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Hallmarks of Success in Telecom
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With the long-distance business struggling to survive in its current form, firms with local operations typically make the best investments. Even on the local side, though, growth is typically very slow and the future regulatory and competitive environments are uncertain. In addition, bankrupt telecom firms, including WilTel and WorldCom/MCI, are starting to emerge with much smaller debt loads, making them more able competitors. To weather what storms may come, it is vital that a telecom carrier be in strong financial health.

Even with a dearth of growth opportunities today, capital spending needs in the industry are likely to remain high. That makes a strong balance sheet and solid free cash flows even more important. Healthy and consistent margins are also vital to success because they mean that free cash flow can remain strong. Rural carriers, such as Century Tel and Citizens Communications, have maintained the best margins in the business. Regional Bell SBC has seen its margins pressured, but as of mid-2003, the firm had arguably the best balance sheet in the entire sector, with cash flow covering interest expenses about a phenomenal 12 times over.

The biggest difficulty for wireless carriers "will be differentiating their services. For a while, Nextel Communications escaped the commodity trap by offering a unique product and by focusing on business customers, who tend to be heavy cell phone users and "who are more concerned with quality and features than price. As a result, Nextel has had the highest average revenue per user and lowest rate of customer disconnection among nationwide "wireless carriers. Nextel's strong performance was due primarily to its Direct Connect feature; because until recently, no other operator offered a similar push-to-talk service. Unlike rivals that competed mainly on price, Nextel wasn't forced to promote cheap calling plans to win customers. However, rival carriers have already rolled out services similar to Direct Connect, which will substantially erode Nextel's competitive advantage. As in most industries, technological superiority can keep the competition at bay only for so long.

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