under the reorganization plan, Bermuda-based Global Crossing would emerge from bankruptcy with much of its $12 billion in debt set aside. But estimates are creditors would get not more than 4 cents on the dollar under that arrangement. Not surprisingly, reports emerged this week that the creditors are mounting opposition, and if they are successful, Global Crossing's reorganization could become a liquidation. Global Crossing officials maintain the plan is sound and would allow the international telecom provider to continue. Meanwhile, a Qwest stockholder has filed suit in U.S. District Court charging the RBOC's deal with KMC Telecom Holdings Inc. artificially inflated the company's stock price, to stockholder's detriment. Qwest sold some $450 million in equipment and in return agreed to pay KMC hundreds of millions for Internet services derived from that equipment. The suit filed by Adele Brody of New York City also claims the KMC constitutes off-balance-sheet debt, aimed at keeping some of Qwest's debt off its books. She is seeking unspecified damaged and class-action status to allow other shareholders who bought stock between April 19, 2000 and Feb. 12, 2002 to join in. Qwest officials have defended the deal, saying it does not constitute off-balance-sheet debt.
Comcast Enters Multiple ISP Game Now that it is running its own cable modem network, Comcast Corp. is wasting no time diving into the multiple ISP arrangements. The Philadelphia-based MSO announced today a pact with United Online Inc. to offer high-speed service within 90 days in the Nashville and Indianapolis markets. Terms of the agreement are not being released, and United Online also is not releasing what price it will charge cable modem customers. The deal marks the first broadband foray for United Online, which owns the NetZero and Juno ISP services that claim a combined 5.6 million dialup customer base. Both are bargain ISPs, offering a limited free service supported by advertising and a $9.95 monthly service with faster speeds and less advertising. The Westlake Village, Calif.- based Internet company struck a deal in April 2001 with Time Warner Cable, but that deal has not as yet resulted in a service offering. The non-exclusive pact calls for NetZero and Juno to eventually be offered in all Comcast markets where cable modem service is available. Up to now, the ISP has avoided broadband after watching other ISPs spend a lot of money on a high-speed rollout only to rep profits well below dialup offerings. "We believe the agreement will allow us to generate per-user gross profits at or in excess of our current billable dial-up offerings," said United Online chairman, president and CEO Mark Goldston in a release. "We are very excited to be announcing this landmark deal with a quality company like Comcast Corp. We believe it will provide a turnkey solution that should require little to no capital expenditures by United Online." The announcement comes as Comcast has largely completed migration of cable modem customers from the bankrupt @Home network to its own network. @Home is scheduled to go dark at midnight Thursday. "Until about two months ago, Comcast was contractually bound to a single Internet service provider," said Comcast President Brian Roberts in a release. "We have moved quickly to provide customers with true choice and value, while creating sound business opportunities for United Online and Comcast." The MSO also is in trials with EarthLink Inc., but there has been no service deal struck as yet.
BT Cuts Wholesale Broadband Charges Aiming to attract more subscribers to its high speed Internet connection services, British Telecommunications on Tuesday announced a 41 percent cut in wholesale broadband charges. From April 1, Internet service providers such as America Online Inc. and Freeserve PLC will be charged 14.75 pounds ($ 21) in monthly rental charges per connection, down from 25 pounds ($ 36). Broadband technology allows data to be transferred at a much faster rate than traditional technology. Data is sent digitally, via either cable modems or adapted telephone lines known as digital subscriber lines. As well as providing high-speed access to the Internet, broadband enables users to be connected to the Internet and still make and receive telephone calls on one telephone line. BT chief executive Ben Verwaayen called broadband the future of telecommunications services and said the price cuts would "drive the whole market forward by making broadband affordable attractive and accessible." BT's own service provider, BTopenworld, is expected to announce the impact on its retail charges "within the coming week," Verwaayen said. Internet provider Centrica Telecommunications Ltd. pledged to pass on all savings to its customers. "The broadband market needs kick-starting in the U.K. and this will help us to be part of that by offering high-quality, reliable broadband services at a price customers will happily pay," said managing director Ian El-Mokadem. Industry regulator the Office of Telecommunications, or Oftel, said in a statement it would look at the broadband price reduction details to ensure the charges were fair and not anticompetitive. Oftel is investigating BT's existing wholesale prices as the result of a complaint from another operator. A week ago, Oftel had urged BT to cut its wholesale charge for unlimited monthly access to the Internet by at least 7 percent.
Ten years ago, the internet was subsidized by the National Science Foundation (NSF) and populated almost exclusively by researchers before becoming an open, commercial network. Now comes the NSF-supported Internet 2--a high-bandwidth, closed network, reserved for government and academia. In January, New York's American Museum of Natural History became one of the first institutions to connect to Internet 2 and open its use up to the public. According to Frank Lees, CIO of the AMNH, the museum gets 100 times as much bandwidth from its OC3-connected Internet 2 lines as a user of a T1 line on the standard Internet would get. About 200 institutions are currently on the network, although more might be allowed as it begins to be used for tasks like medical-imaging operations. "Institutions can share research, images, and more on a network that's not clogged with music, commercial entities, and pornography," Lees says.
Job One For Nortel: Get Through 2002
Weary telecom investors have already learned the hard way that Nortel Networks is in a tough spot. In the past year, the stock of this communications-equipment maker has lost nearly three-fourth of its value. Then, in mid-February, its chief financial officer resigned after admitting he violated insider-trading rules that prevent executives from buying or selling stock ahead of key announcements. Nortel (NT) has also hinted that first-quarter sales could be worse than previously expected. As a result, its shares have fallen an additional 13% since Feb. 11, from $ 6.38 to around $ 5.50 on Feb. 21. That's just the tip of Nortel's iceberg of problems. Telecoms and service providers continue to cut their budgets for new networks, and the equipment market might remain depressed well into 2003, according to optical-equipment consultancy RHK. In the first quarter of 2002, Nortel will likely be the gearmaker affected most by the spending cuts, says Paul Sagawa, an analyst with Sanford Bernstein. Its quarterly sales could slide by more than 10% compared to the previous three-month period. And an expected revenue boost from a new switching product isn't coming anytime soon. On Feb. 13, Nortel postponed the release of this new switch,
used to direct voice calls and Internet traffic along communications
networks, until mid-2002, nearly a year after the original planned
release date. The product, anxiously awaited by Wall Street, is
now in customer trials -- and analysts say there have already
been some complaints about it. Several service providers say it
uses too much power and is too big, says Mark Lutkowitz, an analyst
at consultancy Communications Industry Researchers. BLEEDING BUDGETS More bad news could be coming. Qwest, which accounts for just under 10% of Nortel's revenues, is struggling. On Feb. 14, both Standard & Poor's and Fitch Ratings downgraded Qwest's $ 24.9 billion in debt, although the company managed to keep an investment-grade rating. Many carriers are financially hurting, and analysts expect massive consolidation in the next 12 months (see BW Online Special Report, "Cell Phones at the Crossroads"). That would further hurt Nortel and other gearmakers. In fact, demand for their products might not pick up again until mid-2003, according to RHK. Bernstein's Sagawa, who foretold the optical industry's meltdown, disagrees. He believes orders will ramp up -- to double-digit growth -- by the fourth quarter of this year. PROFITS IN '03? Such sky-high growth is unlikely. In the fourth quarter of 2001, Nortel recorded $ 3.5 billion in pro-forma revenues and lost $ 720 million before taxes. In all probability, the company likely won't be profitable until the fourth quarter of 2003 -- or later, Henderson says. Nortel declined to comment. That's a disheartening outlook, although no one is forecasting
Nortel's demise. It will pull through the difficult times of slack
demand and continuing outflow of high-level management talent,
says David House, who served as president of Nortel until August,
1999. House, who is now the CEO of optical startup Allegro Networks,
bought about seven-figures-worth of Nortel's shares in the cash
market a month ago, when the stock traded near $ 5. He isn't sorry.
"They are definitely a survivor," he says. PRIDE OF THE NATION? One big plus is that Nortel doesn't appear to be the next Enron, despite some speculation that it may have accounting problems. "To the best of my knowledge, everything is O.K. (with the accounting)," said former CFO Terry Hungle, three days after his Feb. 11 resignation. He left after admitting that he had bought Nortel stock just before key company announcements twice last year, in violation of insider-trading rules for executives. The resignation did nothing to quell rumors that Nortel's accounting needs further scrutiny. But investors were relieved to learn that Hungle's departure was related to straightforward trading violations. And barring any other surprises, Nortel has the financial resources to pull through a difficult 2002. It should burn through about $ 3 billion in cash this year, estimates Nikos Theodosopoulos, an analyst with UBS Warburg. As of the end of December, 2001, Nortel had $ 3.5 billion in cash and $ 3.5 billion in credit lines, though one $ 1.75 billion credit line expires in April. NOT "TOO PERILOUS" "I don't think they are in too perilous of a situation, but they are somewhat dependent on the industry improving," says Jay Ritter, an analyst at rating agency Morningstar, which has held Nortel's debt on review since October. Nortel faces a rough road ahead, but most analysts believe the company will make it. That in itself is an achievement in this challenging economic environment. Still, most of Wall Street analysts have a hold rating on the stock. And though a former president just bought a heap of Nortel shares, investors might want to hold off before following his example. Broadband Bill Would Beef Up Frail Economy
With Congress stalemated on a tax-cut economic stimulus plan and the White House considering approval of a dreadful protectionist steel bill, the jittery financial markets are seeking any positive signs that Washington will take productive action to help jump-start economic growth. No industry needs more intelligent help than the embattled telecommunications sector, where profits and investment spending have vaporized. That's why a vote in Congress this week on deregulation of the broadband infrastructure carries such heavy significance for the economy as a whole, and this industry in particular. If approved, the Tauzin-Dingell bill has the potential over the next decade to bring high-speed Web service to nearly every U.S. home. Broadband service is the Mach 4-speed Internet technology that will bring to Americans the next generation of Web services. It could transform the Web from a device for exchanging e-mail and checking stock quotes into a tool that will link all businesses in an e-commerce Web, let users quickly download video or music on demand and give rise to products and applications we can only dream of today. Economist Robert Crandall of the Brookings Institution, and a top deregulation scholar, calculates that if we can accelerate broadband deployment, the value to the U.S. economy could reach $ 500 billion a year. That's more than the entire economies of most nations. Very few actions that Congress could take - short of scrapping the income tax for a consumption tax or privatizing Social Security - could deliver those size benefits to workers and consumers. Broadband deregulation would seem to be a no-brainer. But this issue has become the mother of all political brawls, pitting AT&T against the Baby Bells, including Verizon and BellSouth. Both sides have spent tens of millions on lobbying and fatuous TV ads. The truth is, there's no angel in this fight. The good news is that if Congress shows some common sense, there can be clear-cut winners here - American consumers and businesses, tens of millions of whom lack broadband access simply because of a regulatory regime that prevents access to the infrastructure. Almost eight of 10 homes and businesses still use clunky dial-up technology to access the Web. Broadband technology is more than a decade old, and still is a rarity in most areas. This makes no sense. It's as if we're still watching black-and-white TV. A hallmark of the U.S. era of high-tech innovation has been to spread the technological breakthroughs to the great middle class in short order. Why the still-lingering digital divide between the information haves and have-nots? Because outdated government regulation is stifling the private-sector investment needed to build the network. Technology analyst George Gilder argues that today's regulation "privatizes the risk and socializes the benefit." Here's how it works: When a phone company risks its own money to wire homes and businesses to broadband, the federal government forces it to open its network to competitors at money-losing, government-set rates. This prevents the original investors from capturing the full value of the risk-taking expenditure. A predictable result has been the collapse in telecom investment over the past 18 months. In 2001, telecom investment contracted by $ 75 billion, a 15% decline. That's one of the biggest reasons the industry shed over 317,000 jobs last year - the largest job loss for any industry ever recorded in a single year. By some estimates, it will cost telecom companies some $ 200 billion of added broadband investment to lay down the cables to bring this technology into most homes and businesses. How can this investment be accelerated? One answer is for Congress to let businesses write off their mega-investments the year they're made. It also must create a fair-minded regulatory structure that allows those firms that make the investments to reap financial rewards. This means eliminating free-riding competitor access without fair payment. Tauzin-Dingell may be the best chance to close the digital divide and ensure that the U.S. maintains its commanding competitive edge in global communications into the future. It might also be the only chance Congress has this year to pass a genuine economic stimulus bill. Stephen Moore is president of the Club for Growth. • The Los Angeles Times reports that German
antitrust regulators have rejected U.S. cable entrepreneur John
Malone's $4.8-billion bid to buy six cable television systems
from Deutsche Telekom and become Europe's largest cable operator.
The deal has been widely regarded as dead since Malone's Liberty
Media Corp. declined to make changes to satisfy the officials.
• The Wireless Local Area Network market posted its eighth consecutive quarter of double-digit growth and grew over 150 percent from 2000. According to market analysis by Synergy Research Group, Wireless LAN equipment sales increased almost 12 percent in the Fourth Quarter over the prior quarter with total sales reaching over $ 450 million and reached $ 1.47 billion for the year 2001. For the quarter, enterprise WLAN equipment sales were flat, while SOHO/Home WLAN equipment sales grew over 25 percent to $ 225 million and equaled that of the enterprise. • Global Crossing may be on the block, even as it appoints two new key people. The bankrupt fiber optic company ha said it has several bidders who want to talk about options, but won't name them, the Los Angeles Times reports. Observers are watching such companies as AT&T corp., Verizon Communications and BellSouth Corp., as well as NTT in Japan and Cable & Wireless as potential contenders, the Times says. Meantime, Global Crossing named Carl Givner COO and Anthony Christie senior VP of product management. Givner was executive VP of global operations and Christie was senior VP of global strategy and business integration at Asia Global Crossing. • Alcatel landed a $45 million contract to supply the terrestrial portion of Sea-Me-We 3's intercontinental network, connecting Northern Europe to East Asia and Australia. Designed to support 2.5 Gbps WDM transmission, two wavelengths out of eight, on a single fiber optic pair, the consortium seeks to upgrade to 10 Gbps transmission. Alcatel's portion includes DWDM systems and network management. It also will supply the major part of the undersea optical networking infrastructure, it says. The upgrade will be operational by February 2003. • RCN Corp. and Starpower Communications inked
a five-year, "multimillion dollar" deal to provide fiber
rings in New York City and Washington, D.C. via Qmedia's hub site
in each city. The deal provides connectivity to Qmedia's national
fiber optic network. The rings should be installed by June. Financial
terms were not disclosed. Starpower is part of an RCN joint venture.
• AOL Time Warner applied for Federal Trade Commission approval to allow Internet Nebraska to offer cable modem Internet service in Lincoln, over AOLTW systems. The FTC is taking comments until March 15, but Internet Nebraska says the service will take a few months to launch, the Omaha World-Herald reports.
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