Low prices force telecom strategy shift

Jessica Hall

PHILADELPHIA: Telecommunications companies that spent billions building

fiber-optic networks to move data, voice, and video at lightning speeds now must

find another way to make money or risk failure, analysts said.

A 50 per cent drop in prices for transmitting voice and data over the past

year already has forced companies such as PSINet Inc. and 360networks into

bankruptcy and others such as WorldCom Inc. to lay off workers by the thousands.

"We think the current state of financial upheaval will only be

intensified as many product-centric companies find themselves increasingly

unable to compete in a services-driven world," said J P Morgan analyst Tod

Jacobs.

Since prices are expected to fall by half again in the next year, companies

must move quickly to shift strategies and find new sources of revenue, analysts

said.

"The ability, for instance, to deliver managed data services allows

more-developed carriers to compete for greater share of wallet at the (corporate

customer) level," Jacobs said. "In addition, services, as opposed to

products, also provide one of the few areas of refuge from severe price

erosion."

Providing services to large companies, however, requires more expertise,

engineering, and sales and marketing. Plus, the sales cycle for sophisticated

services tends to be longer and more complex than selling high-speed

transmission alone.

Dark fiber



Industry experts blame the drop in broadband prices on everything from a dearth
of local network access to overly exuberant capital markets that funded risky

upstarts. They also point to a lack of "killer applications" or

must-have software that would prompt companies and consumers to do more business

over the Web.

Network builders and telephone companies spent about $90 billion over the

last four years on fiber-optic networks in the United States, which now has 39

million miles of glass fiber.

Analysts say less than 5 percent of that fiber is "lit" - or has

the electronics, amplifiers, and software needed to carry information. Credit

Suisse First Boston estimated less than 1 per cent of the fiber in the ground is

used.

Qwest Communications International Inc., which built a national high-speed

network, estimated that for every dollar of capital invested in laying the fiber

in the ground, another $1 or $2 is needed make it available for service.

"Fiber does not equal capacity," said Thomas Soja, president of T Soja

& Associates, a consulting and market research firm in Boston.

More than shiny glass strands



Falling prices for basic transport services have already prompted companies such
as WorldCom, Qwest and Global Crossing Ltd. to add sophisticated services over

their networks.

Higher-end services range from helping corporations run simple Web sites that

provide general company information, to high-end sites that offer online

shopping with personalized frequent shopper accounts, or complex

business-to-business exchanges that bring together buyers and suppliers over the

Internet.

Upstarts, however, lacking the deep pockets to expand their product lines and

expertise, will likely not even finish their networks before running out of

cash.

Some companies - such as 360networks, Northpoint Communications, Winstar

Communications and PSINet - filed for bankruptcy protection. Others, such as

Level 3 Communications Inc., curtailed expansion plans or changed strategies.

Part of the problem lies with lack of high-speed local networks, analysts

said. Optical networks are needed in the local markets to handle services such

as video-on-demand, streaming media and broadcast-quality Webcasts.

Although companies have built the network equivalent of slick superhighways,

the entrance ramps are out of date and unable to handle large volumes of

traffic. As a result, limited traffic flows across the long-haul networks and

fiber remains underused.

The Baby Bells have been working to upgrade their networks and move fiber

closer to customers' homes and offices, but that process has taken time and

could slow to a crawl now that many competitors have gone out of business.

"The last-mile issue is the age-old issue. Most Bells aren't moving that

quickly to replace and upgrade decades-old copper (telephone lines). Also, most

of the competitive companies who tried to drive broadband into local markets

have gone belly up. They're not a driving force anymore, so there's no

competition to put pressure on the Bells," said Rob Rich, executive vice

president with consulting firm The Yankee Group.

A killer application



The incentive to build high-speed networks also is closely tied to the
development of next-generation products and services, Rich said. If companies

don't have lucrative applications to offer over their networks, they can't

justify the cost of building them.

"If the Bells were assured that there were killer applications out there

that companies would pay for, they might speed up their network push. But

companies aren't willing to pay for services that look choppy over today's

networks. It's a vicious cycle," Rich said.

Despite the recent concern about a glut of fiber, falling prices, and

cutbacks in spending, most industry expects agree that the telecommunications

industry will grow over the long term.

"All the things that companies are trying to do - people want. They want

high-speed access, they want data and video services, it's not going away,"

Soja said.

"We're not going to go back to pencil and paper."

(C) Reuters Limited 2001.