DORMAN SAYS CAPITAL NEEDS WILL DRIVE TELECOM CONSOLIDATION
ATLANTA -- Significant consolidation within the telecom industry is almost inevitable within the next 2-3 years, AT&T Chmn. David Dorman told reporters at Supercomm here Tues., although he seemed to indicate his company wouldn’t be a major part of the move. In a keynote, Dorman said the industry was in the midst of a 10-year boom-and-bust cycle impelled by the 1996 Telecom Act and wasn’t likely to achieve stability for another 2-3 years.
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The likelihood that there still will be 13 major telecom companies 2 years from now “is not great,” Dorman said, partly because telecom remains a capital-intensive industry and “capital is getting tougher to come by.” He said, for example, that “having 6 (major) wireless companies 2 years from now seems less likely than having 4.” He wouldn’t speculate on how the wireless market would shake out, but said he would have expected the consolidation to have happened already.
Three of the former Bells, with the exception of Qwest, have strong balance sheets, but they don’t seem particularly interested in consolidation, Dorman said. Despite that, he said their portfolios had gaps that might mean acquisitions.
Dorman continued to refuse to comment on speculation that one of the Bells might acquire AT&T, suggesting that the rumors were a result of “too many investment bankers with too little to do.” He said “our objective is not to sell ourselves,” but “if someone showed up with an offer beyond our wildest imagination” the board and stockholders would have to consider it.
The need for scale in the telecom industry will drive some of the consolidation, Dorman said, but he indicated that wasn’t an issue for AT&T, since its revenue was larger than the combined revenue of all of its major traditional competitors. “Carriers that lack scale will find it difficult to raise capital and grow over the long term,” he said. He said telecom companies needed to reduce their cost structure, but that would require investment, meaning those without capital would have difficulty. “That is why we have put so much focus on the balance sheet,” Dorman told reporters, citing AT&T’s elimination of more than $50 billion of debt, to about $12 billion, in the last 2 years, leaving it with a “relatively unleveraged position. We intend our balance sheet to be a weapon, not a liability.”
Despite that, AT&T is “unlikely to be a buyer” during the consolidation process, Dorman said. He said its investments were likely to target making its network more efficient, particularly on the edge of the network. He said there still was “an enormous amount of latent capacity” in the backbone because “technology rushed way ahead of demand,” but the edge of the network still was bandwidth-constrained.
AT&T will make capital expenditures of more than $3 billion this year, while its main competitors are making little because of bankruptcies and the economic environment, Dorman said: “We are going to move the ball forward while our competitors are just trying to get their houses in order.” He decried bankruptcy laws that allowed competitors to offload debt, but said that wasn’t a “panacea” because the resultant carriers would lack the necessary scale and access to capital.
AT&T will have to develop more of its own local networks in competition with the Bells “by necessity,” Dorman said, because the RBOCs didn’t price their local services adequately. He said that could be in partnerships with power companies, cable, Wi-Fi and MMDS, but some AT&T would build itself.
Among AT&T’s announcements at Supercomm were: (1) Plans for a single global MPLS-based IP network by 2005, with a multiservice edge architecture. (2) Spending $500 million this year to “significantly improve customer experience” through improved contracts, billing and customer service. (3) Frame relay customers within a year will be able to implement IP-based virtual private networks. (4) Global Wi- Fi will enable access to AT&T IP virtual private networks.
A restriction on the growth of telecom capacity through consolidation and bankruptcy also was predicted by BellSouth Chmn. Duane Ackerman, who said “the telecommunications ecosystem is broken.” In addition to overcapacity, Ackerman in a luncheon speech blamed many of the problems on govt. regulation, which he said persisted in putting unrealistic rules on wireline services instead of considering them just one part of a larger telecom environment.
Telecom regulators “thought they had the model right,” Ackerman said, but left the industry “gasping for air” as “natural markets and technology transform our industry.” Despite the change, he said, public policy “has been trying to keep the lid on,” but “convergence keeps blowing it right off.”
The telecom industry shouldn’t wait for the regulatory problems to be solved, Ackerman said, because it’s “100 days and counting” since the FCC supposedly decided the UNE-P issue, but the rules haven’t been published. He said “layer upon layer of regulation” is restricting the industry’s access to capital, which in turn is squeezing its ability to innovate.
Despite the need, consolidation and true bankruptcies that actually remove capacity aren’t happening as fast as expected, Ackerman said. He said another solution would be for the industry to find better ways to compete. He said the cable industry’s CableLabs was an example because it gave cable a competitive advantage by quickly approving the DOCSIS standard for cable modems. Telecom has no equivalent ability to move quickly, he said: “To compete we have got to move at the speed of business today.”