Home Front: Terrorist Threat Renews Interest in the Internet

Some, but not all, telcos will benefit from companies' need for redundant ways to communicate.
Author:
Publish date:

Editor's note: This is the third installment in TheStreet.com's Home Front series, a collection of twice-weekly features that examines how American business, society and investing have changed in the post-Sept. 11 landscape.

In the post-Sept. 11 landscape, many workers are afraid to fly, open mail and even go to the office.

To keep their businesses running and put their employees at ease, companies are shifting resources toward establishing safer forms of communication. Telecommuting and teleconferencing are replacing risky air travel. Email advertisements and Internet catalogs are supplanting direct-marketing campaigns via regular mail.

In essence, companies would rather combat computer viruses and worms than anthrax and plane hijackers. As a result, firms have initiated or accelerated the deployment of various Internet projects. Such moves may alter investors' outlook on certain companies in the beleaguered telecom sector.

"The increasing use of the Internet was already happening, but these

terrorist issues are just pushing the implementations," says Matt Barzowskas, analyst at FAC/Equities.

For example, the General Services Administration recently released a Request for Information to the IT and telecommunications industries, seeking information and suggestions to develop a special network called Govnet: a private voice and data network separate from any other public or private network.

After the terrorist attacks on the World Trade Center's Twin Towers cut the telephone circuit to the office of Kaufman Brothers, a financial services firm in Lower Manhattan, employees there made calls using Net2Phone, an Internet telephony service, according to one of the company's analysts, Vik Grover.

"You see a heightened interest in shifting applications to the Internet in order to create redundant ways to communicate," Grover says. "The Internet backbone is a computing grid. Such interest will drive the deployment of next-generation Net products that use Internet protocol."

But the deployment of various Internet initiatives at companies won't happen immediately. "It isn't so simple for people to change the way they do things," says Frank Prince, an analyst at Forrester Research. "Some companies would have to retrain personnel and make sure their various systems are compatible."

Indeed, a lack of demand has forced a number of telcos such as

SBC Communications

(SBC)

and

Sprint PCS

(PCS)

to curtail their high-speed offerings for consumers and small businesses.

But the ultimate driver for Internet initiatives will be cost. If businesses continue to lose money because their employees aren't traveling to meet with clients, for instance, or potential customers refuse to open marketing letters sent through regular mail, companies will fund Internet forms of communication.

And costs, too, will keep these various Net initiatives from being just Band-Aids to temporary problems arising from the war on terrorism. Corporations and government agencies will benefit from cost savings that Internet communication systems create through greater efficiencies. The return on investment ultimately will save end-users money. "They will be able to collapse 50 storage systems into just a few, for example," says Grover.

Not All Telcos Will Benefit

Such Internet initiatives may even get a boost from the government.

In a new world in which terrorist acts can cripple companies and thus the economic health of the country, corporate security has become national security, says Alan Paller, director of research at SANS Institute, a computing think tank.

It is in government's best interest, then, to help companies fund Internet initiatives that provide safer ways to communicate, certain networking companies argue.

Lucent

(LU)

and

Cisco

(CSCO) - Get Report

, for example, have requested that the government's economic stimulus package include a $2 billion tax credit for companies that roll out new high-capacity Internet lines.

Leaders at other telecom companies suggest that one way Washington can spur growth is to create a high-speed initiative similar to the federal highways' program and to provide regulatory incentives for broadband investment.

"If the government comes in and says that it will give a company a certain amount of money to upgrade its system, that will be a driver," says Matt Barzowskas, the FAC/Equities analyst.

But analysts agree that any help from Washington will take some time to get passed. "There will be some sort of program set up, but what shape it will finally take is still not decided," says Barzowskas.

However, Charles Disanza, a strategist at Gerard Klauer Mattison, suggests that government aid might not be necessary. Companies seeking alternative forms of communication via the Internet will naturally channel funds toward telcos.

But not all telecom companies will immediately benefit from this trend.

Indeed, additional demand will use up excess capacity. Govnet, for example, will run on unused fiber-optic lines. Large network providers with data networks, such as

Qwest

(Q)

, UUNET (a

WorldCom

(WCOM)

company) and

AT&T

(T) - Get Report

, stand to benefit. "Voice shifting over IP migrates traffic to Internet backbones," says Kaufman's Grover.

Qwest and AT&T are by far the more expensive, trading at 59 and 83 times 2001 estimated earnings respectively. By comparison, WorldCom is at only 18.

But many of the high-speed lines already built can handle more bandwidth. "So we won't see a huge uptick for companies in that area in the near term," says Barzowskas.

That's because data lines are paid for on a flat-rate basis. "People can use more of it, and

telcos providing the lines won't necessarily get more revenues," says Scott Cleland, a telecom analyst with Precursor Group, an independent Washington-based research shop.

Most likely, the investment will happen on the edge of the network, with equipment providers such as

Riverstone

(RSTN)

and

Redback

(RBAK)

, says Barzowskas.

Riverstone just became profitable in their second quarter of fiscal year 2002, reporting 1 cent a share. The stock is pricey, trading at 276 times 2002 estimated earnings. According to Thomson Financial/First Call consensus estimates, Redback won't be profitable for several years. The stock is trading at 2.9 times 2001 estimated revenue of $226 million.

Internet telephony plays like

ITXC

(ITXC)

,

iBasis

(IBAS)

and

Net2Phone

(NTOP)

likely also will benefit, says Grover. "Companies involved only in edge delivery, those that control the gateways."

All three of these companies have yet to turn a profit. ITXC is trading at 1.1 times estimated 2001 revenue of $176.95 million. iBasis is trading at 0.2 times estimated 2001 revenue of $148 million, while Net2Phone is trading at four times actual 2000 revenue of $72.4 million.