Digital Matters - Issue 49

How big a problem is the telecom meltdown?

Depending on your point of view, we're either on the verge of — or in the middle of — a telecommunications-led recession. Every day, the papers are filled with news of more financial stress in what had been the global economy's fastest-growing segment.

How big a problem is the telecom meltdown? Business Week recently described the industry's staggering debt load as a "ticking time bomb." It noted that major telecom companies in the United States and Europe have nearly $700 billion worth of debt on their balance sheets. "Analysts estimate that more than $100 billion in junk bonds will end up in default or restructured." More than $100 billion in defaulted debt was the initial estimate of the savings-and-loan crisis of the late 1980s. The final cost was roughly $150 billion — and a brief but harrowing recession.

Among those firms holding telecom bonds today are the California Public Employees Retirement System (CalPERS), Fidelity, Metropolitan Life, New York Life, Prudential Investment Management, State Farm Insurance,Wellington Management, and Zurich Scudder Investments. Syndicators of telecom loans include Bank of America, the Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Salomon Smith Barney — in short, every blue-chip financial-services organization you can name.

The Federal Reserve Board doesn't much care whether individual telecom companies go belly-up, as some already have done this year. But it does care when major financial institutions are destabilized by those same bankruptcies — which probably explains why Fed chairman Alan Greenspan has moved so aggressively to cut interest rates and contain the collateral damage of the telecom meltdown. What we don't know is whether the Fed's intervention will work.

What we do know is that the future of telecommunications — wireless technology — has taken a big hit at exactly the moment that it could least afford to. In Europe, $300 billion in wireless investment (roughly $150 billion for licensing fees and $150 billion in third-generation, or 3G, network buildout costs) has added so much debt to the balance sheets of companies like British Telecom (BT), Ericsson, and Deutsche Telekom that at least one of them will have to be acquired to survive. Even in Japan, where NTT DoCoMo was assigned its wireless spectrum at no cost, the rollout of 3G services has been pushed back until later this year. Everywhere you look, wireless operators and the companies that supply them are struggling.

Every financial trick in the book is being deployed to keep things afloat — at a time when demand for wireless services has (one hopes temporarily) crested. As in all business cases like this, the near future promises bankruptcies and liquidations, mergers and acquisitions, consolidation and rationalization. Where there were once many players, there will soon be two or three at most. It will not be pretty. But, pretty or not, it will be. We are moving inexorably toward a wireless world. The question is whether consumer demand will be able to sustain a fully built-out third-generation wireless network.

The American automobile industry is betting that it will. Roughly two-thirds of all wireless voice calls in the United States are made from automobiles, so the industry has been thinking wirelessly for at least a decade. More importantly, American automakers view the "wireless cabin" as the key to their future growth. Unable to make better cars than Toyota and lagging behind Honda and Toyota in the development of fuel-efficient hybrids, companies such as General Motors and Ford Motor Co. must add value to remain competitive. Since cars are a big-ticket item anyway, adding a bit to the sticker price (to pay for the wireless cabin) should be manageable over the three-to-five-year term of an auto loan or lease — which is why many analysts say that the future of wireless is automobiles.

The problem, of course, is that this vision of the future automobile depends on the buildout of a fully functional, wide-area network of third-generation wireless technology. The cost of building that network is hugely expensive. And no compelling evidence exists to show that consumers are desperate to have it. What if you built a network, and then no one used it? That vision haunts the big players in the wireless arena. And for good reason. Across the globe — in Australia and Boston and London and San Francisco and Seattle — little outdoor antennas are popping up. They are the first sprouts of a grassroots technological revolution. The name of that revolution is wireless fidelity, or Wi-Fi.

To understand the Wi-Fi revolution, we have to back up a bit. For the past six years or so, companies both public and private have been laying down hundreds of thousands of miles of fiber-optic cable across the United States, across the sea, and into all of the hubs of the developed world. The problem, as everyone knows, has been the last mile. Roughly 75 million American homes are still without high-speed Internet access. The last mile is bollixed up, and the companies that control it aren't rushing to break the logjam.

What if you could cut out the last mile and connect directly to all of those high-bandwidth fiber-optic lines? That's what Wi-Fi does. Its technical name is IEEE 802.11b High Rate, and it is a standard that enables wireless networking within a range of 300 feet. As Andy Kessler of Velocity Capital Management LLC wrote recently, Wi-Fi "uses the 2.4 gigahertz spectrum the FCC set aside for things like microwave ovens and cordless phones." In so doing, it enables truly broadband connections — up to 11 megabits of data per second.

That's a third-generation network without the cost of building a third-generation network. The only downside is that it is necessarily localized — the range can't be greater than 300 feet. But that may not be much of a problem. Can you really send email while you're driving?

People in most major metropolitan areas can now buy Wi-Fi antennas for their homes, apartments, or offices — which will enable many of the same capabilities offered by 3G at a lower cost. The big players in the telecom and wireless industries dismiss Wi-Fi as the "ham radio" of wireless. Maybe. But as the financial woes of the big telecom players increase, look for Wi-Fi to emerge as the future of the wireless world.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York.

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