A Pause, Then Big Growth for Telecom

In the wintry aftermath of the 1990s telecommunications boom, the promise of new technologies and Internet services to homes and businesses looks like a pipe dream. But the boom was real and transformed a century-old industry, pointing it toward new possibilities on the Internet.

Conventional thinking bemoans the collapse of a “bubble,” but what is happening in telecommunications is a perfectly normal shakeout of inadequate concepts and companies. This could lead to a revitalized telecom industry with a bright future, as the development of broadband Internet communications and services gathers force.

Revenues in the telecom business more than doubled in the last four years and will double again in the next four, as communication through wires, cables and airwaves becomes the basic infrastructure of every business and a greater essential in every home.

To be sure, the casualty lists are daunting. Global Crossing, builder of a fiber-optic network, has entered Chapter 11 bankruptcy. Firms once hailed by Wall Street as new-wave competitors of the old phone companies went into bankruptcy last year, including Teligent, WinStar Communications and Covad Communications Group.

Suppliers of network equipment--Nortel Networks, Lucent Technologies, Cisco Systems--are treading water, hoping for an upturn in telecom capital investment to restore their profitability.

Contemplating such destruction, it’s easy to forget that there are victors in the recent telecom wars.

The regional Bell operating companies were challenged by newcomers and they responded, merging operations and adapting their businesses.

Now SBC Communications, Verizon Communications and BellSouth are giant companies with strong finances at a time when capital is scarce for telecom ventures.

Qwest Communications owns US West, but Qwest has troubles. Its fiber network is part of the great fiber overcapacity that already has claimed Global Crossing.

But this is no longer the one-size-fits-all telephone industry. Wireless telephone revenues nearly equal those of traditional local telephone service.

Newcomers Vodafone of Britain--which owns AirTouch Cellular--Nextel Communications and Sprint PCS are prominent in wireless service, as are spinoffs or subsidiaries of traditional firms, such as AT&T; Wireless, Verizon Wireless and Cingular Wireless, a joint venture of SBC Communications and BellSouth.

Americans are using a variety of media to communicate more than ever--wireless and traditional phones, cable connections and telephony through the Internet.

The industry is in a post-boom pause, and investment in new facilities is restrained. But the pattern of headlong expansion followed by consolidation has happened at least twice before.

After Samuel F. B. Morse invented the telegraph in 1842, investors and entrepreneurs formed ventures and made and lost huge fortunes for two decades before the Western Union company emerged to lead the industry, writes historian Daniel Gross in the Milken Institute Review.

The telephone itself saw enormous growth--phone usage grew sixfold in the 1890s. Hundreds of companies crowded the field until Theodore Vail in 1907 started to consolidate the industry under American Telephone & Telegraph--the present-day AT&T.;

The transformation of telecom today lies in the expansion of broadband Internet communications and services. The number of homes with broadband Internet connections by cable or digital subscriber lines will grow from 17 million this year to

23.3 million next year and

28.3 million in 2004, according

to research firm Gartner Dataquest. That’s 65% growth in two years.

The Ciscos and Nortels, not to mention Internet component makers such as JDS Uniphase, could see their business picking up late this year and growing again in 2003.

But what immediately lies ahead for telecoms is a period of intense competition.

“Competition in the next two years will pit Bell phone companies against cable operators and wireless providers,” says David Cooperstein, director of Forrester Research in Cambridge, Mass.

able company Cox Communications, for example, is preparing to offer voice telephony over its cable system. AOL Time Warner, a major cable owner, and Comcast, which is acquiring AT&T;’s cable operations, and other cable firms will push further into traditional phone services.

Wireless companies will add information services to their phones, and providers of hand-held computing devices, such as Palm and Handspring, will expand their communication capabilities. The prospect is for a competitive and technological free-for-all.

The federal government may back greater competition. The Federal Communications Commission issued a rule last week that views competition by the form of service offered--telephony, computing, television programming--rather than by delivery system, such as telephone line, cable or wireless network.

And a bill to encourage competition could come up for a vote Wednesday in the House of Representatives, sponsored by Reps. W.J. “Billy” Tauzin (R-La.) and John D. Dingell (D-Mich.).

Competition is likely to bring lower prices for consumers. AT&T; Broadband--the Internet service division of the long-distance phone company--is already test marketing a $100-a-month flat rate for all services.

“It would replace separate bills for Internet access, cable and telephone services and could be competitive” Cooperstein says.

As more people have access to broadband Internet services, experts expect many aspects of life to change. Customers with broadband Internet access typically spend 25 hours a week online, compared with 7.5 hours for customers with today’s more prevalent dial-up access.

Fred Chang, head of SBC’s technology subsidiary, foresees customers with broadband access dispensing with newspapers, radio and television and instead turning to the Internet for news, information and entertainment.

Services will proliferate, says investment manager Kelly Pan of Pantheon Capital in New York. Already some fallen dot.coms are becoming profitable, Pan says, citing IVillage , the Internet-based service for women and new parents, and Autobytel, the Irvine-based auto marketing service.

The next two years will be a time of technological development to bring down costs, says venture capitalist Brad Jones, of Redpoint Ventures. His firm raised $1.25 billion in late 2000 to invest in new firms working with lasers and optical components for Internet networks.

So far, Redpoint has invested $200 million of that money in start-up companies, such as Sabeus Photonics of Long Beach, Asymmetric Integral Photonics of Princeton, N.J., and Telasic of El Segundo.

“We’re not impatient,” Jones says. “For broadband Internet, we invest looking ahead five years.”

That’s a good perspective for an industry with a big future.

*

James Flanigan can be reached at jim.flanigan@latimes.com.