2000 marked tumultuous times for telecom companies

Far and wide, established communications companies and aspiring start-ups were forced to alter course to survive in a cutthroat consumer and business market.

No one was safe.

Market conditions and a wary investor community caused behemoths AT&T, WorldCom and Sprint to restructure their businesses, while many smaller competitors fell by the wayside as capital markets dried up and profits became more important than growth.

The year "saw the telecom industry come back to earth after spiraling into a hyper frenzy of expectations," said Elliott Hamilton, senior vice president at The Strategis Group. "Investors initially thought the opportunities were so immense and wide open that any company stood a good chance of reaping a windfall as long as the company had their bucket underneath the spigot."

The telecommunications downturn was precipitated by the suffering stock markets, which led to a shortfall in investment capital as Wall Street and venture capitalists became more skittish. Suddenly, instead of focusing on speedy growth, companies were scrambling for enough capital to survive.

Those still standing as 2001 arrives are faced with making their new business focuses successful, renewing investor confidence and shaking free from the carnage of 2000.

Long-distance upheaval
Perhaps nowhere was the downturn in the communications sector more visible to the consumer than with the makeover of the top three long-distance carriers, AT&T, WorldCom and Sprint.

What struck many observers as odd was how quickly, in the course of two weeks this fall, all three companies pulled back from what had been for decades their primary business: long-distance.

Facing double-digit revenue declines in long-distance, Ma Bell announced in October that it would disassemble the company that had dominated telecommunications for a century. By 2002, chief executive C. Michael Armstrong promised there would be three companies, AT&T Business, AT&T Wireless and AT&T Broadband, with the dwindling consumer long-distance segment a subsidiary of AT&T Business with a separate tracking stock and dividend policy.

In the latest sign of Ma Bell's woes, the company warned for the second straight quarter Wednesday that profits will fall below expectations due in part to sluggish growth in the company's consumer and business long-distance division.

WorldCom followed suit a week later, saying it would separate its long-distance business under the MCI name with a separate tracking stock. As with AT&T, the tracking stock was billed as a way to insulate the parent company from the sector's declining revenues.

Days later, Sprint joined the exodus, not with a tracking stock but by detailing a shift in its business focus. The company that had made a name for itself as a long-distance competitor would now focus on the increasingly competitive data services market.

These actions didn't occur in a vacuum. Stock in the three companies had been falling all year. The trio saw their shares lose roughly two-thirds of their value between March and September. AT&T's total market value dropped below the amount it spent a year earlier to acquire cable concerns TCI and MediaOne.

None of the three stocks has recovered, though Sprint's has been the most stable.

Rates and revenues in long-distance had been falling for years, as Qwest Communications International, WorldCom, Sprint and others leapfrogged each other to offer rates of 10 cents per minute, then five cents per minute and even below that.

A result of such a free fall is a devotion to higher-margin businesses, such as providing Net access and other network services to businesses. Rather than devoting more attention to this already declining business, the long-distance giants turned elsewhere, some analysts said.

"They're trying to invest in new growth opportunities" and convince Wall Street they've turned their companies around, said Drake Johnstone, vice president for investment firm Davenport & Co.

Carnage for small competitors
If times were tough for some of the nation's largest communications carriers, the last half of the year was even worse for smaller entrants.

For much of the late 1990s and through the early part of 2000, competitive local phone carriers (CLECs), wholesale broadband providers and high-speed Internet companies raced to build new networks and add customers while demand for high-speed services soared.

Communications carnage The communications industry fell on hard times in 2000, with even industry bellwethers AT&T, WorldCom and Lucent Technologies struggling through the rocky year. Perhaps hit hardest, however, were dozens of smaller competitors, as well as broadband ISPs and the smaller equipment makers that supply them. Major carriers

AT&T long-distance profits fall, stock slips 60 percent from January; company announces four-part breakup. WorldCom lowers profit and sales projections, plans to spin off core long-distance voice business; acquisition of Sprint scuttled by antitrust concerns. Sprint suffers from poor perception and slumping stock after WorldCom deal nixed, sells stake in international communications venture Global One. Small competitors

ICG Communications executives resign in droves; company issues profit warning, faces shareholder lawsuit. GST Telecommunications files Chapter 11 bankruptcy, sells assets. Covad Communications and NorthPoint Communications revise earnings, announce layoffs. PSINet considers corporate sale. HarvardNet, New Edge Networks and Jato Communications are among others to announce layoffs. Equipment makers

Lucent Technologies' profits slip; company issues repeated earnings warnings, plans major restructuring, announces layoffs; CEO Rich McGinn resigns. Copper Mountain Networks, a high-speed Net access gear maker, warns that lower capital expenditures will hurt earnings; stock tumbles from March highs. Nortel Networks' sales growth strong but slower than expected; Nortel concerns send optical stocks lower. Source: CNET News.com

The seemingly endless supply of funding came to a screeching halt. Wall Street, venture capitalists and individual investors became spooked by a sudden stock market downturn and began to look more favorably upon established, profitable companies.

"The biggest mistake by everyone was that all of the start-up companies were on such a high burn rate that they required new capital every six to nine months just to stay in business," The Strategis Group's Hamilton said. "Thus, a market downturn saw these companies with no means to access new capital and not enough revenues to fund ongoing operations."

Analysts say the demand for broadband and the easily available capital created too many start-ups for the market to sustain. Many analysts have for some time forecast today's shakeout, and now start-ups and smaller communications providers are being winnowed out of the industry.

"If 20 people are in a row boat and one person hangs over the edge, it's fine. But if all 20 hang over, the boat capsizes. All the CLECs ran to the same edge of the boat," said Scott Cleland, chief executive of The Precursor Group, an independent research firm. "They all ran after the same customers, the same buildings and the same investors."

Other analysts concur that too many providers chased too few customers.

"The glut of new companies all competed for the same basket of businesses, which had them cannibalizing themselves more often than taking customers away" from the Baby Bells, Hamilton said.

Many smaller competitors now face serious financial perils and have abandoned their grow-at-all-costs strategies.

Companies such as Covad Communications, NorthPoint Communications, PSINet, DSL.net, HarvardNet, Flashcom and others have had to lay off workers, restate earnings, and consider takeover offers.

Communications crystal ball
The telecom company downturn has laid a shaky foundation for the sector going into 2001.

The companies that are restructuring, splitting or creating tracking stocks will be closely scrutinized to see whether their individual reorganizations can combat issues endemic to an industry.

For one, communications carriers' strategies for growth require huge capital outlays to create new data and wireless networks. But traditional voice revenues are falling, while data and Internet revenues have yet to pick up the slack.

At the same time, an influx of new competitors has created steep competition for the same customers. In the early part of the year, this was seen as healthy rivalry. But as stocks fell, and worries began to rise about the high level of capital expenditures necessary for some, the amount of money available to the industry plummeted.

A bright spot in the recent storm clouds has been the big Baby Bell local phone companies. Those giants have traditionally been viewed as slow-moving, highly regulated dinosaurs of the industry, but those onetime weaknesses have meant that Verizon Communications, SBC Communications and BellSouth have been less exposed to this year's ill winds.

"Over the next year anyone who already has a monopoly is going to be looking good," said Reed Hundt, a former chairman of the Federal Communications Commission who now serves as a communications venture capitalist. "Defenders are better off than attackers in times of credit crunch."

What many point to as the deciding factor behind the fate of telecommunications over the next year is the cutback in available capital. Building and maintaining a network infrastructure is a costly business, and if the markets remain hostile to new borrowing, communications companies will likely continue to face Wall Street hardships.

That means that many eyes are on the U.S. Federal Reserve Bank and Alan Greenspan, who is expected to ease pressure on interest rates early next year, and on president-elect George W. Bush, who risks a recession led by technology and communications slowdowns. Their action could help turn around the problems, some say, or could lead to a precipitous decline in the once-healthy U.S. economy.

"The demand is there, and the need for capital expenditure is huge. But we're being overtaken by a crisis of confidence causing the credit crunch," Hundt said. "We're not looking at a soft landing (for the economy) here, we're looking at a repetition of Galileo's experiments with gravity."

News.com's Ben Heskett contributed to this report.