Early hopes quickly dashed 

NEON Communications, an upstart Northeast fiber carrier, has had a busy two weeks following the terrorist attacks of Sept. 11. Its technicians have set up an OC-12 at 60 Hudson St. to bring dial-tone service to New York's City Hall and are field testing a wireless optics device to connect a New York health services building to its POP. A clear case of the recent terrorist disaster boosting sales in the beleaguered telecom sector? Not quite. 

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Admirably, NEON did the work pro bono, so the benefit to its revenue line will be zero. "We're not charging for the services we're providing," said Ron Steele, NEON's vice president of finance and chief technology officer. But "I would expect somebody along the way will remember we were there to help out." 

The hope sustaining any hint of optimism in telecom-particularly among wireless, hosted services and videoconferencing companies-is that in the wake of last week's horror some economic good can be salvaged. 

The financial markets are not cooperating, however. Fear and uncertainty clung to investors last week as the Dow and Nasdaq wiped out more than $1 trillion of market value. Indeed, telecom stocks are so devalued--the Nasdaq Telecommunications Index is at its lowest level since April 1997--they may be hitting a sustainable floor. Ironically, wireless service providers' and incumbent carriers' securities sailed through last week's storm relatively unscathed.

"Our [telecom] world has been so depressed and beat up that the impact from these [terrorism] events is going to be negligible," said Edward Jackson, senior analyst for U.S. Bancorp Piper Jaffray. "When you have companies trading at 1 to 1.5 times tangible book, they're not trading on their income statement anyway."

However, telecom is not immune to economic cycles. Nothing on the horizon is likely to ameliorate the somber mood of investors, so the sharp V-shaped downturn economists are predicting could dampen consumer and business spending past 2002. 

Short-term, economic indicators released in the next few weeks could wipe more market capitalization off the books in part because they will be "contaminated" by the interruption in business that occurred after the terrorist attacks, said Ed McKelvey, senior economist for Goldman Sachs. "Most indicators will get disrupted-it's a done deal that industrial production is down for September," McKelvey said. Any possibility of positive indicators won't occur until November when October data is released, he added.

NewsNow Allegiance borrows $350 million Sep 18, 2001, 11:09 a.m. ET Online Exclusive

The transactional lull could hurt telecom's traditionally backend-loaded third quarter, causing equipment vendors to miss already-reduced earnings forecasts, Jackson said. More lasting effects loom for companies seeking capital. Although the low interest rate environment created by the Federal Reserve will push some telecom-focused capital into the market, the addition will be incremental, Hodel said. For example, Allegiance Telecom last week tapped $350 million of an existing $500 million credit facility at a low interest rate. 

But even if the Federal Reserve cuts the federal funds rate an additional 50 basis points, the material impact on larger carriers will still be nil, said Susan Kalla, senior analyst for Friedman Billings Ramsey. "They have so much debt that a 2% financing upside doesn't help them much," she said. 

How telecom has fared  in the wake of Sept. 11 Bell companies  Fewer competitors and expense controls means greater return on investment. "Incumbents are somewhat a flight to safety," said Tim Horan, CIBC World Markets analyst Videoconferencing Decreased air travel results in increased use of conferencing technology; Department of Justice decides not to block Polycom/PictureTel merger Wireless service providers Security concerns generate immediate increase in new subscribers, but many question whether growth can be sustained in a declining economy CLECs  XO, McLeodUSA downgraded. A battered stock market puts the squeeze on carriers with funding shortfalls Wireless equipment GPRS delays and weakened consumer confidence eats into replacement handset sales, which comprise 50% of the market  Landline equipment Corvis, Tellabs downgraded; business disruption threatens a typically active Q3

A surge in demand for certain services stands a better chance of righting the telecom ship-if it materializes. Though only two weeks have passed since the national tragedy, already the airline, hotel and travel-related industries are recoiling from the effects of a nation terrified to fly. 

But businesses still need to communicate with each other and their customers in group settings. Enter equipment providers and carriers specializing in video- and audioconferencing solutions. 

Zeus Kerravala, a senior analyst with The Yankee Group, estimates a tenfold increase in demand for conferencing services in the immediate aftermath.

However, Sue Soares, general manager of AT&T TeleConference Services, isn't sure how long the spike will last. Videoconferencing demand has increased about 20% since the tragedies, but Soares said she's not planning-at least for now--to change her forecasts for this year. "One week does not a trend make," she said.

While there surely will be a falloff in demand once paranoia subsides and people start traveling again, Kerravala predicted the video- and audioconferencing markets would remain above previous projections. "It becomes like a drug. Once [people] see it, they don't want to go back." 

Becky Replogle-Wilkes, director of collaborative applications marketing for Sprint, agrees. "You decide that you no longer want to drive across town because [audio] conferencing is a much more effective use of time," she said. 

It's also an effective use of money compared with the alternative. Peter Kastner, chief research officer for Aberdeen Group, said, "It costs about $30 an hour for full-motion video. That's dirt cheap compared with a coast-to-coast flight." Changing the communications habits of businesses won't be easy, according to Christine Hartman, research director of voice-over-packet markets for Probe Research. But if system and service providers succeed, they might have the incentive to take conferencing to the next level: combining voice with data over the Web. 

"You could put a presentation on the Web and use a second line to access it," she said. 

Sept. 11's events also may foster growth in hosted services such as disaster recovery, e-mail management, voice mail management, content management and Web hosting. The uptick for the ailing hosting industry will come from companies concerned about protecting data beyond one location.

"We have definitely seen reaction [to the events]," said Jay Adelson, founder and chief technology officer for Equinix, which operates neutral Internet exchanges. Companies "need to look at their network and server architectures and find ways to create redundancies." 

To create that, multiple locations may be integral for mission-critical data. No single building can be disaster proof, Adelson said. "You have to be geographically diverse and go to two IBXs, for example." 

The attacks have put disaster recovery at the forefront of companies' minds, according to Jason Schaffer, vice president of marketing for storage service provider StorageWay. "But in the long term, things will get back to normal business activities." Others seem to agree that despite optimism that the horrific events may invigorate some sectors, it isn't likely. 

"We can make some assumptions that we will see an increase in hosting, especially anyone that ran Web sites that became overloaded like the news sites," said Jeff Phillips, director of consulting for TeleChoice. "But the AT&T and WorldCom frame relay network outages were a hot topic, too," he said, noting that interest faded quickly with those events. 

And companies may not necessarily go to a third party to do it, said Melanie Posey, an analyst with IDC. 

"I'm not sure there are any new business opportunities for these companies," Posey said. "There have been a lot of gross press releases from hosting companies [expecting] to profit from the attacks." 

Kevin Maroni, managing general partner of Spectrum Equity Investors, said he can't imagine any business his firm invests in benefiting from the Sept. 11 tragedy or the ensuing military conflict. "I can see why a lot of people want to say there will be a pickup in telecom spending, but I think it's a stretch." 
Glenn Bischoff and Liane LaBarba contributed to this report.