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Four analysts and top management from twenty-two sector firms examine the comunications services sector in this special 98-page Comunications Services issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info470.htm.

TWST: Rick, how much risk should investors be prepared to take with the CLECs or any of the emerging communications companies, the higher beta companies?

Mr. Franklin: I guess it's up to the individual investor or portfolio manager what kind of risk they want to take. But if you're seeking beta, I would encourage people to look at companies that have strong balance sheets, which eliminates most of the firms in competitive telecom. In the CLEC space you would be looking at Time Warner Telecom (Nasdaq:TWTC) and Allegiance Telecom (Nasdaq:ALGX). Those companies have fully funded or nearly fully funded business plans. After that, it's a bet on the model. If the CLEC model works, these guys have the financial structure to survive.

TWST: What's your view? Does the model work?

Mr. Franklin: I have been struggling with that this year. But I would look at the rural local phone companies that are dabbling with CLEC assets: ALLTELL, CenturyTel and TDS. They all have CLEC subsidiaries. Their strategy is a bit different from a pure CLEC. They can leverage existing infrastructure switches and fiber, and extend their footprint into neighboring properties. They have been very successful, and all those management teams seem to believe that the model works. Certainly if you have your own switching infrastructure, the pricing structure of unbundled loops would, in theory, enable a company to make money. I think now it comes down to execution on the part of Time Warner Telecom and Allegiance. The challenge with each of those companies is customer mix. Time Warner Telecom has had a wholesale-driven model, and those wholesale customers are beginning to struggle. They need to transition to a model with more retail/large business focus. At the other end of the spectrum, Allegiance is focused on small businesses, which are probably the most vulnerable to RBOC (regional Bell operating company) entry into long distance. They would probably like to migrate their focus toward larger businesses. I think both management teams recognize these issues and are taking steps to transition their mix appropriately.

TWST: Rick, what’s the bullish case at this point in time for investing in communications services?

Mr. Franklin: The bullish case would be that this is a subscription industry where subscribers pay a predictable fee each and every month. And over time, those rates typically go up. It’s a highly fixed cost industry, so those increasing revenues can be leveraged across a fixed cost asset in order to drive increasing rates of return. That’s the bullish case.

TWST: And what do the bears say?

Mr. Franklin: The bear case is that we still have an excess supply of competitors. Excessive competition will make pricing ultra-competitive, and an inability to raise prices at a sufficient rate will make adequate returns on capital for the industry, as a whole, difficult to earn. So you have to go over to where there aren’t any competitors, and that’s the local market. That’s the safest place to be. Playing wireless would be like betting on consolidation. Playing broadband would be like betting on consolidation. There’s the potential to make a lot of money by guessing correctly in those areas, but timing and the pricing of those assets at the time of a potential merger are big risk factors.

This special issue includes:

1) Communications Services & Equipment - In an in-depth (4,500 words) Analyst Interview, Rick Franklin & Gary Franklin, both Senior Industry Analysts at Bank of America Capital Management, examine the outlook for the sector and share specific stock recommendations.

2) Emerging Communications - In an in-depth (4,100 words) Analyst Interview, Vik Grover, Managing Director at Kaufman Bros., L.P., examines the outlook for the sector and shares specific stock recommendations.

3) CLEC & Incumbents - In an in-depth (4,300 words) Analyst Interview, Thomas Morabito, First Vice President/Senior Telecom Analyst at McDonald Investments, Inc., examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of twenty-two sector firms examine the outlook for their firm and the sector.