Telecom Firms’ Woes Growing on Several Fronts
The struggling telecommunications sector took another hit Friday as wireless heavyweight Ericsson said planned to stop making its own mobile phones and word spread that WorldCom Inc. may cut as many as 11,000 jobs from its struggling long-distance business.
Stockholm’s Ericsson unveiled a larger-than-expected fourth-quarter loss, projected further woes ahead and announced plans to sell its wireless phone factories to an Asian contractor to stem losses in the handset business.
Though it is the world’s third-largest cell phone maker, behind Nokia Corp. and Motorola Inc., Ericsson said it was incapable of making the phones cheaply enough. Ericsson will hand over manufacturing to Flextronics Corp. of Singapore, but it will continue to research and design the phones as well as sell them under its brand.
Meanwhile, there were rumors that Clinton, Miss.-based WorldCom was preparing to lay off as much as 14% of its work force as part of a major restructuring. The company, whose MCI long-distance unit is the nation’s second largest, called the reports “speculation” and would not comment.
WorldCom said last year the company would soon split off its faltering long-distance and calling-card businesses into a tracking stock to separate them from faster-growing WorldCom units.
The phone company’s stock closed up 94 cents to $21.31 in Nasdaq trading Friday. Ericsson’s U.S. shares, also traded on Nasdaq, fell $1.75 to close at $11.25.
The latest dose of bad news follows this week’s announcement from Lucent Technologies Inc. that the communications equipment maker will slash more than 16,000 jobs. Recently, Motorola said it will shutter some of its mobile phone plants, and financial updates from a string of upstart phone companies have revealed that they are teetering toward bankruptcy.
The developments show that nearly every segment of the telecommunications industry is on the skids despite record growth in wireless phone use and a continued worldwide surge in Internet.
The companies are suffering because demand for mobile phones is cooling off its once-torrid pace, making wireless carriers less willing to heavily subsidize the cost of newfangled phones. Already, many carriers sell phones below cost or give them away to attract customers.
In addition, Ericsson has been slow to expand beyond its business-basic designs to the flashier looks that have helped make Nokia dominant among younger adults and teenage cell phone users.
Ericsson said Friday that its handset unit generated an operating loss of about $1.67 billion in 2000. The losses pulled down the company’s overall results, eating away the high profits of Ericsson’s mobile network equipment business, which accounts for roughly two-thirds of its sales.
Overall, Ericsson’s net income in the fourth quarter, which ended Dec. 31, dropped 63%, compared with the same period a year earlier, to about $239 million. For the full year, the company’s earnings rose 74% to about $2.2 billion, and net sales rose 27% to about $29 billion.
Company executives said the firm would only break even in the first quarter this year and also lowered its forecast for industrywide global mobile phone demand in 2001 to 500 million to 540 million phone units, more pessimistic than Nokia’s and Motorola’s forecasts.
Falling prices have been the biggest factor in the long-distance market, where declining revenue has caused AT&T; Corp., WorldCom and Sprint Corp. to retreat substantially from the consumer long-distance business.
Competition has become ever more fierce in the battle for phone customers, and the Big Three carriers have abandoned the once-familiar price-war mentality.
The woes at the biggest carriers are small compared with those plaguing companies that had hoped to grab market share in the local phone market. Many of them, including once-promising competitors Covad Communications Corp., Rhythms and NorthPoint, are financially strapped and unlikely to survive their challenge to dominant local phone companies such as Pacific Bell in the growing market for high-speed Internet access.
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Times wire services were used in compiling this report.
