Announcements of more layoffs and share declines by major telecommunications companies Monday served as a warning that previous predictions of a telecom recovery in the second half of this year were off base.
The news portends more consolidations by providers, which will likely lead IT and telcom managers to renegotiate better data and voice services, analysts said.
"The general telecom industry was projecting a return [to normalcy] in the second half, but the reality is that momentum has not kicked in fast enough," said Bill Lesieur, an analyst at Technology Business Research Inc. in Hampton, N.H. "So, 2002 will be another unprofitable year for equipment makers and their service provider customers with the recovery pushed into 2003."
The news is stark for vendors. Shares declined at WorldCom Inc. by one-third yesterday to $4.01 after the service provider announced a projected billion-dollar cash shortfall this year.
Meanwhile, L.M. Ericsson Telephone Co. and Lucent Technologies Inc. said yesterday that they will cut a total of 23,000 jobs. In a report of its eighth consecutive quarterly loss, Murray Hill, N.J.-based Lucent announced it will cut 6,000 of 56,000 jobs. Stockholm-based Ericsson said it will cut 17,000 jobs, nearly one-fifth of its workforce, after warning it won't return to profitability this year. Its stock dropped 23% following that announcement.
Meanwhile, Williams Communications Group Inc. filed Chapter 11 bankruptcy court protection last night. Analysts described Williams' plight as similar to the case of Global Crossing Holdings Ltd., which filed for Chapter 11 earlier this year.
With Williams and Global Crossing, plenty of core infrastructure gear was installed, leading to a glut in the market, said Craig Mathias, an analyst at Farpoint Group in Ashland, Mass. The same problems could befall Denver-based Qwest Communications International Inc. as it builds out core networks, Mathias said.
"There's been an overbuilding of the network core by providers, but not enough of the edge network," Mathias said, referring to the lack of expanded bandwidth services in the final miles that reach from the core out to offices and homes.
"We're not done with the downturn in telecom and it's going to take years to get rid of the excess capacity," Mathias said. "However, try to run an economy without telecom."
Phillip Redman, an analyst at Gartner Inc. in Stamford, Conn., said the problems reported yesterday by Lucent, Williams, Ericsson and WorldCom point to problems with data and voice providers in the wireline world. Wireless carriers are reporting somewhat positive quarterly results by comparison.
"Wireless seems to be holding strong," Redman said, but added that consolidation by wireless carriers is also "inevitable". There are rumors that AT&T Corp. will buy Cingular Wireless LLC, he said. "It could happen."
Mathias said the downturn in telecom doesn't point to any fundamental problems with wireless technologies. "It doesn't say a lot for the general economy," he added. "We really aren't out of the recession and it's going to take awhile."
Mathias said enterprises should still consider moving to third-generation wireless services for faster wireless bandwidth, but only if the pricing makes sense. "Right now, it's quite expensive," he said.
Lesieur said the bad news in telecom means the bargaining power on prices and contracts has shifted heavily in favor of customers, including end users negotiating voice and data contracts.
"It's an ideal time to get some good deals," he said.