Breakdown in Communications -- Telecom and NJ

[Dave Farber <dave () farber net>]

Breakdown in Communications

November 24, 2002
By SUSAN WARNER 




 

LAURA and Ken Jewell have entered the Lucent afterlife.

After more than 20 years in the telecommunications
industry, the Fair Haven residents are now out on their
own. Ms. Jewell, who was laid off just three months before
she would have been eligible for early retirement, is
running her own marketing business, promoting the Red Bank
Jazz and Blues Festival and helping startup businesses. Her
husband, who retired before he was even 50, is now selling
his hand-carved wooden ducks and teaching banjo.

The Jewells are small players in the great New Jersey
telecom crash that has ravaged one of the state's leading
industries, leaving thousands of highly skilled workers
jobless or underemployed.

"At first it was a shock," said Ms. Jewell, who owns up to
being in her 40's. "We all grew up in this company. There
were so many opportunities you never really looked anywhere
else. Now the situation is that the company is shrinking
and there's no other place to go."

In just two years, telecommunications executives saw option
packages worth tens of millions of dollars - and their jobs
- evaporate. Some of the most prestigious companies in New
Jersey were thrown into turmoil, most notably Lucent
Technologies. Lucent, parent company of the state's
research icon, Bell Labs, plans to slash its global
workforce to 35,000 by March, from 153,000 three years ago.


AT&T and Verizon, the state's second and third-largest
employers respectively, are also scaling back. AT&T, after
spinning off Lucent and other businesses over the past
several years, including its cable operations, let 10,000
employees go worldwide. And Verizon is also reducing staff
to cope with declining business in New Jersey.

New Jersey - which ranks among the nation's top telecom
clusters along with San Francisco, Boston, Dallas, Atlanta
and Washington - is not suffering more than the others. All
of them are reeling in the aftermath of a global investment
binge that lead to today's industrywide hangover.

Nor are the mammoth companies the only ones suffering. The
once high-flying startups that flourished in their shadows
are sputtering, and manufacturers of telecommunications
equipment are scrambling to reposition their products for
other industries. 

"It's been a catastrophe," said former Representative James
Courter, president of IDT Corp. a Newark-based company that
provides long-distance service and prepaid calling cards.
"It is probably the largest implosion of an industry in the
history of this country."

Even now, two years into the slump, the industry shows no
signs of coming back.

"We were so used to growth, even hyper-growth for awhile,"
said Matt Desch, chief executive of Telcordia Inc. of
Morristown, a software and service provider that has cut
its staff to 4,869 from 8,657 in February 2001. "Now we're
in a state of decline."

Mr. Desch added, "Most of us see signs it has leveled out,
but we don't see any signs that there's going to be growth
any time soon." 

While the crash of the once-thriving telecom business is a
global phenomenon, the effect on New Jersey has been
particularly pronounced since it is one of the state's
leading industries. From 1992 to 2000, employment grew from
to 71,000 from 63,700. Since then, however, the number of
employees has dropped to 66,800, according to the New
Jersey Department of Labor.

"Telecom has been one of the pillars of the New Jersey
economy along with pharmaceuticals and tourism," said
Joseph Gonzalez, president of the New Jersey Business and
Industry Association, a trade organization. "The downturn
has had a significant effect. The difference from five
years ago and today has been dramatic."

Ever since the nation's first long-distance telephone lines
were stretched across the state from New York to
Philadelphia in 1885, New Jersey has had a long and
prosperous involvement in the telecommunications business.
In 1941, Bell Labs, the research arm of the American
Telephone and Telegraph Company, moved to Murray Hill from
New York City, and New Jersey went on to nurture such
life-altering innovations as the transistor, communication
satellites and the computer language, UNIX.

In the 1970's and 1980's, the office staff of American
Telephone and Telegraph also migrated from New York to new
suburban office space in Bedminster. By the late 1980's,
AT&T's chief executives were all based in New Jersey,
although the company's official headquarters to this day
remains in New York.

"New Jersey is ground zero of the telebomb," said Peter
Bernstein, president of Infonautics Consulting Inc. of
Ramsey, which specializes in the telecommunications
industry. 

To Joseph Seneca, chairman of the New Jersey Council of
Economic Advisors, the current industry chaos is the result
of three major factors:

¶Vast overinvestment in telecommunications equipment -
particularly in fiber-optic networks, which occurred in the
late 1990's - similar to the bubble experienced by dot-com
businesses that eventually lead to that industry's bust.

¶Deregulation, resulting in fierce competition among local
and long-distance carriers, driving down prices and profit.


¶The flood of such new technology as wireless
communications and computer-based telephony, putting
pressure on companies using traditional landlines.

"These three factors - combined with the general economic
downturn - have really made the industry significantly
exposed," Mr. Seneca said.

Of course, the state's most widely known telecom problems
have focused on Lucent, which makes telephone equipment for
such service providers as AT&T and Verizon. In addition to
the loss of jobs, Lucent's stock has dropped from $84 a
share in 1999, when it was one of the nation's most widely
held companies, to below $1 this fall.

Lucent was created in 1996 when it was spun off from AT&T
into a market that was set to explode with growth - fed by
optimism about the Internet and another round of
deregulation. 

"There was dot-com mania and start-up frenzy going on,"
said William Price, a spokesman for Lucent. "There was
almost unlimited capital from venture capital firms."

In the supercharged environment, Mr. Price explained, the
company went from having a few hundred customers to several
thousand around the world, and it was projecting growth
rates of 15 to 20 percent. But by 2000 the company was in
trouble. 

He said the downturn began when Lucent miscalculated the
design on a crucial product that transmits information and
watched as buyers showed a clear preference for the same
product made by its Canadian competitor, Nortel Networks.
Lucent lost business on that just as the entire industry
was becoming buried in a glut of unneeded equipment and
high debt taken on to build it.

But when the bottom fell out at Lucent, it fell rapidly. As
2001 dawned, Lucent employed 106,000 people worldwide, but
by this September that number had dropped to 47,000. And
last month the company announced plans to cut back again.
The bulk of Lucent's New Jersey employees work at three
locations: 2,300 in Holmdel, 2,000 in Murray Hill and 2,500
in Whippany. 

Trying to put the best face on a grim situation, Mr. Price
noted that 55 percent of Lucent's downsizing was done with
layoffs, with the rest of the staff reductions coming
through the sale or spin-off of businesses and outsourcing
programs - in which workers moved with their jobs to a new
owner. Voluntary incentive plans encouraged 8,500 employees
to leave the company, he said, of which about 30 percent
came from New Jersey; those who left with early retirement
packages are earning about 30 percent their salary and are
covered by Lucent's health plan, but they worry that they
could lose those benefits if the company does not recover.

While some analysts have raised the possibility that
Lucent will file for bankruptcy protection, the company
emphasized in its October earnings announcement that it had
enough cash to pay its bills. After completing its most
recent cost cuts, Lucent said it expected to be profitable
by the end of next year.

"When this all clears," said Mr. Price, "Lucent will still
be standing." 

Cutbacks have also taken a toll on Bell Labs, the research
arm of Lucent. Mr. Seneca said Bell's scientists, who were
once encouraged to pursue far-out science in hopes of
making breakthroughs, have been reined in.

"Bell Labs was the long-standing icon of superb research,
and that has been threatened and changed in terms of focus
to much more of an immediate pay-off," said Mr. Seneca.
"That has an effect on the company, but also on the overall
research capability of New Jersey as the state where basic
science and cutting-edge science is done in telecom."

In the meantime, AT&T has been paring back to become more
of a pure service provider for businesses and residential
customers. The latest slimming down began in 1996, when it
spun off Lucent along with Avaya of Basking Ridge, which
serves large business clients, and Agere, AT&T's computer
equipment business, now based in Bethlehem, Pa.

Last year AT&T Wireless, with headquarters in Redmond,
Wash., split off from AT&T, and just this last week AT&T
Broadband, a cable television company that also provides
Internet service, merged with Comcast.

In addition, AT&T has let 10,000 employees go in the past
two years, bringing its global workforce to 72,000. Of
those 72,000 employees, 16,000 work at 108 facilities in
New Jersey, including 3,500 at AT&T's corporate
headquarters and its global network operations center in
Bedminster. The center is the size of a football field and
transmits 310 million voice calls a day and data equal to
the Library of Congress every 11.5 minutes.

But AT&T, like Verizon, its local service rival, is losing
ground to new competitors and technology including wireless
and the Internet. In the third quarter, AT&T said its
residential business was down $2.8 billion, or 25.9
percent. 

Verizon, which has its headquarters in New York, is the
descendent of New Jersey Bell and several other regional
operators spun off from AT&T in the original 1984
divestiture. The company, along with others, has been
moving steadily into its former parent's long-distance
businesss. In New Jersey, Verizon has 6.8 million lines,
and employs 18,720, including staff at its wireless joint
venture with Britain's Vodaphone in Bedminster.

But Verizon is also losing basic business.

"The
traditional landline telephone business is in pretty rapid
decline in New Jersey," said Dennis Bone, president of
Verizon New Jersey. He said the company had lost 350,000
lines in the state since January 2001 as a result of
customers switching to wireless or getting rid of their
second line when they switched to cable Internet service.

"As a result, we need to manage our business down to a
smaller company," said Mr. Bone. He said capital spending
in New Jersey will drop to $800 million this year, 40
percent below its 2000 peak. The company has already cut
more than 300 jobs in New Jersey by offering
early-retirement incentives and is seeking 900 more
volunteers. 

In addition to wireless and computers, Verizon is also
facing new competition in local service in several states,
including New Jersey, where regulators have reduced the
prices Verizon can charge competitors to use its local
lines. Mr. Bone said the rates were now below cost and
would put Verizon at a disadvantage. "In the long run this
model will simply not work," he said.

Jeff Roberts, a spokesman at AT&T, said local competition
had exploded in New Jersey as well as other states, which
have ordered a reduction in the wholesale rates that local
carriers can charge competitors for access to that crucial
last mile of access to customers. AT&T and other carriers
are aggressively marketing in Verizon's territory.

Mr. Roberts objected to Verizon's argument that the new
model in New Jersey and elsewhere required the company to
subsidize competitors. "It is disingenuous for Verizon to
claim that reselling others' networks is not sound," he
said, "since that's exactly how Verizon got into the long
distance business."

Beyond the industry's big names, the telecommunications
bust has also hit thousands of other companies in the state
that feed off the industry.

Fred Barre, chairman of The Barre Company in Mountainside,
a 51-year-old family-owned operation that makes metal parts
for the telecom industry, said business was off 70 percent
from two years ago.

In July and August 2000, Mr. Barre said his company shipped
more than $300,000 in inventory to Ericsson, the Swedish
mobile telephone company. In September, he added, orders
had dropped to $10,000.

"It didn't slow down," said Mr. Barre. "It just stopped."


To make matters worse, the company expanded during the
boom, opening a new plant in Virginia that Mr. Barre has
since had to close, putting all 45 employees out of work.
In Mountainside, he has cut the number of employees to 45
from 100. 

Sales are down to $6 million a year, half what they were in
2000, he said, but about the same as in 1995.

"This is certainly the longest and the deepest recession
we've seen," said Mr. Barre. "People have talked about
whether this is really a recession or a slowdown, but from
a manufacturer's standpoint it's really been a
recession-depression since 2000, and it is certainly
exacerbated by telecom or what used to be telecom."

But it is more than a story about sagging profit margins
numbers. 

Ms. Jewell, the former Lucent employee from Fair Lawn,
organizes regular meetings of Lucent refugees and now has
an e-mail list approaching 700. She said she has seen waves
of laid-off workers pass through distinct stages of shock,
disbelief and anger that usually, within a few months,
mellow into contemplation as the workers try to figure out
what to do next. 

Many former Lucent executives have begun teaching or are
starting their own small businesses, said Ms, Jewell. Some
are relying on a spouse's paycheck, or have gone to work
part-time. She said many Lucent engineers had tried their
hand at Home Depot, including her husband, who worked there
for six months. 

"Others are trying to act as consultants in what remains of
the telecom industry," said Ms. Jewell, "or they're going
to the technology piece in other types of companies like
pharmaceuticals." 

Despite the jump in unemployment Ms. Jewell said that so
far there had not been a large migration out of New Jersey.


"That's because there's nowhere for them to go," said
Donald Peterson, chief executive of Avaya, the AT&T spinoff
that reduced its global workforce by 2,500 jobs - to 19,500
- this year. 

Mr. Peterson said he did not expect a recovery in the
industry until it leapfrogged over the current equipment
glut with new breakthrough technology that customers
demand. The development cycle, he noted, usually takes
three to five years.

In that time, he said, New Jersey - with its marquee-name
telecom companies - might be better poised to recruit the
most talented young people who several years ago were lured
to dot-com startups. But by then, time might have passed by
many of those currently jobless who are in their 40's and
50's. 

"How will these guys stay fresh?" he asked. "To stay in it,
you need to be current and that's not easy to do with just
a personal computer."

As Mr. Bernstein of Infonautics put it, there can be no
recovery until the industry has worked off several trillion
dollars in debt. 

"The good news is that the inevitable trends are working in
favor of the people who survive," he said.

The world is becoming increasingly "network-centric," said
Mr. Bernstein, with huge developing countries like India
and China demanding more telecom equipment and services. As
demand recovers, New Jersey is likely to again take a
leading role. The hemorrhaging at the state's large telecom
employers has given birth to a wealth of small startup
working in new areas of technology. Not all of them will
survive, said Mr. Bernstein, but those that do will be
ready to grow. 

Mr. Bernstein pointed to IDT as an up-and-coming company
that was experimenting with voice service over computers.
Founded in Hackensack as an international phone service
provider, IDT now employs 1,500 in the former Mutual
Benefit Life building in Newark.

IDT and others that can survive the current climate, said
Mr. Bernstein, are likely to grow through the misfortune of
others. Mr. Courter said IDT recently bought Winstar, a
Virginia wireless provider for commercial buildings, for
$45 million. Three years ago the company was worth $7
billion. 

Mr. Bernstein also said New Jersey was a leader in
nanotechnology, which will also be in the leading edge of
the coming generations of telecom. He said several
companies, including a division of IDT, are working on
bringing voice service to residential personal computers.
And, he said, the United States lagged the rest of the
world in broadband. When it begins to catch up, New Jersey
companies will capture a significant share of that market
too. 

Owen Kurtin, a telecommunications specialist at the Salans
law firm in New York, said research was crucial to any
recovery. 

"We are in a period where research and development is
suffering," Mr. Kurtin said. "I don't think it will dry up
completely and the good news for New Jersey is that it has
sufficient critical mass in telecom and intellectual
capital between AT&T and Lucent that New Jersey is not
going to lose its relative market segment in telecom."

He added, "Eventually, companies are going to have to start
spending on equipment again if for no other reason than the
old equipment will wear out."

But by then, many workers may have given up any hope of
working in their once-thriving industry - at least in New
Jersey. 

"We were all living nicely and we were enjoying the
benefits, but there was a cost as well," said Ms. Jewell.
"We were all working incredible hours and maybe we weren't
doing the exact thing we wanted to do. This has been the
opportunity to go out and spread our wings. One door
closed, another opened."

http://www.nytimes.com/2002/11/24/nyregion/24COV.html?ex=1039141402&ei=1&en=
321841fe7d885bc1


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