Telecom remains landscape of despair

Analysts: 'Bandwidth glut' may take years to struggle through

By Peter J. Howe, Globe Staff, 5/21/2002

Biggest telecom cos. All the charts

he killer hangover. Nuclear winter.

For telecommunications executives and analysts describing the disaster that has spread through virtually every corner of the industry, those two metaphors seem to be among the most popular these days.

The boom in telecom spending that began around 1996 and lasted into the autumn of 2000 has come to look like a giddy party for which the industry is now suffering the after-effects: plunging sales, evaporating profits, share prices that are down 80 to 90 percent or more from their peaks.

Others see a landscape of competitors that have plunged themselves into a dark, cold fog of destruction like the aftermath of a nuclear war. By pouring so many hundreds of billions of dollars into building networks and funding new hardware makers and telecom carriers, the industry collectively is choking on a massive "bandwidth glut" that may take years to get absorbed and worked down so telecom can start growing again.

Whichever metaphor is the more apt, the hard fact is that Wall Street has soured on telecom, hammering shares of local companies such as cellphone tower giant American Tower, equipment makers Sonus Networks and Sycamore Networks, and start-up carriers including CTC Communications of Waltham.

While telecom firms pepper the list of Massachusetts-based companies that lost the most shareholder value last year, many also posted healthy revenue growth.Westford-based Sonus, for example, saw its sales more than triple last year even as its stock plunged nearly 87 percent in the 12 months ended March 31. American Tower racked up a 54 percent increase in sales, clearing the $1 billion mark, even as its stock lost 70 percent. Burlington-based iBasis, which carries phone calls over the Net for a growing who's who of phone companies, saw sales more than double even as its stock headed below $1 for weeks on end.

The problem, says analyst Joanna Makris of Boston investment banker Adams, Harkness & Hill, is that "expectations were set too high. What we did was throw too much money at too many companies."

Wall Street priced telecom stocks in the late 1990s and first half of 2000 as if the industry forever would enjoy the explosive growth rates fueled by a unique combination of the Net boom, network upgrades related to the "Y2K bug" fears, and the profusion of Baby Bell competitors spawned by the 1996 federal telecom act.

"There are so many public companies that have to go away for the sector to get better, but a lot of them still have a year or a year and a half of cash, so I think they're just going to sit there," Makris said, and slow down the massive wave of consolidation needed to winnow the industry down to a healthy core.

By sales, Boston-based American Tower dominates the list of the top 10 publicly traded telecom-oriented companies in Massachusetts, accounting for almost as much revenue as the next nine companies on the list combined.

The company owns more than 13,000 towers in the United States, Mexico, and Brazil, which became hot properties in the late 1990s as rapidly expanding cellphone companies came looking for new facilities to serve tens of millions of new customers each year and increased wireless calling by existing subscribers.

But when wireless growth began slowing last year, American Tower shares fell almost in lockstep with its major customers, such as AT&T Wireless, Nextel, and Sprint PCS. "We are somewhat tied at the hip to our customers' performance," said American Tower spokeswoman Anne Alter.

"Virtually everyone is losing money in the telecom business," said Eric Giler, president of Needham-based Brooktrout Technology, which makes components and software for telecom devices and didn't make The Globe 100 list for 2001, after having landed at number five for 2000.

Giler said the company took itself out of contention for this year's Globe 100 for a very basic reason. "We made a very conscious decision at Brooktrout to lose money [during 2001], and the reason we did is we didn't want to lay anybody off."

While maintaining his 350-person staff and freezing salaries and bonuses, Giler encouraged employees to find a range of ways to cut spending, such as less travel, fewer trade shows, and better-targeted advertising. Along with the sale of a software unit, those steps helped Brooktrout increase its cash position by $12 million last year even as sales dropped 43 percent to $79.8 million.

Peter J. Howe can be reached at howe@globe.com.