Could This Be the End of the Telecom Bust?

Consumer demand and stabilized pricing could make this a comeback year for the broadband industry.

By Om Malik, September 06, 2005

Business 2.0: The telecom industry’s long-awaited turnaround may be under way. For the first time since the bust of 2000, companies are taking risks and making investments, broadband prices are beginning to stabilize after years of freefall, and, most important, demand for high-bandwidth data services is starting to rise.

Driven by the growing popularity of Internet-based services — including voice-over-Internet-protocol phone services from companies such as Vonage and Skype, newly launched services like Google Talk and Google Video, peer-to-file-sharing, and digital-music services from Apple (AAPL), Microsoft (MSFT), and Yahoo (YHOO) — bandwidth is in high demand. That, along with the growing number of consumers connecting to the Internet with DSL and cable modems, means good news for telecoms such as Level 3 Communications and WilTel that have endured years of losses. In July 2005, AT&T (T) announced that its data-related sales had declined 10.2 percent. That may not sound great, but it’s a significant improvement over the past few quarters, when declines of 30 percent were commonplace. For Level 3, another major bandwidth wholesaler, the news was even better. It revealed that data sales in the second quarter were $122 million, up $3 million from the previous quarter — the first gain in six months.

Now there’s evidence that the rising tide is leading to renewed confidence among other major telecommunications firms. Austin-based OnFiber Communications just announced that it will take on AT&T and MCI in the San Francisco Bay Area with a broadband service that’s cheaper and uses newer technologies. A new entrant to the market comes as a welcome surprise and indicates that companies are slowly beginning to shake off the effects of the downturn. Telegeography, a research firm in Washington, D.C., that tracks bandwidth pricing data, reports that a consortium of major carriers is negotiating for a multiyear agreement that would provide a terabit of broadband capacity across the Atlantic. As demand for bandwidth increases — popular routes connecting New York to Boston and San Francisco are already filling up — the company that controls popular transatlantic routes connecting New York to London or Paris will be well positioned to profit. Whether it occurs or not, the deal suggests that the market believes bandwidth prices won’t drop any lower.

Other signs are equally encouraging. Dave Schaffer, founder and CEO of Cogent Communications, based in Washington, D.C., says relief is coming from businesses that did not exist five years ago, such as online music and movie download services. Cogent specializes in selling massive 100-megabits-per-second connections, for a flat rate of $1,000 a month, to companies with big bandwidth needs like Apple, which uses Cogent for its iTunes Music Store. Some entrepreneurs are seizing the opportunity to resurrect their companies from the dead. Jeff Storey, chief executive of WilTel, based in Tulsa, Okla., says that as new technologies such as Internet protocol television become popular, he expects the demand for his wholesale bandwidth services to continue to grow. WilTel, formerly named Williams Communications, was one of the casualties of the telecom bust, filing for Chapter 11 bankruptcy protection in October 2002. As demand for bandwidth increases, Storey has been able to right his company ship. For the first half of 2005, WilTel showed steady growth in sales — $850 million, up from $776 million in the same period a year ago.

After years of fighting to stay alive, however, no one is ready to declare victory just yet. The market remains crowded with struggling companies desperate enough to resort to indiscriminate price cuts to win new business. And although it’s unlikely, it’s possible that consumer demand for broadband could trail off. Still, things have not been this stable for telecom companies in a very long time, and if bandwidth usage continues to grow, a recovery is sure to be on the horizon.