Rejuvenating telecom sector won't be easy

NEW YORK -- A year ago, analysts were touting 2001 as a big year for telecommunications. Most consumers were supposed to get high-speed home Internet access and reliable cell phones with snappy Net access and e-mail.

Then the lines went dead.

The Nasdaq Telecommunications Index, which tracks stocks of 317 telecom companies, plunged 40 percent in 2001. Tens of thousands of telecoms workers lost jobs. Tens of billions of dollars in market capitalization evaporated.

Miles and miles of newly laid fiber optic cable went unused.

"Last year we were looking toward a year of excitement and exhilaration," said Jeff Kagan, an Atlanta-based telecom analyst. Now, said Kagan, "the sizzle is gone."

Still shivering in reality's shadow, the telecom industry isn't expected to climb out of its cocoon anytime soon.

Analysts say 2002 will be a back-to-fundamentals year, with companies cutting spending and taking refuge in core businesses.

Digging out

Perhaps 2001's best metaphor is Nortel Networks, the Ontario-based equipment manufacturer.

Nortel shed more than half its 95,000 workers after declaring an unheard of $19.4 billion second-quarter loss.

The company is starting to dig itself out. Nortel landed big contracts in the second half of the year, including a $1.1 billion deal with Sprint and big sales to SBC Communications and VoiceStream Wireless.

Others weren't so resilient. Many companies that burned through Wall Street's cash to build networks now lie on the scrap heap. Investors took back their money as quickly as they gave it. Endeavors without strong revenues failed, Kagan said.

A band of upstart broadband service providers probably fared the worst. NorthPoint Communications, Rhythms NetConnections, PSINet and ExciteAtHome are either gone or clinging to life with the help of bankruptcy court.

Covad Communications, another victim, emerged from bankruptcy on Dec. 20 with a $150 million infusion from carrier SBC.

Some say these companies were tripped up by poor cooperation from the four "Baby Bell" local phone companies who own the critical "last mile" of the residential phone network.

A lost year

Whatever the reason, the upstart providers ran out of cash and fell apart before they could reach profitability. In some cases, customers were cut off and left to fend for themselves.

For U.S. consumers, most of whom still crawl the Internet from dial-up connections and complain about spotty cellular service, 2001 was mostly a lost year.

Promises of inexpensive broadband Internet connections never materialized. Instead, prices went up.

Just 10 million U.S. households are now accessing the Internet via broadband, using either DSL or cable, said Joe Laszlo, broadband and wireless analyst for Jupiter Media Metrix.

By the end of 2002, that number will have risen to 15 million compared to the 53 million U.S. dial-up households, Laszlo predicted. In Japan and South Korea, broadband adoption is growing at a quicker pace, fueled by lower monthly fees, he said.

Another disappointing laggard was the ballyhooed wireless upgrade to so-called 3G or third-generation capabilities. These upgrades were supposed to provide more bandwidth for better voice service along with fast e-mail, text messaging and Web surfing.

In Japan, 3G capabilities are already available on a limited basis. In Europe, they are expected to begin to emerge in the coming year.

In the United States, where the broadcast spectrum targeted for 3G service has yet to be vacated by the broadcasters now occupying it, 3G services are still more than a year away.

"We're way behind," said Deloitte Consulting partner Martin Dunsby.

Technology delayed

Now, even the modest half-step to 2.5G technology -- which will double transmission speed and offer "always on" connections to e-mail and text messaging services -- isn't expected to be deployed across the United States until well into 2002.

Foot-dragging in the United States is partly the fault of carriers' insistence upon building separate cellular networks using competing standards. Most carriers don't allow customers to roam from one network to another.

In Europe and East Asia, carriers use a single standard and permit customers to roam across networks, offering much more reliable service. Instead of competing by coverage area, as U.S. carriers do, foreign telecoms take coverage as a given. They compete by offering new services like custom ring tones and high-tech handsets.

The U.S. upgrade will be a step toward winnowing down the tangle of competing standards.

One standard, called GPRS, will be employed by AT&T Wireless, Cingular Wireless and VoiceStream. The other, known as CDMA 2000, will be adopted by Sprint PCS, Verizon Wireless and, eventually, Nextel Communications.

In the realm of long-distance telephone business, the interests of consumers and businesses diverged.

Core unaffected

Competition pushed prices down, giving consumers ultra-cheap long distance service.

The Baby Bells weren't much affected because their core business -- local phone service -- remained strong and they added new services like calling features and DSL.

But the traditional providers, especially AT&T, suffered.

Some analysts say long distance is a dying business. Already, cellular companies are offering free long distance. More and more local carriers are winning permission to sell it.

In 2002, analysts will look for a merger involving one of the ailing long-distance providers.

Possible scenarios have AT&T -- which capped the year by announcing the sale of its cable unit to Comcast Corp. -- or MCI's consumer long-distance business being swallowed by a cash-rich local carrier like BellSouth, Verizon or SBC.

"In the next several years, virtually half of the long distance consumers will go away," said Seema Williams, a Forrester Research telecom analyst. "The local providers are sitting in catbird's seat. That should be enough to scare the pants off anybody in the long distance business."

But the mergers won't happen until the long distance companies bleed a little more of their value away, said Drake Johnstone, an analyst with Richmond, Va.-based brokerage Davenport & Co.

"You don't want to catch a falling knife," he said.