SURVIVAL

Apr 1, 2001 12:00 PM, Marcia Martinek, Senior Editor

When will the markets turn around? Who will survive?

These issues got a lot of play as carriers, vendors and financial analysts took their shots at the wireless broadband industry during the 2001 Broadband Wireless World Forum.

“I expect to see consolidation in the entire value chain,” said Scott Davis, vice president and general manager of broadband wireless access for Nortel Networks (www.nortel.com)

“Only the strong will survive,” said Gideon Ben-Efraim, Netro chairman, president & CEO (www.netro-corp.com).

“We will see the survival of the fittest,” said Kwame Boakye, Harris (www.harris.com) vice president of technology. He said Harris has been around for more than 100 years and then added what most of the speakers probably were thinking: “We expect to stay.”

Timothy Luke, Lehman Brothers (www.lehman.com) senior vice president, said this is clearly a tough landscape for the vendors.

“There have been significant downturns centered around a well-documented slowdown in capital expenditures by service providers,” he said.

James McIlree, Tucker Anthony (www.tuckeranthonysutro.com) senior analyst, said some equipment vendors that have been pinning their hopes on the automatic resumption of financing would be disappointed.

“These are periods the market uses to separate those vendors it believes in from those that it doesn't,” he said.

On the carrier side of the equation, the analysts seemed to view both Winstar (www.winstar.com) and XO Communications (www.xo.com) as the brightest stars in the constellation.

“Over the last few months, it's been somewhat encouraging seeing players like Winstar getting backing from Microsoft (www.microsoft.com), Compaq (www.compaq.com) and Cisco (www.cisco.com) — seeing players like XO being successful in gaining financing.” Luke said. This is an important element in underpinning investor confidence, he said.

“A lot of the carriers deploying broadband services are really the virgin carriers, carriers such as XO and Winstar, which are going out and building networks and offering services to companies at a discount of what the RBOCs are offering them,” said Jim Friedland, Robertson Stephens vice president & senior analyst (www.robertsonstephens.com). Where pricing is an issue, it's likely that small and medium businesses will look to these companies as an alternative, he said.

“It's just cheaper at the end, and that will drive the continued roll-out of broadband,” Friedland said.

XO Communications was not represented at the conference, but Frank J. Jules, Winstar president and COO of U.S. operations, was both present and optimistic.

Jules seemed pleased with his move to Winstar this past August after serving as SBC/Ameritech (www.sbc.com) business communication services president. And he didn't mind taking a shot at the RBOCs.

“Broadband is not a priority for the RBOCs,” Jules said. “They can't do it,” he said, describing Ameritech as “anchored in copper.”

Jules noted that although fiber is the best solution for long-haul networks, fixed broadband is the way a company such as Winstar can reach the largest segment of businesses.

Three things will drive the broadband wireless industry: Local bandwidth is scarce; the demand is exploding; and new broadband services are coming to the market every day, Jules said.

Winstar has 60 markets connected by fiber with fiber rings connecting most of these markets.

Two other large wireless broadband players, Teligent (www.teligent.com) and Advanced Radio Telecom (ART) (www.art-net.com), have had a tougher time in the industry, but representatives of both seemed confident of their future.

Alex Mandl, Teligent chairman & CEO, said that early fixed-wireless technology did not develop as it should have. Teligent has been operating primarily as an off-net business, using LEC networks, a low-profit kind of business, he said.

But Mandl thinks that the company has turned the corner.

“Now we have an on-net footprint of 5,000 buildings, and we're ready for prime time,” he said. “We have more satisfied customers. Margins are more attractive.”

International expansion is a business strategy Teligent shares with the likes of Winstar, XO and ART. Teligent now has 180 million POPs overseas, including recent spectrum awards in Germany and France.

Mandl noted the often-quoted figures about the number of U.S. buildings passed by fiber (which varies from 5% to 10%, depending on who's citing the statistics). He said in Europe, only 2% of the buildings are passed by fiber, so there is an even bigger potential market for wireless broadband access.

Wharton B. Rivers, newly appointed ART CEO, also sees better days ahead for his company. For one thing, he's enthusiastic about ART's new offering, 100Mb/s for $1,000 a month. Then ART recently announced an $11 million deal with Cable & Wireless (www.cw.com), which will be using ART's broadband wireless services to extend its wireline networks. (Before coming to ART, Rivers was Cable & Wireless North America president.)

Rivers sees a $5 billion marketplace opportunity not being tapped.

“Most companies can't sort through the options,” he said, speaking of potential customers. “If we don't deliver a solution to them today, there may not be a tomorrow.”

However, despite the doom and gloom of the financial markets, no one was predicting that tomorrow won't come. The question is: When?

As far as services are concerned, Friedland said, comparing telecom vs. the NASDAQ, there have been five major corrections over the past 20 years.

“We've found on the way down, telecom service companies almost always under-perform the markets,” he said.

He cited 1994 when the bond market collapsed and the 1998 currency crisis.

“We found that if you bought at the trough 12 and 24 months out, you would outperform the NASDAQ significantly,” Friedland said. “In fact, in 1998, you would have outperformed NASDAQ about five times.”

Bottom line: “There's lots of good data out there (showing) that we have touched bottom,” he said.

McIlree cited the likelihood of weakness through the first half of the year and possibly the third quarter, and then the potential of a fourth-quarter rebound.

Friedland said he sees the demand for bandwidth growing, but questions whether a potential slow down in IT spending will have an effect on the purchase of bandwidth. His outlook is generally positive, but “more lukewarm than it might have been six months ago.”

“We actually believe the market will remain intact, especially for those companies who are offering services to small- and medium-sized businesses,” Friedland said.

A proven success on the carrier side will validate many of the business models, Luke said. Over the next six to 18 months, he sees investors focusing on measuring the growth and success of some of the key carriers in broadband wireless services, in the United States and overseas.

“Will investors be able to see players such as XO and Winstar doing well, growing rapidly and delivering strong services?” Luke asked. There are a number of grounds to think those companies will do well, he said, and he believes that major technology players will stand behind those carriers to obtain financing.

There is a demand issue, McIlree said. XO wasn't unique in lowering its expectations on revenue generated this year.

“The change is important, because though XO is growing, it's not growing as fast,” he said. This is being driven by the access to capital issue, intertwined with the weak economy.

You have to look at the securities buyers, the fidelities, Friedland said.

“XO is supposed to be a safe haven, a carrier with one of the most beloved management teams that has been proven time and time again and has really been executing,” he said.

Yet XO hit a high of $65 a share and is now between $15 and $20 a share, he said at the late-February meeting. Institutional investors have been hurt badly, and they are not looking to invest in this space unless they think they can make money.

“They're saying, ‘Why should I invest in a carrier that has less of a track record when I'm still worried about Level 3 (www.level3.com) and XO, and are they going to make their numbers?’”

He added that he is hopeful things will change later this year.

Luke suggested that the market is a lot nearer the bottom from the vendor side. Companies such as Nortel and Cisco have been setting the bar and resetting the bar; this is an important process before you can move up again, he said.

A lot of excitement in the vendor area surrounds point-to-point technology in the higher frequencies used as fiber extension, Luke said.

With the next-generation point-to-multipoint solutions, there is interest in time-division duplexing and whether high-speed point-to-multi-point solutions can be delivered that are scaleable. There's also a focus on campus connectivity, and the potential of high-speed wireless LANs.

“The mobile-wireless-backhaul market is an area where you get a lot of questions from investors,” Luke added. “As they build out more capacity networks for data, that's going to be a big market, backhauling all that traffic.”

McIlree agreed that over the next 12 to 18 months, mobile backhaul will be a key industry driver as mobile networks move from 2G to 3G systems. This favors the vendors that are moving up the capacity scale, those that have capacities of DS3 and above, he said.

“We also believe that the high-capacity point-to-point players currently, and possibly for the next couple of years, have an advantage over the point-to-multipoint players,” McIlree said.

The analysts all agreed this is not a climate for IPOs.

“If 2000 was the year of the IPO, then 2001 is the year of consolidation and mergers and acquisitions,” Luke said.

On the vendor side, the types of companies that will be buyers will be those that have wide distribution, broad product portfolios and strong balance sheets, McIlree said.

“They will buy companies that would add to that product and portfolio or to distribution,” he said. “Look around at the single-product companies, those that are uniquely leveraged to a single customer, who have weak balance sheets. I'm not saying they will be merged or acquired, but …”