Too Much Long Distance With five new networks crisscrossing the continent, America is awash in fiber. Telcos will strain to make use of it all--and that's great for consumers.
By Rachael King

(FORTUNE Magazine) – The clearest glimpse of things to come in the telecom industry isn't to be found in the plush boardroom of Ma Bell. Instead, it's here in a ditch about an hour south of Dallas. Off Interstate 45, just outside Corsicana, a construction crew operating a so-called spider plow propped up on four spindly, jointed legs scoops out earth alongside the Burlington Northern Santa Fe railroad tracks. Four feet down in the bottom of the trench, men carefully lay ten plastic pipes, each about the size of the one that connects to the drain of your kitchen sink.

The scene is being repeated across the country--3,000 workers wearing hardhats and Day-Glo orange vests are laboring to build the nation's newest long-distance network for upstart Level 3 Communications. More than 40 strands of hair-thin fiber-optic glass fill one pipe, while the other nine are left empty. The conduits--to be filled with fiber at a later date--symbolize the optimism of CEO James Q. Crowe about his company's future, as well as that of telecommunications. "This is the equivalent of the computer industry in 1980," he says. "We're very, very early."

Such optimism may seem quixotic, since Level 3's is the fifth long-distance network to be built in the past several years. Aren't the three great networks of AT&T, MCI WorldCom, and Sprint enough? Does America really need more? Newcomers Qwest, IXC, Williams, and Frontier will face the same question as their networks start to come online this year, bringing the nationwide total to eight and unleashing a flash flood of capacity. Any of these new networks alone could change the dynamics of the long-distance industry. Qwest CEO Joseph Nacchio, for instance, claims that when his network is finished this summer, it will have greater capacity than those of AT&T, MCI WorldCom, and Sprint combined. And Frontier's network has twice the capacity of Qwest's.

The growing glut is proof positive that Moore's Law has arrived in telecom, with profound implications for carriers and their customers. In the computer industry, Moore's Law predicts that the performance of computer chips will double every two years. In telecom, performance is rising and costs are collapsing even faster, as improvements in lasers, fiber, and software reinforce one another, exponentially expanding the number of calls a fiber can carry from 8,000 in 1985 to 1.5 million now. The result two years from now will be a national phone infrastructure with more than 80 times the capacity it had three years ago.

This stupendous buildup will be a boon for consumers and businesses: Many phone-industry executives predict that prices for long-distance calls will plummet by as much as 50% annually. Frontier CEO Joseph P. Clayton envisions a day not too far off when long-distance calls will be offered free to consumers who buy a bundle of services including high-speed Internet connections and wireless telephony.

What's good for you isn't necessarily good for the upstarts. They've buried billions of dollars in the ground and will never survive if they merely lower your phone bills. To prosper, they need you to consume more and more, so that they can offset falling prices and still make a profit. The newcomers don't have the same kind of marketing budgets as the Big Three; they won't be as likely to dangle $100 bribes to get you to switch carriers. Instead, they will woo you with broadband links to the Internet, videophones, and movies on demand.

As people say about comedy, though, timing is everything. The trick for the upstarts is to be ready with the added capacity just as new applications arrive to ignite demand. Right now they have a problem: The bandwidth is almost here, and the applications aren't, which means that long-distance companies face a deep trough, if not an abyss. Even if the companies can invent new services, many analysts remain skeptical that they can inspire consumers and businesses to snap them up. Forrester Research in Cambridge, Mass., predicts that a bandwidth glut will begin next year and last at least until 2005.

If it does, the new companies will face a serious cash crisis. Level 3, for instance, plans to spend between $8 billion and $10 billion to build its network over the next four years. To cover construction this year and next, the company has $4 billion in cash: $2 billion from its corporate parent, Omaha construction giant Peter Kiewit Sons', and $2 billion from a 1998 bond issue that one analyst declared the biggest junk-bond offering of the decade. The additional billions of dollars Level 3 needs to build the rest of the network and to retire the debt--the 9.2% bonds are due in 2008--must come from paying customers. CEO Crowe is counting on Level 3's network to generate sales of at least $250 million this year and $650 million in 2000. Level 3 had revenues of $392 million in 1998, but nearly 60% of that sum came from coal-mining operations that Kiewit spun out to Level 3 to help tide the company over. Crowe hasn't said when he expects Level 3 to earn a profit.

Like the other new CEOs, Crowe dismisses the possibility that demand won't keep pace with supply. "With all due respect, most of the analysts who say that failed Economics 101," he says. He reels off possibilities: Businesses will download software from the Internet rather than fuss with CD-ROMs; consumers will forgo trips to Blockbuster, browsing movie catalogs and ordering videos from the family den; music lovers will download symphonies from the Web directly into the digital library on their hard disk.

As they spin such tales, Crowe and the others aren't talking of ordinary change. They are predicting a transformation on the same grand scale as the personal-computer revolution of the '80s. None of these men aspire to make their company the next AT&T, which they equate with the hidebound IBM of the PC era. Instead, they speak wistfully of becoming the next Intel.

Meanwhile Frank Ianna, president of network services at AT&T, claims not to take offense when upstarts compare his company with IBM. "Last time I looked, IBM is still doing pretty well because they were able to remake themselves," he says. Yet beneath the cavalier exterior of Ianna and other executives at AT&T, MCI WorldCom, and Sprint lurk defensiveness and worry. Their worst fear: that the arrivistes won't generate enough new traffic to fill their networks, and instead will make a grab for market share, touching off a ruinous price war.

As they dig in against the newcomers, the long-distance giants have distinct advantages: billions of dollars in revenues and millions of customers. The Big Three will try to lock in these customers by offering discounts for those who buy packages of service. AT&T, for instance, recently introduced a service plan with a uniform rate of 10 cents a minute for long-distance and cellular calls. The Big Three are also counting on growth in newer businesses, like wireless and network management for corporate customers.

Such tactics are at best a stopgap. Despite its noisy television ads touting collect calls and cheap long-distance plans, AT&T's consumer long-distance business is shrinking, with revenue decreasing by 3.6% in the fourth quarter of 1998. The Big Three are racing to make their networks more like the ones that Qwest and Level 3 are building, capable of running voice and data over the same wires, using Internet Protocol (IP), the digital language of the Internet.

In revamping, though, the Big Three have a tough row to hoe--often quite literally. A good portion of their networks consists of fiber buried in the ground and not encased in plastic pipes, which means they can't add more unless they want to dig up the streets and countryside. To complicate matters for AT&T, many of the rights of way where it built its network in the 1930s are now in backyards, which homeowners are none too anxious to see disturbed. Where they can't add fiber, AT&T, MCI WorldCom, and Sprint are hurriedly retrofitting the networks with new lasers and software that can increase traffic on each strand of fiber by a factor of 16 or more. But there's a limit to how much such tweaking will help the old guard catch up.

The contest between old and new telcos will also turn on questions of marketing strategy. MCI WorldCom vice chairman John Sidgmore, who must make do with older fiber in much of his network, insists that it is the new long-distance carriers that will encounter a rough ride: "Even if, as an example, Level 3 developed some lead in transmission cost, they would be completely blown away by sales and marketing cost because they don't have any base to spread it over."

Crowe of Level 3 argues that this kind of thinking is reminiscent of IBM's inability to understand where the PC market was headed. "Our model is not to go out and see if we can hire 10,000 direct salesmen to compete with AT&T, MCI, and Sprint," he says. Instead, Level 3 will hire a small sales force and transact most of its business with customers via the Internet.

What the two camps share is a need for bandwidth-eating applications. That is good news for consumers, because it is driving the companies to take on a vexing problem: snail-paced connections to the home. While big businesses are connected to their long-distance company with fiber, most residences and small businesses are joined only by the old-fashioned copper wires owned by their local telephone company. To break the jam, the locals are touting a technology called digital subscriber line (DSL), which can carry high-speed traffic over copper. But they have been frustratingly slow in rolling it out. So long-distance telcos are taking matters into their own hands. Sprint announced that it would deploy DSL nationwide beginning in May, linking customers directly to its network and providing local as well as long-distance service. "It's a key driver to get control over our destiny," says Kevin Brauer, president of national integrated services. MCI WorldCom and Qwest recently took minority stakes in DSL startups. AT&T is trying to crack the local market via cable telephony, with its $48 billion acquisition of TCI and its recent deal with Time Warner to offer cable phone service to 20 million households.

Rather than go it alone, the long-distance newcomers are pulling together suppliers and partners in new kinds of relationships to create demand for network services, much as Intel, Microsoft, and PC makers united to equip America's desktops with computers and software. Qwest CEO Nacchio calls this approach "telecom keiretsu." In December he forged an alliance with Microsoft to develop electronic-commerce services. Qwest also has partnerships with suppliers like Cisco, Lucent, and Nortel, co-developers like Netscape, and customers like Bear Stearns, NBC, and Exxon.

As the bandwidth barons promote their vision of the future, some of the services they hope to see lie closer to reality than others. It's not too hard to imagine, as Qwest multimedia chief Lew Wilks suggests, that people will routinely watch customized versions of the evening news delivered over the Net. It's a little harder to go along with MCI WorldCom's Sidgmore as he speaks longingly of the day when we're jacked into the Web all the time, wearing multiple wireless Internet devices that alert us to breaking news or changes in the weather or the stock market. It's harder still when Crowe of Level 3 foretells a time when we'll communicate over the Net via telepresence--a 3-D version of videoconferencing that will project our images into a room to interact with other real and virtual beings.

Occasionally, though, we actually get to see what these executives hope to do. This year, when 350 Super Bowl fans found their places on the 20-yard line of Miami's Pro Player Stadium, they discovered high-tech computerized TVs attached to their orange plastic seats. Those lucky enough to get one of the ChoiceSeats could view the game from 13 live camera angles, which they could change whenever they wished.

The fans have probably never heard of Williams Communications, the Tulsa company responsible for developing the technology and bringing it to the Super Bowl. In fact, Williams wants to forge partnerships with other companies to take its technology to every stadium and home in the U.S., so that fans can control their view of Monday Night Football from their living-room couches.

However far-fetched such sexy new services may seem to you, the ability to deliver them could decide which phone companies survive to propel customers into the next digital era.