For decades, America's expanding telephone system provided steady work for contractors who built and maintained the aerial and underground cable networks that linked homes and businesses to one another and to the world.
Construction levels reached a near-frantic pace in the 1990s. Big telecom companies and smaller competitors rushed to build cross-country fiber optic networks that became the backbone of the information highway; constructed loops to connect cities; and prepared to bring broadband services to homes and businesses across the country.
Manufacturers could not build machines fast enough to bury hundreds of thousands of route miles of duct to hold millions of miles of fiber cable. Other companies built their businesses solely on providing the switching gear, duct and cable, hardware and software, and the hundreds of other products and services.
Then everything came crashing down.
It is beyond the scope of this report to analyze the factors that contributed to the telecommunications bust; but the economy, 9–11 and its aftermath, mismanagement—including unethical and illegal activities by telecom executives—all played a part.
Rather, we will report on telecom construction under way today, hear how three telecom construction specialists are surviving, and consider prospects for the industry's recovery and construction opportunities it will bring.
With continuing bad news about the industry's troubles, it is easy to overlook the fact that there are many active telecommunications construction projects. Cable television companies, aggressively competing with traditional carriers for both long-distance and local telephone service and high-speed Internet connections, continue to expand and upgrade their infrastructures.
Many existing systems owned by regional bell operating companies and established local carriers are old, outdated, and badly in need of repair and upgrading. Modest levels of work are under way to keep them operational until funds are available to initiate major improvement projects.
Telecom construction in rural areas continues. Rural Utilities Service (RUS) programs guarantee loans to finance rural infrastructure for broadband and other advanced services.
Still, compared to the boom days of the late '90s, work levels are drastically down. Hard-pressed carriers are short of operating funds and credit. Many telecom contractors that were so busy they were turning down work three years ago are out of business or pursuing other markets. For those remaining, there isn't enough telecom work to go around, resulting in intense competition, which drives prices down.How contractors survive
Diversity is a key to survival for contractors who expect to be in business when the industry does rebound, and companies already active in other markets before the bust are better prepared to get through hard times.
"Many telecom construction companies started out in other markets," says John Colson, president of Quanta Services. "So they are going back to what they did before, reintroducing themselves to old customers, and taking a big hit on margins."
Houston-based Quanta, one of the more successful contractor consolidators, has its roots in the electrical industry and was active on electrical and cable-television projects throughout the telecom boom period.
"It's a good thing we were diverse," Colson says. "We had a strong base in the electrical power business which we maintain, and it looks like it will be a while before telecom work comes back."
S&N Communications, Walkertown, N.C., is a large regional contractor. In 1999, the company had as many as 300 crews doing telecommunications construction in seven states.
Things are much different today.
"Staying in business today is an extreme challenge," says B. Wayne Newkirk, S&N's CEO. "We have to do things differently today. Adversity brings opportunities and forces companies to sharpen their abilities in business."
S&N still does telecommunications construction, holding master contracts with several companies and expanding into RUS projects.
"Right now," says Newkirk, "master contracts are like crown jewels, and we're bidding on more of them. Rural carriers can still get funding through RUS programs, and work is going on all of the time. Rural telephone construction has always been around, but we never were active in that segment before because we had plenty of work. Now we are actively expanding into this area."
Newkirk says the company now is doing more electrical and natural gas projects. S&N was active in both markets before the telecom crash and had made the decision to diversify even more, says Newkirk. That has facilitated the shift to more non-telecom work.
The company also was well established as a turnkey contractor. It is doing all phases of aerial plant construction, including building conduit systems, pulling cable in conduit, splicing, pedestal, cabinet, cross box, and switch installations, manhole placement, cable testing and analysis, and fault location.
"Turnkey projects are more important than ever," says Newkirk. "Project owners don't want to deal with 10 or 12 contractors—they want one company to handle everything."
One of the industry segments hardest hit by the telecom crash has been small contractors specializing in horizontal directional drilling (HDD).
One of those contractors is Allison Sierra, Mariposa, Calif. President Steve Allison compares telecom's boom days to the California gold rush.
"Everybody got into telecommunications work, including a lot of people who probably shouldn't have. With so many people ready to work, prices were driven down. And we were right there, doing Level 3 work [one of the last big long-haul projects] and gearing up to do the city build-outs everyone expected to follow."
But then work stopped.
"We never saw it coming," says Allison. "But we weren't the only one surprised. There are a lot of smart people in the industry that didn't anticipate what was going to happen. They just thought it would go on and on.
"We had to find other avenues to pursue," says Allison. "We weren't in the telecom business to begin with—we were in the business of underground construction. So we went back to other markets: open cut and trenchless sewer and water construction, gas work, and electrical construction."The road to recovery
Analysts agree that telecom has to recover. The world is too dependent on communications for America's system to be allowed to fail. But when recovery will actually occur is uncertain. There are signals it already is under way even though old issues are unresolved and new problems are revealed. The industry won't begin to get healthy again until the general economy improves, until market stimuli within the industry occur, and money for expansion becomes available, says Christopher Daum, CPA, a consultant with FMI, Raleigh, N.C.
However, Daum does see positive signs that should mean renewed construction activity. He believes the merger of AT&T and Comcast will bring new construction in broadband markets previously served by AT&T.
Sprint is spending money to upgrade local loops, and RBOCs (Regional Bell Operating Companies) may be ready to increase spending to upgrade their infrastructures.
A Federal Communications Commission decision to rescind the requirement that RBOCs make their networks available to competitors at wholesale rates should strengthen the financial position of the RBOCs, allowing more money to be spent on needed construction.
"We are starting to see a trend whereby existing incumbents are purchasing all or part of the fiber networks built by now defunct wholesale carriers and CLECs at steeply discounted prices," says Daum.
Whenever money is available to do needed construction, the good news for contractors is that the work will be outsourced.
Daum cites an established trend for carriers to employ contractors for outside plant construction; carriers believe that is more cost effective than using their own crews for construction. Daum also expects pricing for underground construction work to improve as marginal contractors that were driving down prices leave the market.
Whenever recovery does happen, those in the industry agree construction will never approach levels of the mid-to-late '90s. Much of the fiber optic cable installed during that period remains unused, and many long-haul routes include empty duct, ready to be filled when necessary. Capacity is considered more than adequate for the immediate future, making new long-haul construction unnecessary. Much of the new construction is likely to be in second, third-, and fourth-tier markets still without access to broadband services. In the end, contractors who survive the telecom disaster should be stronger for the experience.
"I've never encountered adversity that was without opportunity," says Allison. "And right now there certainly is a lot of opportunity."