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For Telecoms, Some Signals Of Distress

By Cecilia Kang
Washington Post Staff Writer
Monday, November 3, 2008

Beyond the wreckage created by the credit crisis sweeping through corporate America, the telecommunications industry has been a relative bright spot.

That is if you're AT&T, Verizon or Comcast.

The giant telecoms have large and growing customer bases, and even more importantly fairly stable balance sheets and cash on hand. But for the smaller, local companies the forecast is more uncertain.

Since the dot-com bubble burst in 2001, the region's telecom industry has been contracting. That's when the plunge of the stock market led to dozens of small start-ups going under or being gobbled up by other companies.

Now a new financial crisis threatens to leave some area telecom companies much smaller, or worse.

To compete with the likes of Verizon and AT&T, a number of companies have taken on piles of debt to put down fiber optic cable or raise cell towers. That has left some, such as Ciena, Cogent and XO Communications, more vulnerable to market instability as demand dwindles for services from businesses and consumers, analysts say.

"The smaller competitive telecos are once again on the wrong side of change and the economy," said Scott Cleland, an analyst at Precursor, a telecom research firm in McLean. "The local industry will probably shrink further."

Businesses and consumers are expected to hang on to their cellphones, Internet service and cable television even in uncertain times, analysts say. But hanging on does not signal growth. Where many consumers had upgraded from traditional cellphones to more expensive smartphones, or from DSL to wireless broadband, the belief now is that many will keep the services they subscribe to for much longer periods.

Such behavior has the potential to hurt even big companies such as Sprint. The firm has 51 million subscribers, but is losing some each quarter. And it has a large debt payment looming.

"The credit crisis is another straw on the camel's back for a company that is already facing severe headwinds," said Craig Moffett, telecommunications analyst at investment firm Sanford C. Bernstein.

Smaller companies have to spend in excess of their scale to reap returns, which is possible during periods of loose credit, but is nearly impossible otherwise, Moffett said.

Many are viewed by banks as riskier than bigger firms because they don't have the cash holdings and strong customer base to weather bad times, and that makes it more difficult to draw credit from capital markets.

"Every company is looking to minimize risk so they are consolidating their providers and lowering costs, which is hardest on the competitive upstarts where credit and economic growth are like oxygen," Cleland said.

Still, analyst Tim Horan of Oppenheimer said the telecom sector is much more firmly situated than it was around 2000 and 2001. Back then, firms were suffocating under greater piles of debt.

"The economy is obviously going to have an impact and for each company it will be different, but the industry is not as highly leveraged as it was in 2001," Horan said. "And the good thing about service companies is that they can pull back on capital expenses if revenue comes out light."

Here's a look at some area companies and the challenges they're expected to face:

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