Crisis of co-dependence

In last week’s print edition of Telephony, after early telecom earnings reports appeared to be flat but no worse than anticipated, we asked, “Is this the bottom?” It’s nice to get such a quick answer to our question, though certainly not the one the industry had hoped.

Already, further earnings reports released this week, most notably those announced by major Bell companies SBC and BellSouth, combined with the news that WorldCom has filed for bankruptcy, have indicated that we probably have not hit bottom.

In short, if Bell company earnings per share continue to fall short of Wall Street expectations, as both SBC and BellSouth said they had, these companies will not initiate the large-scale equipment spending the industry ultimate needs to begin its recovery.

In a couple of ways, the WorldCom filing, though expected by many, exasperates what was already a bad situation. For starters, several equipment vendors, software companies and professional services firms that depend on WorldCom for some portion of their revenue, can forget about seeing anything from WorldCom for at least a year. Secondly, because the nation’s second-largest long-distance company pays Bell companies several million dollars each year in access charges, the absence of such could have dire consequences for the Bells.

In perspective, missing out on several million dollars in revenue will not bring down multibillion-dollar companies with dozens of revenue channels, but access charges have been a reliable provider of revenue for the Bell companies for the last two decades. It’s one example of how co-dependent telecom companies have always been and continue to be.

Another glaring example of how this co-dependence hurts the telecom sector is the Adelphia Communications fiasco. The federal government arrested three members of Adelphia’s founding Rigas family this week for allegedly taking $3.1 billion in personal loans from the company and keeping them off the balance sheets.

In some respect, it is refreshing to see executives face punishment for crimes they may have committed to eventually cause the downfall of their companies. However, the behavior of people such as the Rigas family and WorldCom’s Scott Sullivan is doing a lot to drive investors away from the telecom industry in huge numbers. This crisis of faith and the subsequent effect that all of the selling out will have on telecom companies will further ensure that the road to new spending and investment in this industry will not only be long, but up a steep hill littered with obstacles.

The web of co-dependence in the industry means there are no safe havens for anyone, and that bad news for one is bad news for all. For now, the bad news continues.