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Smaller telecoms feel pain of giants

A sign of how bad things have become for the beaten-down telecommunications sector: WorldCom's Chapter 11 bankruptcy filing wasn't even the day's worst news.

Instead, blame BellSouth Corp. The Baby Bell company, one of the parts of the old AT&T monopoly, saw its shares tumble Monday to a near five-year low. Its stock closed at $22.61, down $5, or 18 percent.

The company, which is the local phone provider in much of Florida, reported disappointing second-quarter earnings, cut its full-year earnings growth forecast and said it sees no near-term signs of relief in sight.

The main problem for telecoms continues to be network overcapacity, an embarrassment of what were once seen as riches. During the technology boom of the mid to late 1990s, the major industry players drastically overbuilt their long-distance voice and data networks in anticipation of a massive surge in demand that never materialized.

"I don't think we're getting close to the equilibrium that we need as far as capacity is concerned," says Mark DeRussy, a telecom analyst for Raymond James & Associates in St. Petersburg. "There's demand but not nearly enough to justify the fiber that was put in the ground.

"The issue with WorldCom is yes, they're going to go through bankruptcy proceedings so they as a company might go away," he added. "But the capacity they had in the system doesn't go away, that's going to stay there."

The slump, and the resulting difficulty in raising capital in both the stock market and through private channels, hurts not only large telecom service providers like the Baby Bells but also the smaller companies that do business with them.

Paradyne Networks Inc. of Largo sells high speed digital modems for business data networking to WorldCom and other service providers. The company said last week during a conference call to discuss its second quarter earnings that it expects a decline in earnings and revenue in the third quarter from the previous quarter.

The telecom sector's protracted slide, coupled with WorldCom's accounting scandal and history-making bankruptcy filing, has made the United States a difficult market for telecom equipment makers to sell their wares, said Scott Eudy, Paradyne's vice president of marketing and development.

"Psychologically, it's very, very tough," he said. "The food chain starts with those telecom carrier giants. During the Internet bubble, they went a little drunken-sailor-crazy with spending, and now we're facing the backlash."

But Eudy added that even WorldCom's bankruptcy "is not an unmitigated disaster" for companies like Paradyne.

"Their assets may be owned by someone else, but they're still going to have to upgrade those assets," he said.

Similarly, Digital Lightwave Inc. of Clearwater, which makes equipment to test and monitor fiber optic networks, is trying to stay focused on the positive.

"Obviously WorldCom has built one of the largest telecom networks in the world," said Digital Lightwave spokesman Paul Harris. "Whoever is running the network is going to need to monitor it, and that's where we fit into the equation."

A local company more directly affected by WorldCom's bankruptcy filing is alternative telephone company Z-Tel Technologies Inc. of Tampa.

In April, Z-Tel and WorldCom unit MCI launched an innovative calling plan called the Neighborhood, offering unlimited local and long-distance calling in select markets (not yet including the Tampa Bay area) for about $50 to $60 a month. The program is crucial for Z-Tel, which is trying to shift its focus away from its retail business toward selling wholesale services to major telecom carriers and other corporate customers.

Despite a torrent of negative news about WorldCom's accounting irregularities and dire financial straits, the Neighborhood has proved to be a success. The program has more than 800,000 customers, well on its way to attaining its goal of 3-million subscribers by early next year, MCI spokeswoman Audrey Waters said.

But WorldCom's bankruptcy filing Sunday forced Z-Tel to release a statement Monday explaining that it "does not expect to experience a significant financial impact" and that it has "taken steps to minimize our risk level associated with fulfilling our agreement with MCI."

Sarah Bialk, Z-Tel's director of investor relations, declined to detail exactly how the company was minimizing the risk in its MCI partnership, saying only that there were certain "operational and financial controls in place" to protect the company.

Another uncertainty, one that MCI's Waters declined to discuss, is how much WorldCom's bankruptcy will affect the budget for the Neighborhood's national ad campaign.

Bialk conceded that "they're going to do what makes sense to conserve cash," but added that MCI and Z-Tel remain staunchly behind the Neighborhood program.

"It's been very successful," she said. "Both companies are working in a spirit of partnership and good faith."

_ Louis Hau can be reached at hausptimes.com or (813) 226-3404.

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