JUNK THIS

When Standard & Poor's lowered the credit ratings of General Motors and Ford to junk status earlier this month, it sent shock waves through the financial community like an earthquake that began deep in the planet's core. Here were two stalwart American icons reduced to the same level as many Internet-based companies.

But a funny thing happened along the way to both GM and Ford. Investors didn't punish the companies by dumping shares. GM's stock, in fact, is up since the downgrade.

There are lessons in there for telecom companies. Paul Ingrassia, president of Dow Jones Newswires, wrote in the Wall Street Journal last week that the downgrades are part of the process that will spark the rebirth of the U.S. auto industry. Using Hyundai as one of many examples, Ingrassia points out that massive corporations can, and have, turned around from the brink of what outsiders would consider the precipice of ruin. At the same time, the “U.S.” auto industry now must be thought of as both traditional domestic manufacturers as well as the 23 assembly plants located in America but owned by non-Big Three car makers.

But wait, you say, aren't telcos back in the good graces of Wall Street? Yes and no. While share prices have recovered somewhat, the core challenges of transitioning large telcos from monopoly mentalities remains. In its latest report card on the industry, S&P noted that despite the rapid rate of change occurring in the market, it only issued two upgrades (and two downgrades) to carriers. It also noted that despite the moderate activity related to new ratings and rating changes, there is a continued rapid pace of industry changes and high level of M&A activity that will have a significant impact for many years to come.

Fundamentally, the industry still faces a tough future. Access line numbers keep falling, broadband penetration is increasing but not fast enough, and perhaps most important, competition from cable operators can't be regulated away in the same fashion as competition from CLECs.

The fact that most telcos have saved themselves from reaching junk status — or worse, bankruptcy — is a credit to the financial executives within those organizations. The real challenge, though, lies in trying to pull the same trick as Hyundai. Faced with a reputation for shoddy quality in the late 1990s, the Korean company focused its effort on quality improvement and now ranks ahead of Mercedes, Audi and BMW in the latest J.D. Power survey.

The entire U.S. industry is at the beginning stages of very basic shift that will rebalance the market and forever change the way the world views it. How well carriers manage and control that transition is what will determine who comes out smelling like Hyundai and who heads to the scrap yard.