For Subscribers

Get the complete article now!

Four analysts and top management from twenty-two sector firms examine the communications 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, what’s it going to take to get investors to take an interest in communications stocks again on the services side or the equipment side?

Mr. Franklin: I’ll let Gary speak to the equipment side. On the services side, I think we have to return to a rational expectation of what this industry really is. It's not a huge growth industry. The model looks very much like a utility. And that’s not a terrible thing to say.

TWST: But the RBOCs are a utility, aren't they?

Mr. Franklin: While nobody likes to call the industry that anymore, they certainly have utility-like characteristics. They provide a service that most people feel is a necessity, they are heavily regulated and they typically grow revenues in the low- to mid-single digit range within their core business. There’s nothing wrong with a business like that. Although they may be slower growth than other areas of telecom, they generate large amounts of cash flow that can be used for new growth opportunities, dividends or deleveraging. Returning to your original question, I think that before investors can get interested in the telecom services industry, again, we'll need a shakeout of supply. We have too many competitors in the industry. It's very difficult to see how you can make reasonable returns on your invested capital with six or more wireless carriers in every market. It's difficult to see how those business models work after the growth slows. We need to see some consolidation in wireless, and we need to see consolidation in the broadband area. Similarly, going back through history, long distance was really never meant to be a standalone industry. Communications is a product or service that people want to buy, but they really don't want to think about who provides the service from their home to the next-door neighbor's versus their home to a friend or relative in the next state. So a shakeout of long distance capacity is also needed. Perhaps, as the RBOCs begin to offer long distance, we will see that happen. But we need consolidation and a return to seeing the industry for what it is — a slow but steady growth industry.

TWST: What form should that consolidation take? Mergers and acquisitions don't necessarily reduce capacity, do they?

Mr. Franklin: They would certainly reduce the number of players, which reduces the chances of irrationality in pricing. So I think that helps. But the capacity in the ground, as Gary can speak about to some degree, isn't necessarily usable. If it lies fallow in the hands of a company that needs to generate revenues, it's going to be put to use. If it can be transferred to another company for future use, it doesn't necessarily have to be put into the market immediately.

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

Mr. Franklin: I have been struggling with that this year. The challenge with each of those companies is customer mix. Time Warner Telecom (Nasdaq:TWTC) 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 (Nasdaq:ALGX) 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.

This special issue includes:

1) Communications Services & Equipment - In an in-depth (4,500 words) Analyst Interview, Rick Franklin & Gary Mobley, 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.