Suddenly, it seems, too many players were chasing too little business. Jamie Doward on how the party ended - and what happens next Sunday March 18, 2001 The Observer Back in October 1999 Ray Dutton thought he was about to become a very rich man. His telecoms company, iaxis, which called itself a 'pan-European network', was looking at a $2 billion flotation to fund further expansion. Dutton, with hubris which then typified the telecoms sector, boasted: 'If you can't make money in telecoms, you should be in an institution for the feeble-minded.' He now lives in Australia - as far away as possible from angry investors who backed his company only to see it collapse last September. There are question marks, too, over Telemonde, an iaxis offspring chaired by Kevin Maxwell. Its shares have crashed by 85 per cent over the past 12 months. Both companies are 'carrier's carriers'. They have no infrastructure; they just lease capacity from other telecoms firms and sell it on. That was the theory. Unfortunately for iaxis and Telemonde, many other firms had the same idea and piggy-backed on companies which owned networks. The result: overcapacity that drove the price of bandwidth down by 80 per cent in little under a year. The problems facing the carriers' market, which emerged towards the end of last year, were the first true signs that the telecoms bubble was not sustainable, despite predictions heralding an explosion in data traffic as the world embraced the knowledge economy. Too many players have spent too much money on trying to compete at a time when companies are reining back spending plans in anticipation of hard days ahead. So margins are taking a hammering, and the stellar growth predictions made only a few months ago now look increasingly shaky. Dutton's iaxis is likely to be the first in a long line of failures. Last Wednesday it was the turn of Cable & Wireless to depress the sector. It issued a profits warning, blaming a sharp fall in the price of internet traffic. Some 4,000 jobs will go. Chief executive Graham Wallace described the price cuts as 'severe' and suggested that rival companies would soon admit similar problems. Earlier this month US giant WorldCom announced it was laying off 7 per cent of its workforce. Rival AT&T, forced to cut its fourth-quarter dividend last year, is now looking at breaking itself up after its shares plummeted. The problems facing debt-laden BT - now valued at #35 billion, half what it stood at less than a year ago - are becoming worse daily. Then there is the nightmare mobile phones sector. With the costs of launching a global 3G wireless internet service estimated at more than #150bn, the likes of Vodafone and Orange have seen their share prices slide due to fear that they overpaid. All this has made the money markets nervous. The banks have overstretched themselves, lending the sector a staggering $300bn. It is only a matter of time before a number of telecoms players default. Only last week ratings agency Standard & Poor's said it 'no longer considers it prudent to rule out the possibility that the operator Viatel [which is in the middle of building a pan-European state-of-the-art network and once enjoyed a huge following on Wall Street] may fall below the junk bond CCC+ rating'. Concerns over other possible defaults have driven investors away from the telecoms bonds market. As a result, spreads have widened dramatically, and telecom bonds offer average interest of 14 per cent, compared with around 6 per cent for a no-risk Government bond. 'There are too many telecom companies and they're not all going to make a profit,' says Adrian Murray, analyst with broker Teather & Greenwood. 'The financial markets are no longer willing to increase their exposure.' The problems facing some network operators have in turn started to cut dramatically into the profits of makers of telecoms infrastructures. As their clients have faced a cash crunch, the equipment manufacturers - the very stocks analysts saw as 'safe harbours' because they provided the picks and shovels for the internet gold rush - are suffering. Why? Because when there is no way of raising new financing, smaller clients simply can't afford capital expenditure. Instead they must use what they've got. 'They can't keep building the networks,' Murray says. 'Every dollar those companies spend now must earn a return. They can't hope it comes in in three or four years.' Significantly, on the same day as Cable & Wireless was announcing redundancies, Germany's Siemens and Motorola of the US added to the gloom, chipping in with, respectively, a profits warning and news of more job cuts. This came in the same week that Swedish mobile phone giant Ericsson, which makes the bulk of its revenues from building network infrastructure, announced it expected a first-quarter loss of up to #350m. Rival Nokia later put out a trading statement showing it expected sales growth to slump this quarter. Earlier this month network equipment giant Cisco said it would make 2,500 staff redundant, 5 per cent of its workforce. On the same day bellwether stock Intel, whose chips are found in everything from internet servers to mobile phones, issued its third profits warning in a row and announced that 5,000 jobs were to go. Gloom outside the telecoms sector hasn't helped. Cisco, for example, says the motor industry has cut around $100m of investment in telecoms. And as more dotcoms fail, demand for faster, fatter 'pipes' evaporates. No company is immune. Canadian giant Nortel, the world's largest telecoms equipment maker, stunned the market last October with disappointing sales figures, sending shockwaves through the infrastructure sector. Bookham Technology, the UK maker of fibre-optic cables and one of Nortel's biggest suppliers, has seen its shares slump as a result. Earlier this month it announced 150 redundancies. Where will it end? 'The bottom of the market will probably be marked when you see a relatively large telecom company go bust because the banks say they're not going to refinance it,' Murray says. With the Nasdaq now below 2,000 points, compared with a high of 5,000 last year, the markets' love affair with telecoms stocks, which powered the rise of the IT sector, is clearly over. Charles Dumas, analyst with Lombard Street Research, who predicted last the Nasdaq's slide last May, is now warning it could fall by a further 50 per cent. 'The tech sector is at best ex-growth, and much of it merely a profit-less call option on a bust,' Dumas says. So that's that. Time for a new bandwagon. Sell, sell, sell. A week of market madness Japan needs another miracle to survive Charging bulls and bears with sore heads 'Stockbrokers ran stalls on Petticoat Lane to make money' Guardian Unlimited ) Guardian Newspapers Limited 2001 _______________________________________________ CrashList website: http://website.lineone.net/~resource_base
