Telecommunications industry outlook.

With the possible exception of information technology, perhaps no industry has been buffeted more by the recent economic storms than telecommunications. But there's a silver lining in that dark cloud: with new products and services on the horizon, and a recent uptick in sales, many of the industry

On an unseasonably cold late-spring morning, this group gathered in the downtown boardroom of Grant Thorton LLP for a discussion of the status of the industry, technological changes, new services, industry consolidation, capital investment, the role of the Internet and competition.

Attendees included Rick Barlow, Cricket; Mark Blosch, Integra Telecom; Lanette Carlsen, Avaya; Rex Knowles, XO Communications; Darren Mosier, Sprint Wireless; Jaron Payzant, Mountain West Telecom; Gary Nieboer, Electric Lightwave; Vernile Prince, All West Communications; Robin Riggs, Qwest; Todd Southwick, Verizon Wireless; and Robert Spafford, Nextel.

Special thanks to Ted Smith, former Utah vice president of Qwest and now an attorney with Stoel Rives, for acting as moderator.

This gathering allowed senior managers from many of the state's most prominent wireless and wireline providers to put aside their differences over regulatory issues and focus on opportunities and concerns facing the entire industry. As Ted Smith said, "The general consensus is that we're coming out of the bad economy and demand looks good out there."

How do you view the current health of the telecom industry, and are you bullish about the future?

PRINCE: The industry is like somebody who's been in a head-on collision. I see some bleeding sores, but the industry is healing. I wouldn't say I'm totally bullish. I'm guardedly optimistic for the future. We have services to provide; as long as people want those services, the industry is going to survive.

PAYZANT: Telecom has been hurt in the last couple years. We feel somewhat bullish about the future based on recent activities in the marketplace. Our pipeline has improved dramatically in the last 35 to 60 days. Consistently, my competitors have said that April was the largest pickup they've seen in over 18 months.

NIEBOER: Everybody's trying to do things for less cost, so they can provide services and be profitable. We are seeing a takeoff, increase in sales, increase in pipelines within the business, in the government and more stable businesses. High tech is not taking off as quick.

SPAFFORD: I feel bullish on the market. We've met our first quarter projections and passed them. We also made our projections from last year. We haven't seen sales drop off, because our target market is the business customer. Our business phase, which is 90 percent of our customer base, seems to be buying more.

MOSIER: We see more communication happening, not less. From the wireless perspective, we see a large portion of our traffic starting to push towards wireless data opportunities and not just voice. With the new wireless data opportunities, we see an increase and are bullish on the future.

SOUTHWICK: We just launched our express network product, which gives us a new base of customers. Looking at market segments that we have not touched yet is n good indicator of what's happening, but we've seen solid growth the first quarter, and that ought to continue. Our goal is to allow customers to take that connectivity they have at their desk and stand up wirelessly.

CARLSON: I don't know if I'd be as bold to say "bullish," but our pipelines have definitely picked up. The big difference in how we sold to customers 18 months ago is it's a totally different approach. They're really looking for return on investment, what is the value in this? In the telecom industry, a lot of customers would buy because this is cool; this is technology. Cool isn't that neat any more, so we're having to show value.

BARLOW: We're going after the mass consumer market. We are bullish on the niche that we have chosen and the acceptance of our product. Salt Lake was the tenth market to launch Cricket service 15 months ago. We've added 30 additional markets since. Our younger population is well suited to the Cricket offering.

BLOSCH: Integra's confident in the future. We're servicing small- and medium-sized customers. They've been hit like other businesses and looking for overall value, not just savings. We're excited about what the future holds if we can get our friends at Qwest to work with us in terms of their unities and maintain our margins.

KNOWLES: From the wireline side, there was no surprise there was a shakeup. We saw the same thing with the long distance entry. It will take about 10 years for everything to stabilize. The people that survive will have significant opportunities, because the demand is from the end user. One of the problems that some of the wireline carriers have is that they sold a lot of carrier-to-carrier deals, and some of those carriers have gone under.

RIGGS: We invested a lot of capital in improving our network, and we're to the point now where we're about finished investing that capital, so we're optimistic that we'll have an improved network upon which we can launch future growth. The other thing we've spent some capital on is getting back into long distance. We are bullish on the investments we've made in our network and in long distance.

Equipment manufacturers would like to see you starting to order more switches and fiber. What do you see in your company, and then in the industry as a whole, on capital deployment in the near term?

RIGGS: I hope growth for growth sake is over and the dot-corn era was an anomaly in our history. We'll see more cautious investment, people who will invest for return's sake and not for growth sake, which means there'll be less capital overall, but there will be a growth in capital just probably not as dramatic.

KNOWLES: Obviously, customer-related growth requires capital, and wherever there is customer opportunity associated with the capital investment, the capital will be there.

PAYZANT: Technology is really here for us. It's been talked about for the last few years and the liability of those switches that have been out and the new players that have come and gone in the marketplace are finally weeded out. Technology is truly here and working, so we're seeing a high demand. Over 90 percent of the equipment we propose today has that technology in it. A year ago, it was 30 percent. We see an increased demand in those who want to move towards that technology. It's growing our side of the business. Customers aren't just going to spend money because it's a new technology, but instead it's really here and it works and it provides applications that reduce costs.

PRINCE: Rural telephones are primarily either privately owned or coops. Financing, rather than coming from public sectors, is primarily from banks. We've noticed over the past year and a half that the banks have been tightening their grip. We just can't borrow because they've short-stopped the credit lines and the banks are a little scared of it.

From the wireless side -- can we expect more expansion capital investment in Utah, or is it strengthening the already existing infrastructure, or are you taking your services further out?

SOUTHWICK: Last year, we spent $40 million in Utah on networks, which brought us pre-Olympics to a level of service that will be good for us, and we'll continue to build that capital, not only improving the other networks as we get more and more users within the metro areas, but expanding those full-time. We opened a $42 million-dollar customer-service facility here which brought 1,000 jobs to the local economy.

SPAFFORD: We didn't build our own call center here, but we subcontracted out to the local call center for customer service and telemarketing. As far as rural areas go, we have a unique relationship with a group called Nextel Partners. While we focus on urban areas, they focus on rural areas. We'll be doing some more capital expenditures to bring some different features in order to assist them.

What will we see in the marketplace in the next year or two that will be of interest to both businesses and consumers?

MOSIER: We'll be seeing integrated palm devices or air cards or devices you can use with a PDA or laptop where you can then take all those things that you have sitting at your desk with you. This year, we'll have a phone that's got an integrated camera, so if you're a real estate agent, for example, and you want to know if your client is going to like this particular house, you can take a picture of it, send it directly to them. E-mail in the future, it's the higher, faster data speeds that will be able to do attachments, to get Power Point on your PDA device.

CARLSON: The other thing that is going to be a key focus in the future in light of 9/11 is business continuity - understanding where all your employees are. If there is a disaster, how do I reach them? How do I make my business function so I have the mobility to have my employees work wherever they are?

BARLOW: On the consumer end, you'll see gaming or entertainment applications coming into wireless devices. Also, requirements forcing the carriers to be more exacting on where a caller is located will result in some location-based capabilities that will be marketed.

PAYZANT: Every one of these technologies is a better way to communicate. It's less expensive to communicate more efficiently, resulting in a better overall return on investment.

What other equipment do you see hitting the market?

PAYZANT: Voice activation. You can run your web browser with voice, talk to your computer. That's really hot technology.

CARLSON: We've got speech recognition where you can use your cell phone on a speaker basically driving down the road doing things where you have hands-free mobility The other thing is being able to use one device. We all have phones in our office, cell phones. A lot of us have wireless phones connected to our PDS's in our office, and then we have home phones. People are looking for, instead of having a list of six phone numbers on your business card, one number that reaches me anywhere no matter if I'm on my PC at home or if I have my cell phone.

PAYZANT: Your voice is more secure than a fingerprint or web scan, so no more passwords. You can use caller I.D. that will recognize your voice. You don't have to describe what the password or function is.

SOUTHWICK: The air card has proved to be an exceptional product. It's a card that you slide into your computer. It gives you the phone line and does that type of connectivity for you. Those are critical things from a business perspective. Nirvana for a business customer would be to be able to sit down wirelessly on their laptop and connect into their company database.

MOSIER: Air cards will make life easier for the average person. The wireless carrier becomes your ISP... basically, you'll just click a button and you're on the web. Instead of being device-driven, it's going to recognize you as a person, so if you're connected from your wireless phone or from your PDA or from a laptop, it's going recognize you as a person as opposed to the device that you're connecting from, which is going to make life simpler.

Where does the Internet fit into your business plan? Do you still see this as a major driver for the future?

CARLSON: The Internet is definitely the major direction for our business, but customers have realized the risk versus rewards. It is applications-driven, and we need to be careful about what applications are going to run on the Internet and where you're willing to take the risk of losing information or a connection. The initial thought was everything goes to the Internet and it's a lot cheaper, but that reward came with risk. People are more cautious about what they put over the Internet.

KNOWLES: We see a huge increase in the virtual private network. E-mail becomes an absolute requirement to companies. They can't do without it. Small- and medium-sized businesses have found the Internet to be crucial. If you want to find out about a company, that web based storefront is an important P.R. area for most small- and medium-sized businesses.

PRINCE: The Internet saves a million trees every day. Our monthly financials, we printed it a stack at a time and mail them out to the various managers and officers. Today they push a button and it's there on their desktop. In rural areas where distance becomes a factor, we're holding teleconferencing meetings rather than driving.

SPAFFORD: Our customers can go onto the system called E-care and do their own account maintenance, and if they want to change phone numbers, if they want to pay their bill, they can go in and it's done. It's also a way that we can sell more data product. People have to have some way to get into the system.

BARLOW: I don't believe the Internet was designed for that one-inch square screen, and surfing the web with a keypad is a tough proposition. I see voice portals as the way to go. I use voice portal now, and I often will race colleagues to go in and get stock quotes or weather information just by voice demand rather than using a keypad.

Using the wireless network and our wireless devices for the Internet, is that going to drive some of these devices to get bigger?

SOUTH WICK: Bigger meaning FDA size; I don't think it's going to grow bigger than that. People are on the go and they want to do the same thing that they can sit down in their office or their home computer and do. It doesn't necessarily mean that they have to do it from their PDA or their hand-held device. The air card allows you to flatten that same thing into your laptop computer and gain access that way.

NIEBOER: Your original question was regarding the Internet and what does the dot-coin meltdown do to our businesses. We were affected because a lot of the dot-coms were purchasing our Internet service. We now have more vendors coming in on the Internet, because the businesses are buying directly from us rather than through the dot-coms. Dot-coms and the ISPs and even the telecom providers were buying based on future forecast of what the growth was going to be. That contributed to the dot-coin pause. Everybody bought more than what they really needed to provide the services to the customers they have.

Do you see a move towards consolidation in the wireless industry in the future?

SPAFFORD: If you read the trade journals, they've linked us together at one point in time, and nobody agrees at all. Unless you have a crystal ball, you're never going to be able to say, okay, we'll be with Voicestream, Sprint or Verizon or Cricket or whoever. We don't really know. From Nextel's perspective, our company is focused on being independent.

MOSIER: Sprint PCS feels like we can stand as our own entity. Whether or not we'll seek consolidation, my guess is that we will. There's a limited amount of wireless spectrum available to use. There's going to be increasing demand on each company to have more spectrum to provide service to the customers. Consolidation's probably going to come around to how to get spectrum in any given market, and that's what's probably going to drive that.

Do you see wireline companies consolidation in the future?

KNOWLES: Nothing's going to happen in near term. There's going to be balance sheet issues that companies have to deal with. The next major round of consolidation, to the extent there is one, will be around getting the developed companies freedom to offer long distance. When that happens, there's a possibility that they would have an interest in some of the current long distance providers. That depends on how those long distance providers' balance sheets look at the time that the "Baby Bells" are ready to do that.

BLOSCH: Consolidation is also going to be driven by labor services and what gets approved at the higher level and how that trickles down through the industry.

Most businesses have some competitive choice on the wireline side and certainly on the wireless side. What do you see as the future for competition, both on the business and consumer sides?

PAYZANT: As the market demand increases, we're going to see smaller guys starting to pop up again and our competitors will increase.

NIEBOER: A number of us at this table compete on many deals every day for almost all types of business, but that ends pretty much along the Wasatch Front. When you go into rural areas in the state, the businesses have a choice, or they might have another vendor or another provider that's just reselling the incumbent services. That's a potential problem for businesses in rural areas. I'd like to see competition actually increase in rural areas throughout the state.

CARLSON: Some of our businesses have chosen to get into new technology. That has changed the way you compete from how we did even two years ago. Our competitors are completely different than they were two to three years ago.

PRINCE: Rural competition doesn't exist outside the Wasatch Front from the wireline competition. Competition and deregulation are kind of intertwined and can't really exist together that well. I don't see competition really easing deregulation. In the wireline side, competition would be great if it's market-driven. I live in Kamas. I've got a really nice FoodTown in Kamas, but that's the only choice we've got. When the FoodTown expanded, all those little guys went broke, and a market the size of ours just can't support two FoodTowns. For some years to come, it's going to be the same with telecom. The market just can't support two wireline providers. It's not going to happen soon in the rural areas, because the people just aren't there and you've got to be able to sell those services to people to pay for the infrastructure.

NIEBOER: It's easy to pick the Wasatch Front as an area that you can compete in because there is so much business. It may be much more difficult to justify going to Hurricane.

What about St. George and Cedar City? There's some competition but less than along the Wasatch Front. How big does the market have to be for an XO or DLI to jump in?

KNOWLES: The costs of approaching or getting into a market are high. Given the current environment, that's very difficult on our private capital basis. There is potential for a number of cities putting together a consortium of technology to use together. The availability of capital is scarce. An expansion for an untested market such as a rural area is a questionable amount of money.

RIGGS: We're obviously perceived to be monopolous in most of the state and probably are, at least along the I-15 corridor. The regulatory environment prevents a lot of investment in residential and rural areas, because those are projects of last resort, and the rates are basically subsidized in those areas. It makes it difficult for someone to go into those markets. Our competition comes through AT&T Broadband, through wireless. Competition in the Wasatch Front is healthy and will continue to expand, hut the last place you're going to go is to the most remote areas.

BARLOW: An overall decline in customer loyalty, both corporate and consumer buying, is fueling the competitor buyers. It's harder and harder to achieve a brand loyalty out there, and when we change our names a lot, that adds to that. My fear is that the younger generation will have less brand loyalty than we grew up having, and that is a reason to keep competitions even.

One perspective is find your niche and get loyal customers in that niche. Another look at the market is you want to be a company who can provide one-stop shopping. Which of those is right, or are they both right, and have changes in the industry and the economy changed the thinking about that?

SPAFFORD: We know that we've got our particular niche we play in. Everybody at this table really has their own niche, and that's what customers are looking for.

RIGGS: The Wasatch Front bundling is going to be a factor of life in the long term. In rural areas, a niche is going to be the way to go.

PAYZANT: From the wire side, bundling is what keeps growing our business today. We give customers one solution and it's turned out to be successful. The niches... I've got three Cricket phones for my kids, and I've got Nextel and a wireless phone through Sprint for my wife. I let one company do them all.

On the wireless side, is there a perception that the FCC's going to change the rules for the game, or are they relatively understandable?

SPAFFORD: The spectrum cap going away is going to have the biggest impact on our business. We were each told you're going to have 'X' amount of spectrum in the market. Unfortunately, we're going to have half of it and that's really the main reason the digital came out. Well, the next step to get more capacity, you get additional spectrum. Because we're already at the restriction of how much we can own, you can't have some of the consolidation you're talking about, and so that's why that's changed in the landscape.

BARLOW: It happened last November. We couldn't own more than 45 megahertz of spectrum in any market. That's why Cricket was able to come into the market, buy a license here, because the big guys were at that cap level already, so we exist because there was a spectrum cap. That goes away now, so you have the free market coming back to where there could be some consolidation, which heretofore couldn't have happened.