WINNOWERS & LOSERS

The winnowing process occurring in all segments of the teleconomy is, in most sectors, still in its early stages. The bankruptcy trend will parallel the trickle-down that, at the peak of the bubble, carried money from cash-flush carriers to equipment providers to component suppliers and on down the line.

The vast majority of the bankruptcies have thus far been in the carrier space — WorldCom, Covad, XO Communications, Teligent and other collapses have been high-profile and often gigantic in magnitude. Remarkably, more bankruptcies still loom. Although most of the carriers in that category have already seen the sun set, we'll still see several wireless carriers — most likely Sprint and AT&T — ride off into the horizon next.

The equipment vendors, component suppliers and others further down the teleconomy river will accordingly be the next to face a rash of bankruptcies. The smaller private companies that have closed their doors over the past year or so are just the tip of the iceberg. Just as there wasn't enough end-user demand to justify all the hundreds of billions of dollars spent building out carrier networks, there simply isn't enough capital expenditure to justify all the plants and equipment vendors churn out. Similar to networks sitting around with tons of excess capacity, there is a bunch of inventory still out there, some of which isn't even on anyone's books.

One interesting twist on the parallels between the service providers and other telecom companies is that hangman's noose commonly known as debt. While most carrier start-ups dipped again and again into debt markets, many start-up equipment vendors went public in overheated markets, which left them incredibly well capitalized. Corvis, Sycamore and many others can barely generate any real revenues, but still have tons of cash and no real debt. This actually prolongs the problems for companies like Cisco, Advanced Fibre and Nokia that will clearly survive this winnowing process, but must wait for these lesser rivals to wither away and die.

Leveraged vendors like Redback and Riverstone — or even Nortel and Lucent, whose management teams were too foolish or hubristic to take advantage of the crazy market caps they once sported — need to die away in order to move things along. These vendor's customers are helping to push this winnowing process as they become increasingly selective about their suppliers, and we'll eventually see the demise of many vendors. And when all is said and done — perhaps another year or two out — the survivors of the equipment and component worlds will thrive.

DOSSIER: CODY WILLARD

Occupation: Author of The Telecom Connection newsletter; contributor to TheStreet.com's RealMoney

Place of residence: New York

Current reading: “The Money Game” by Adam Smith

Hobbies: Guitar, basketball, music composition

Favorite Web sites: RealMoneyPro.com and OpenCyc.org

Next project: Digging for treasures