Alternative Telcos Could Capitalize on Recession

“Sometimes a downturn in the economy can actually be an upturn in business,” said CompTel CEO Jerry James. CompTel’s CLEC members haven’t seen harm from recession nor a worsening credit market, he said. And casualties are unlikely, since most CLECs have seen worse, he said. On the contrary, CLECs may be winning customers seeking a less costly alternative to incumbent rivals, he said. The role suits CLECs, which long have offered plans for customers with bad credit, he said.

CLECs are more concerned about regulation, said Gregory Kennan, One Communications federal counsel. “While many economic factors are out of our immediate control, potential obstacles to CLECs’ ability to serve our customers, such as loss of unbundled loops through ILEC forbearance petitions or retirement of copper plant, pose a threat to our [small and mid-sized business] customers and in turn the economy.”

A laggard economy also is a chance to “make lemons into lemonade” for corporate-catering VoIP carriers, said Nuvio CEO Jason Talley. Nuvio is “capitalizing” on the slowdown because it offers a less costly alternative to many firms’ legacy phone systems, he said. Layoffs at financial institutions may be positive, as pinkslipped parties start new companies trying to save money on IT, he said. Phone firms that take advantage of these “opportunities” will survive, he said.

But a bad credit market could put many standalone VoIP carriers on “shaky financial footing,” Talley said. More “high-profile” closings like SunRocket’s 2007 collapse (CD July 19 p15) OR (WID July 19 p2) are likely, he said. Small operators with 2,000 to 4,000 subscribers are most at risk, he said: “A lot of those guys just aren’t going to make it.” Residential VoIP carriers may be more vulnerable to the slowdown, with landline-based phones possibly expendable among consumers with cellphones who need to tighten their belts, he said. Residential VoIP also faces direct competition from cable companies, a greater threat than financial unrest, he said. But Vonage is large enough to survive, he said.

Phone companies aren’t “recession-proof,” selling as they do a “fairly essential” service that should make them less vulnerable than other businesses, said Curt Stamp, executive director for the Independent Telephone and Telecommunications Alliance (ITTA). And ITTA members like Qwest, Embarq, and CenturyTel are “well-positioned to raise capital” even in a credit crisis, he said. Some members have seen line loss, he said, but it’s unclear whether the economy is to blame or if it results from the normal business cycle. Still, consumers might avoid buying “bells and whistles” like voice messaging and call waiting, he said.

The Bear Stearns affair “got a lot of people’s attention,” but among rural telcos there’s “not a lot of alarm at this point,” said Hank Buchanan, industry affairs vice president for the National Rural Utilities Cooperative Finance Corporation. Barring a depression or “credit meltdown,” economic conditions won’t be a large concern, he said. Weighing more heavily on rural LECs’ minds are three pending FCC proceedings on the universal service fund that could cut USF income for RLECs, he said.

Rural LECs may be protected from recession thanks in part to their customers, many of them farmers profiting on ethanol and other in-demand agriculture products, Buchanan said. And video and Internet services contribute increasingly to rural LECs’ revenue, he said. Those services run “counter-cyclical” to recession, he said. When money is tight, consumers tend to stay home and watch TV rather than go to the movies, he said. And even if private lenders pull out, rural utilities services have programs to finance RLECs, he said.

Former Bell companies mostly dismiss concerns about the economy. Last week, Verizon CEO Ivan Seidenberg told Dow Jones the Bell hasn’t seen significant impact. “There’s nothing out of the ordinary,” he said. When it reported Q4 results late January, AT&T reaffirmed positive expectations for 2008 and onward (CD Jan 25 p10). AT&T is “confident in our ability to deliver on our outlook,” a spokesman said. Last month, Qwest CEO Ed Mueller said a gloomy housing market likely hurt its retail business, but later in the call said he was unsure if it was economic conditions or competition hurting the company (CD Feb 13 p6).