Telecommunications companies across the board are seeing their share prices slump at the same time as their businesses are going through profound changes, both from technology shifts and a more sober financial environment. At best, their earnings projections are being slashed as the dot fallout bites and a deepening recession hits their customers’ budgets. At worst, companies like web-hoster Exodus and alternative carriers like Viatel and 360Networks are in grave financial difficulties, victims of overblown expectations and the easy-capital environment of the dot boom. “There was a lot of investment and an awful lot of [telecoms network] capacity prior to big corporate demand being developed,” says Gita Sorensen, a partner at Logica, which advised many of the new players.
The newer, alternative telecoms operators who built capacity for new-fangled services faster than they built their business models, have suffered the most. They invested heavily in fibre-optic networks or hosting centres that optimised Internet Protocol (IP) technologies. IP moves information around in data packets, which is much more cost-effective – up to 30 per cent cheaper – than using older, circuit-switched networks designed for voice calls.

Two years ago the companies building all this new capacity were a dime a dozen on the conference circuits, all equipped with power-point presentations showing fantastic growth projections. What they forgot to watch was the revenue side, which wasn’t growing nearly as fast as their capital expenditures. The more exposed companies – those with high debt and few customers – are imploding.For the financially stronger operators, the fallout has proved a kind of boon, allowing them to attract disaffected customers and pick up cheap assets, like web-hosting centres. And certainly the cost savings of using IP technology have not gone away. “Twenty-five years ago we saw the shift from analogue PBX systems to digital PBX systems,” says Jack McMaster, CEO of alternative telecoms operator KPNQwest.

“Well, you are about to see a big shift again as private corporate switched data networks go to IP VPN [virtual private networks]. At the macro level the migration from circuit-switched to IP infrastructures is continuing.”As corporate budgets have been put under pressure by the slowing economy, “companies are now asking questions about their telecommunications that they weren’t asking six months ago,” in the words of Duncan Black, head of corporate network strategy at Cable & Wireless. The problem for Cable & Wireless is that even though it has focused its business on IP technology, and made purchases like Digital Island to give it expertise in digital content distribution, these moves haven’t had much of a positive effect yet on its bottom line. C&W has issued two profits warnings and seen its share price slide 65 per cent since the year began, and it has told analysts that revenue in its principal global business unit will fall 5 per cent this year.Cable & Wireless is “taking some financial hits” in the short term, but company executives say the next 18 months will see a change: businesses will want and expect a “business-quality internet” and only a few carriers will be able to deliver it.Some operators say they are better placed than others. Amsterdam-based KPNQwest, which has almost finished building a pan-European fibre network linking 50 cities, says it is delivering a business-quality internet today and doesn’t fear price erosion. “Sometimes it’s not so much how good you are, but what car you are driving,” says Mr McMaster “C&W is stuck in the UK between BT, Colt and Energis.