WorldCom's massive bankruptcy marks a turning point for the nation's troubled telecommunications sector.
The question is which direction it will go from here toward a historic collapse that could spread to other industries, or to firmer footing for the future?
Optimists argue this is a networked nation. People are still picking up the phone, while businesses send billions of bytes of data over the nation's telecommunications system, despite WorldCom's record bankruptcy filing. Thus, the industry will survive.
Pessimists say that other major telecommunications companies face the same woes as WorldCom: They simply can't compete in a free market where fierce price competition undercuts needed long-term investment. Already, the industry's decline has been startling: By some estimates, it is one of biggest business failures in US history bigger than the dotcom crash and the fall of the railroads in the 1890s.
Still, there is general agreement about one thing. The overcapacity and huge debt loads built up during the 1990s which scared off investors, making the situation even worse will now give way to a period of consolidation. That could result in higher prices overall for consumers, but also a more stable industry.
"It's the great tidal event that the telecom industry was waiting for," says Owen Kurtin, a telecommunications attorney with the law firm Salans in New York. "There's not a lot more that can happen. I think we're going to go through a period of reexamination now that looks at what services people actually need, what capacity is needed to support it, what business models can survive."
Analysts believe the companies that are going to survive are the larger, more stable ones that already have a customer base, solid revenues, and real products and networks like the Baby Bells and AT&T. And there will be fewer of them. The industry faces several waves of consolidation that could include the first mergers of local and long-distance companies. "There's too many competitors slicing the pie too thin," says Jeff Kagan, a telecommunications analyst based in Atlanta. "Not enough have a big enough market share or a big enough revenue stream. And when you slice the pie too thin, nobody wins."
Consumer activists contend the problem goes far deeper than simply too much competition: There's not enough regulation. They note that telecommunications companies, like electric utilities, require long-term investments to build their infrastructures. During the 1990s, investors bought telecommunications stock without caring that the companies didn't show any profits.
But when the dotcom bubble burst, investors suddenly started to worry about all of that red ink. That set off a selling frenzy, with equipment suppliers like Nortel Networks and Lucent Technologies being hit first, then service providers like WorldCom and AT&T.
"The answer is that maybe these are utilities that can not be run on the high risk, short-term view that absolutely pervades the rest of our economy," says Mark Cooper of the Consumer Federation of America.
Despite the industry's overall troubles, however, WorldCom sees itself coming out of the bankruptcy on stronger footing. John Sidgmore, the president and CEO, cites other companies that have emerged stronger, such as Continental Airlines, Texaco, and Southland Corp., which owns the 7-Eleven retail chain.
Yet WorldCom has more debt than any of them: at the moment, $30 billion, on which it pays $2 billion a year in interest. At a press conference yesterday, Mr. Sidgmore says he expects that debt load to be reduced by 75 percent as a result of the Chapter 11 filing.
At the same time, the CEO says he expects the basic company to remain intact. He hopes the bankruptcy judge will not force the sale of such core assets as UUNet, which supplies Internet access, or MCI, the nation's second-largest long-distance carrier.
"The reorganization here is not going to be one where you jump in and sell all the assets: It won't be a liquidation, in my opinion," says Sidgmore. "The value in WorldCom is not in the switches and pipes that we have underground the hard assets but in the 20 million customers and the brands like WorldCom/MCI and UUNet."
WHETHER that actually happens is not clear. In the last few weeks, WorldCom has burned through more than $2 billion in cash. Its vendors required payment in advance, and it funded its European operations, which are not part of the bankruptcy plan. To get through the next year, it is borrowing up to $2 billion in "debtor in possession" financing.
Although the company requires a lot of cash to do business, Sidgmore believes it will get through the year without need of more cash because payments move slowly in bankruptcy court. In the future, bankers say it will have to borrow money against specific assets.
"Creditors will watch it closely and carefully," says Sung Won Sohn, chief economist at Wells Fargo Banks, which is owed $100 million by WorldCom.
Sidgmore says the firm will emerge from bankruptcy in 9 to 12 months, faster than other less complex cases. But WorldCom's new auditors are still checking its books, so the extent of its losses are unknown.