The Smart Techie was renamed Siliconindia India Edition starting Feb 2012 to continue the nearly two decade track record of excellence of our US edition.

June - 2001 - issue > Wall Street View

And God Said,

Friday, June 1, 2001

Just a few years ago, people considered utilities and telecommunications, especially telephone company, stocks to be safe, solid investments. They were the so-called “defensive stocks” that could weather a stock market storm. Ma Bell (AT&T), in fact, was known as the “widows and orphans” stock. But AT&T has gone from a high of 61 to a low of 16 in just nine months. Lucent, spun out of the old AT&T with Bell Laboratories and other networking assets, is rumored to have filed for bankruptcy last month and is in the midst of financial restructuring discussions with its bankers. What’s happening here?
The race to build new networks to compete with the old networks of the entrenched players (AT&T, MCI, Sprint) and the rise of IP-based packet-switching versus the old circuit-switching networks spawned many new companies in this broad space. The regional Bell operating companies (RBOCs, or “Baby Bells”) still have a stranglehold on the “last mile,” that last strand of fiber or copper wire of the network that goes to the house or business. Consumers know how slow and bureaucratic the Bell companies are. They do have monopoly on local networks — although competitive local-exchange carriers (CLECs) have taken about 8 percent of their business in the last few years. On the long distance side, 1980s upstart MCI (now Worldcom) and Sprint have laid fiber network to compete with the Bells and Ma Bell. But even that is almost outdated.

The Telecommunications Act of 1996 opened up the field — from carriers, to networks, to equipment makers and services providers. The law opened the floodgates of new investment in fiber networks, new CLECs, etc.; the arrival of Internet and new technologies led to faster access services such as the cable modem, DSL and now wireless services. Qwest was one of the fastest companies to take its market capitalization into billions before the “Internet Bubble.” The success of Qwest, Frontier, etc., and the demands of new markets and technology led to new investments. Money was poured into laying fiber; launching fast access service companies (like COVAD and Northpoint, both of which are in deep financial crisis on the brink of bankruptcy); starting new optical switching, networking and gear companies like Ciena, Sycamore, Monterrey, Cerent, and others; and creating companies such as XO Communications, Level 3 Communications, Williams. and more.

The Right-of-Way Advantage
Some of these were not in the telecommunications industry until five years ago. Either they did not exist at all, or they were in other industries, i.e., railroad (Qwest and EPIK), construction (Level 3), gas pipeline (Enron), etc. They had the right-of-way and the real estate where they could install fiber networks. Qwest proved that with a simple right-of-way it could lay fiber along its railroad tracks and then fill up the capacity later. And the stock market richly rewarded such large capital investments by giving huge PE multiples and market capitalizations. On the other hand, the old Bells were trapped with low PE multiples and dividend payouts and healthier (A and AA rated) balance sheets. It was impossible for the Bells and other entrenched players to make such huge investments without hurting earnings in the short run, dividend payouts and credit ratings. Eventually, AT&T lowered its dividend and has seen its stock dwindle for the past 12+ months.

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