Telecom Stocks: Busted By Broadband

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Tucked into a corner of Lucent Technologies' Bell Labs in Murray Hill, N.J., stands a small box that houses what could be the future of the telecommunications industry. Called a LambdaRouter, the device contains 512 microscopic mirrors, each of which can switch light waves packed with more than 10 billion bits of information--roughly the contents of 10,000 novels--from one hair-thin strand of optical fiber to another.

You could conceivably jam thousands of these micromirrors into a soccer ball and have enough capacity to connect everyone on the planet simultaneously to everyone else without the time and expense of converting the light to electronic impulses and back again--as today's networks require. Kick that around. Declares Bell Labs scientist David Bishop, who led the development team: "You will either have a technology that does this, or you will have a going-out-of-business sale."

Nobody knows the vicissitudes of technology better than Lucent, which had to negotiate a $6.5 billion loan package last month to avoid a cash crunch. Lucent was first a beneficiary and then a victim of the race to wire the U.S. with the speed-of-light data pipes known as broadband. And now it has company in its misery, as broadband carnage has spread from phone companies like AT&T and WorldCom to fiber makers like Corning to optical-systems builders like Nortel Networks to components makers like JDS Uniphase and networking companies like Cisco Systems.

Broadband growth figured to be limitless. Given that every business and every household is moving online, data transmission has been expanding at phenomenal rates. But as phone companies and Internet service providers sprang up everywhere, capacity raced light-years ahead of demand. So the price for using the pipes tumbled, hobbling the telcos' ability to expand and to buy more gear. "Never in the history of industry has the sheer number of competitors been so underestimated and misunderstood," says former AT&T Broadband president Leo Hindery. "And never have the implications of technology advancement been so misunderstood as well."

The results have been plunging profits, mass layoffs and imploding stock values for companies that had been NASDAQ supernovas and among the chief reasons for the stock market's rise. At BlueStone Capital Securities, an index of 13 fiber-optic heavyweights that includes Lucent, Cisco, Nortel and JDS Uniphase has fallen 78% since last July, a plunge that has cost investors more than $1.1 trillion in market value. The percentage decline exceeds the drop for NASDAQ as a whole, which fell 51% over the same stretch.

Investors who see those falling stock prices and think "bargain" should think again. Few industry leaders expect business conditions to improve much this year. Phone companies "are really conserving their capital because of the severe downturn in the economy," says Clarence Chandran, Nortel's chief operating officer. Nortel is a one-company bear market. The world's No. 1 producer of fiber-optic systems, Nortel accelerated the industry's slide and NASDAQ's sell-off last month by abruptly slashing its 2001 forecasts and declaring that it would idle 10,000 employees, or nearly 10% of its work force.