Qwest and US West: Far from insanity

By Daniel Briere and Christine Heckart
Network World, 07/05/99

Has a bout of insanity gripped telecom industry executives in Denver? Is the air too thin there?

Many in the trade and on Wall Street were asking these questions recently when Qwest moved to buy US West.

These naysayers wonder why an emerging service provider, unencumbered - at least in theory - by multiple networks, back-office systems, legacy equipment and services, would want to buy a stodgy, old regional Bell operating company that carries all these burdens?

We have been among the minority buying the argument that US West would drive Qwest's high-speed Internet access plans and, therefore, justify the investment.

As we've said before, the industry is beginning a period of increased specialization sometimes described as "deconstruction." One layer of this specialization is the ownership and operation of the physical network by a handful of global supercarriers. Another layer will be a fragmented multitude of application service providers catering to specific communities of interest.

Like other facilities-based providers, Qwest wants to be left standing when the consolidation dust settles, meaning it has a pressing need for network real estate. Any successful global supercarrier will control an end-to-end wire-line and wireless network spanning local, national and international boundaries.

Why? Low unit cost, scalability and network ubiquity are the attributes of success in this primarily wholesale business model.

In this age of eat or be eaten, Qwest looks to be a yummy morsel for many a telecom shark. So Qwest will use its high market capitalization to go on a buying spree with company stock as tender. Whether or not the US West deal goes through, expect others like it to follow.

But will the deal pan out? We think probably not, and that's too bad for US West stockholders. The competing Global Crossing deal wouldn't give US West stockholders the same bang for their buck because the "old" processes and management philosophy will persist in a post-merger environment. US West/Global Crossing wouldn't be any more aggressive in launching services, so stockholders wouldn't get the high valuation on predicted future earnings.

It's hard to say that consolidation is always good.After all, the mess in which many MCI WorldCom Cable & Wireless data customers find themselves as a result of that deal is not something you would wish on an enemy.

Such consolidation means mostly short-term pain for end users, as processes, billing, sales forces and networks are consolidated. Long-term you can hope to get lower prices and easier global networks to build and manage.

To offset that short-term pain, you might try investing in a stock market that seems to cure all ills. Otherwise, buy your aspirin in bulk. There are more of these deals on the way.