WorldCom woes: Good or bad for prices?

Market consolidation has two faces: it separates the wheat from the chaff, but it also decreases the number of players. Fewer providers can result in less competition, which in turn can lead to higher prices.

So should corporate users be concerned that prices may creep up in the wake of WorldCom Inc.'s bankruptcy and the string of carrier failures preceding it? You bet.

No one can ignore the impact of major players either being broken up into smaller units or abandoning the market completely.

"We have a situation in which fewer companies are competing, and that theoretically could affect prices," said Roy Bailey, a spokesman for the European VPN Users Association (EVUA) in London. "Customers with binding contracts don't have to worry just now but what about later? The fact is, we just don't know what to expect, and that's a bit disturbing."

WorldCom is a major supplier to EVUA members, which include numerous multinational companies.

The shakeout in the telecommunications sector, which some experts say is still far from over, is putting pressure on the survivors to increase prices to meet costs -- and please shareholders, who haven't had much to smile about in recent months.

"Our composite world pricing index has shown the first increase in bandwidth prices since we started tracking prices in 1997," said Alexandra Rehak, director of European research at Telegeography Inc., the market research arm of London-based bandwidth exchange Band-X Ltd. "Until recently, prices have fallen steadily."

Although Telegeography monitors rates for bandwidth sold among carriers, the prices have a "knock-on effect for corporate users downstream," Rehak said. "In the end, someone has to pay for the bandwidth."

While prices in Europe are stabilizing, they're going up on routes between the continent and the U.S., between North America and Latin America and also between major U.S. cities, according to Telegeography. Last month, for example, the price of a STM 1 leased line, which transmits data at speeds up to 155M bps (bits per second), increased around 20 percent on routes between New York and Los Angeles.

Prices could also rise when corporate users are forced to switch to an alternative carrier, which lacks the same favorable terms for local connections, called circuit tails, as the former carrier, according to Camille Mendler, an analyst at the London office of Boston's Yankee Group. "The new service provider may not have the same volume discount, meaning that some of the tails could cost more to provision," she said. "Several customers have rung me up the past few days; they're worried."

Like many other analysts, Mendler believes telcos are less interested in increasing prices right now than they are in luring away customers from distressed rivals. "It's not in their interest to raise prices now," she said. "But that doesn't mean they won't do so later."

Carriers are largely to blame for their bleak financial situation. They let their prices plunge below costs, allowing many of their services to become cheap commodities. Now they're trying to layer on managed services to increase their margins.

Whether corporate users are willing to pay more and how much is anyone's guess. The economic slowdown has led to tighter IT and telecom budgets.

"Many users are caught between a rock and a hard place," said Josephine Kenny, an analyst with Current Analysis Inc. "They're under pressure to reduce costs, yet they need state-of-the-art network services to run their many applications and carry their huge traffic."

Some service providers say that when the dust settles, corporate users will be prepared to pay a fair price for secure and reliable service. "Some of the players weren't being rational in the marketplace as they stretched for survival," said Mack Treece, senior vice president of partners and channels at Equant NV, an IP (Internet Protocol) service provider majority-owned by France Telecom SA. "The market will now become more rational."

Maybe, but fewer players could lead to a new buddy system, with carriers meeting behind closed doors to talk shop, warned Kenny. "This is survival of the fittest," she said. "Like the good old saying -- Keep your friends close, keep your enemies closer."

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