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Summary:

Two weeks ago, I posted this piece on Telecom’s continuing downward spiral, to somewhat of a mixed reaction. Many believe that I am being too pessimistic. In late 2000, I had written a similar article for Red Herring magazine, and had received the same reaction. At […]

Two weeks ago, I posted this piece on Telecom’s continuing downward spiral, to somewhat of a mixed reaction. Many believe that I am being too pessimistic. In late 2000, I had written a similar article for Red Herring magazine, and had received the same reaction. At the time, there was one person who agreed with me, and that was Susan Kalla, then a little known analyst at BlueStone Capital Partners. It is refreshing to see her nod her agreement with my most recent piece. She is talking about telecom’s continuing problems in today’s Barron’s.

Now she has broadened her scope to the entire communications industry — telecommunications, cable and satellite — and concluded that revenues will rise by less than 1% annually, to $274 billion by 2006. That’s far from the 4% annual growth the industry is promising. The $17 billion shortfall means the industry has committed to too much capital spending and its bottom line will suffer. Shares of telecom players could fall 15% annually as competition heats up. The cable companies, which have higher debt levels and trade at loftier multiples, could face even greater risk. “Everyone knows there’s going to be a war, but they don’t know the war is going to be this bad,” she states.

While most of her research reports in recent months have been, ummm… predictable, it is good to see her team-up with her friend Leo Hindery and make these bold predictions.

“You’re on the eve of aggressive bundling practices,” says Hindery, who was once president of TCI and later headed Global Crossing. “It will be a period of almost mutually assured destruction.” You can tell they don’t want to bring down the price of local phone service so DSL just becomes a freebie,” says Kalla. Now it’s just a question of time before the cable companies decide to match the discounts, continuing the downward spiral.

What I find amazing is that she and Hindery totally miss the fact that there are these pesky tiny VoIP operators who are going to play spoilers like you cannot believe. I never thought I could get more pessimistic than Dr. Doom herself. It is nice to see that we are still thinking along the same lines.

  1. I tend to agree with most of this, especially your analysis, however, I think the little VoIP companies will end up being rolled up. Well, at least the ones with *PAYING* customers, then blended in with the companies that have the better technology.

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  2. Douglass Turner Saturday, June 19, 2004

    Om,
    Could you please walk me through the demise of mobile wireless carriers? Landline, perhaps via classic disruption via VOIP. But Vodafone, T-Mobile, and the rest under threat? Wi-Fi + VOIP? Please.

    -Douglass Turner
    voice/sms: + 354 895 5077

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  3. well this does not affect the wireless guys directly. however, as the price war escalates at some point they would have to lower their voice prices – and again it would be a bit deflationary. not right away but that would catch up. i think if wireless companies successfully transform themselves into access companies – i.e. go wireless plus, they could be quite safe. voice alone is going to become a commodity unfortunately. but i agree, they are less at risk compared to others.

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