DSL

Telecom Insider: Technology

Ironically, the CLECs' real threat would have come from IP telephony, which is cheap. Softswitches will eat up equipment manufacturers' revenues. Also, dumb moves and outtakes.

by Dave Burstein of DSL Prime [March 6, 2002]

IP telephony is really cheap
Three penny international calls from Yahoo Japan BB
Voice over IP hasn't yet driven prices close to zero, but now is starting to eat revenues fast. Whether calling across the street or to the United States, Yahoo! DSL customers will pay only 7.5 Yen (about 6 cents) for a three minute call. Calls to other Yahoo phones will be free. With a monthly charge of less than $5, margins will be razor thin and millions of customers will be needed to break even. But priced at $22 per month, Yahoo! DSL is building a base, fast. Son will lose at least $1 billion on YahooBB, but the payoff is potentially huge.

VoIP is also spreading rapidly in U.S. corporate networks, with Cisco delivering equipment in volume. Verizon is responding by offering Alcatel gear through its data division. Better to eat your own children than to let someone else cannibalize them, presumably. Diminishing revenues are the biggest challenge telcos face.

Equipment
Switched off: Lucent, Nortel's biggest blow
Every quarter, Lucent, Siemens, Alcatel and Nortel fall short. The buzz is on optical and new products, but the key blow is the loss of switch sales, long the key moneymaker. Few products in history have been as profitable as Lucent's 5ESS and Nortel's DMS, which sold for millions of dollars each. They'll never come back: the telcos have plenty of capacity, and when they need more, they'll buy softswitches at a quarter of the price or less. Nortel's Roth told us last fall traditional switches actually cost little more to manufacture than softswitches, meaning the profit margins were in the 90 percent range.

Alcatel is facing a different problem as well: their former chairman is releasing a tell-all book that tears apart their financials.

Dumb moves department
Qwest's Joe Nacchio attacks the press
Nacchio yanked the Qwest ads from Denver's Channel 7 because he didn't like the reporting in Business Week, which has the same owner. He apparently also pulled Qwest ads from the Denver Post. Reporters didn't kill his stock price —Morgan Stanley started the descent, by questioning Qwest's books. With Global, Level 3, and Williams going down, Qwest was guaranteed a fall as well.

Joe intrigues me. He's smart as a whip, intensely focused, and willing to speak openly about the business. His self-destructive short fuse led him to tell off U.S. West partner Sol Trujillo in front of a roomful of analysts and press when the German deal failed. Attacking a newspaper usually backfires. It makes other reporters wonder, "What's Nacchio so afraid a we might find?" I know I'm going to look extra hard at anything from Qwest these days.

Outtakes

• US$16 per month cable modem service at 128K is designed to wipe out dialup in Shaw & Rodgers territories in Canada. Comcast, Cox, and AT&T might do similar, now that they don't need @Home as a middleman. The always-on service at double the speed would be a real AOL-killer, and would have a real impact on telco DSL.
  
  
• 5.1 million new wireless customers in January gives some idea of the size of the Chinese equipment market. Huawei, ZT, and Shanghai Bell/Alcatel are world class manufacturers, who will rapidly expand abroad as well. The U.S. telcos always get a disproportionate share of coverage, but is just a very small share.
  
  
• SBC is coming to New York to meet Wall Street on March 7. I hope they emulate GE, and change to a policy that provides more meaningful disclosure. The stock is down $35 billion, so it would be smart to talk more openly to the street. If you're in New York that night, try African singer Angelique Kidjo at Joe's Pub. I have a few tickets if you want to join me.

Copyright 2002 Dave Burstein.
The first issue of Telecom Insider Newsletter is reprinted with permission. For future issues, subscribe at dave@dslprime.com with "subscribe" in the subject line.

1. Telecom Insider: The First Issue

2. Telecom Insider: Technology

>3. Telecom Insider: The End of Competition

4. Telecom Insider: No Alternatives Remain

5. Telecom Insider: What Powell Should Have Done