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Telecomunications Industry Plagued by Economic Troubles - 2002-07-01

Last week's revelation of WorldCom's alleged fradulent accounting practices has highlighted the economic troubles plaguing the global telecommunications industry.

Analysts say the key cause was a belief in the 1990's that the Internet was going to take off, pushing demand for international telecommunications to unprecedented levels. Investors were eager to speculate on the emerging technology and telecommunication companies competed wholeheartedly for their dollars.

Coupled with the excitement, Penn State University communications professor Robert Frieden says, was a feeling that acquiring market share was more important than generating a profit. "So you had this gold rush mentality, where everyone was out buying facilities, laying submarine cable to accommodate the demand," he said. "The vision was that all of us would have compelling need to download full-motion video. As it has turned out, we have plenty of capacity, but we do not have supply of this video product."

So you had trillions of dollars invested in telecommunications over the past six years for a demand that has not yet taken off.

Then, Robert Friedan says, the belief that bigger was better, that to be a global player offering all types of services, you had to be huge, led to a host of mergers and acquisitions. "AT&T, MCI, Sprint, France Telecom, Deutsche Telecom, British Telecom, I mean you name the major telecom player and they had visions of global one stop shopping," said Robert Frieden. "The execution of that vision failed, and it failed miserably."

It failed, says Arent-Fox communications attorney Jeff Sanders, because the companies were expanding for the wrong reasons. "Were telecom companies making acquisitions because they made sense in a product-specific sense," he said. "Or did they enter into acquisitions to shore up balance sheets and show short-term revenue and profit growth. If it is the latter, that is not a long-term strategy and I am suspecting that is what happened."

Mr. Sanders says, he would not be surprised to discover other firms had resorted to fraudulent bookkeeping like WorldCom. "Each of these companies was under tremendous pressure to show financial results on a quarter-by-quarter basis," he said. "That creates a natural incentive to choose the most aggressive accounting treatment for either expenses or revenues, which will result in certain practices being over the line."

Mr. Sanders says he suspects there will be more bad news in the telecommunications sector in the months ahead.