Hanging up on a rough year
<FONT SIZE=2>Just how bad was 2002 for the telecommunications industry?</FONT>
Tony D'Agata, Sprint's vice president and government systems division manager, said the company has reorganized its government unit to take advantage of Homeland security opportunities.
Henrik G. de Gyor
Just how bad was 2002 for the telecommunications industry?
"Out of 27 carriers that serve the United States, 25 are either in bankruptcy, junk-bond status or under some kind of [Securities and Exchange Commission] investigation," said Tony D'Agata, vice president and general manager of the government systems division at Sprint Communications Corp.
As these companies look ahead to 2003, many are looking to the $12 billion federal market to help ease their financial troubles and give them a more reliable income stream. While numerous telecom providers serve the federal space, the landscape continues -- for now -- to be dominated by three national carriers: Sprint, WorldCom Inc. and AT&T Corp.
Of the regional Bell operating companies, or RBOCs, Qwest Communications International Inc., Verizon Communications Inc., SBC Communications Inc. and BellSouth Corp. are striving to carve out their niches.
As these companies battle for federal contracts, they face increasing competition not only from each other, but also from systems integrators that are vying for the large information technology projects that combine both traditional IT and telecom work. Each major telecom player has adopted a different strategy for expanding its piece of the pie.
New York-based AT&T, for many years the phone company of record, is striving to recast itself as a systems integrator and services provider, not just a carrier.
"Customers are much more flexible than they were 10 years ago. They're looking for solutions," said Chris Rooney, president of AT&T's government solutions business. "They're looking for end-to-end kinds of services."
Rooney said his unit's focus has been shifting toward teaming more and more with integrators, with AT&T willing to serve either as prime or as subcontractor. "That's a new strategy for us," he said.
Sarah DeCarlo, vice president of business development, said that AT&T has formed its own office of homeland security to pursue opportunities that fit the company's capabilities in continuity of operations, disaster recovery, biometrics and datamining.
Qwest, based in Denver, plans to maintain a more focused approach in the upcoming year, said James Payne, senior vice president of its federal unit. It will concentrate on customers with high-end bandwidth requirements, such as Web hosting for the Labor Department, and avoid high-volume, low-priced procurements, such as wireline long distance.
Payne said that price wars along with overcapacity have ravaged the industry. Qwest will avoid contracts that appear solely driven by price, he added, though it looks like price points finally are on the rebound.
"We have to be responsible. We [can] bid aggressively but remember to return something to our company," he said.
Work is getting under way on the successor contract to the Treasury Communications System program, currently held by TRW Inc., which expires in 2005, Payne said. Qwest has an extensive working relationship with the Treasury Department, and the company will be watching to see if the replacement contract is more suited to an integrator or a telecom provider.
At Sprint, D'Agata said, the company has reorganized its government unit to take advantage of new opportunities in the homeland security arena. Responsibility for state government business opportunities now falls to his group, in part because of the synergies between the new homeland security department and state governments.
"It requires a more holistic view of this space," D'Agata said.
Sprint also considers itself well-positioned because of the federal government's increasing interest in wireless applications. The company's nationwide wireless network gives it a competitive advantage, because AT&T has just spun off its wireless business, and WorldCom is still struggling through bankruptcy, D'Agata said.
The General Services Administration is looking at several key technology areas as candidates for growth in the services it offers, including the Internet and data transport, so-called WiFi, or wireless transmission and security.
"We believe the Internet revolution is continuing to drive technology within FTS, specifically IP network and data transport becoming much more dominant," said John Johnson, assistant commissioner of the office of service development in the agency's Federal Technology Service.
Denny Groh, acting assistant commissioner in the FTS office of service delivery, estimated that 65 percent of the agency's business on behalf of its federal customers is now on the data side of telecom. The demand for bandwidth is continuing to increase, driven by Web-based applications and e-government needs, the two men said.
Wireless technologies are growing much faster than traditional wireline, whether for voice or for other services, Johnson said.
"From the landscape standpoint, there are two issues in the wireless arena: how it's acquired and how it's used," Groh said. "Wireless is more decentralized than centralized, but we see that reversed [in the future] because of cost and security concerns."
Security is a concern for any wireless applications, Johnson and Groh said. Within FTS there is an initiative under way to offer federal agencies security solutions at different levels of security capability.
As for providers, FTS sees a blurring of distinctions among systems integrators, telecommunications carriers and network providers, with all the players able to provide a wide range of services.
GSA has released the request for proposal for the first phase of Connections, an omnibus telecommunications products and services contract. In RFPs worth a combined $229 million, the agency is taking bids from companies willing to put together end-to-end solutions for agencies' communications requirements. The first round of winners could be named in the first quarter of 2003.
According to Input Inc. of Chantilly, Va., the Defense Department's appetite for telecommunications and networking, including secure wireless, is even larger than that of the civilian agencies. Defense transformation, including the move to network-centric warfare, is the driving factor.
The Defense Information Systems Agency, for instance, is preparing an RFP for the Defense Information Systems Network Transmission Services Europe procurement. The proposal, expected in June and estimated at $1 billion over 10 years, is to provide communications services across all of Europe, including digital, voice, wireless, data and signal encryption capabilities.
ENCROACHING INTEGRATORS
As government contracts get larger and more complex and include more telecommunications requirements, systems integrators are looking to move in. Even those that are primarily telecommunications oriented, such as the FAA Telecommunication Infrastructure contract, attract integrators' interest.
The contract, estimated between $1.7 billion and $3.5 billion over 15 years, was awarded in July to Harris Corp. of Melbourne, Fla., over WorldCom, the incumbent on the predecessor contract, and Lockheed Martin Corp., which had partnered with AT&T.
Harris won, in part, because it put together a team of subcontractors that included five telecommunications carriers -- Sprint, a national carrier, and four RBOCs -- which provide a degree of stability and risk management that the FAA found attractive. Harris won also because, as a systems integrator, it promised the skills to knit them all together.
"If the government is going in the direction of larger, more integrated contracts, then you're just going to see more integrators taking the prime role," said Input's Payton Smith.
One limitation to system integrators' victories can be markups. If a contract is for access, telecom providers have an advantage over systems integrators, who have to add a little something to the carrier costs to make money. Harris finessed that by passing through carrier services at zero markup, counting on making its returns on meeting the FAA's service-level agreements, according to a telecom executive.
One telecom company trying to meet the integrator challenge head-on is AT&T. Rooney said that customers are looking for vendors who can provide all aspects of a solution -- they don't care about distinctions between integrator and telecom provider.
For instance, AT&T is subcontracting for Unisys Corp. and DynCorp on the Transportation Security Administration's billion-dollar infrastructure contract, but it's bidding as a prime contractor, with Raytheon and DynCorp as subs, on the upcoming Immigration and Naturalization Service entry-exit program, estimated at $380 million.
"I don't think there's a one-size-fits-all model, but it requires the companies involved to be flexible in working with each other," Rooney said. "As providers we have to be very conscious of what the customers want."
Rooney also said that, in light of the telecom industry's financial meltdown, federal customers also are considering who has the wherewithal to carry out promises.
"I see the government very much more cognizant and evaluating [proposals] based on financial responsibility," he said. "All companies have to be prepared to have their customers look at their finances." *
Staff Writer Patience Wait can be reached at pwait@postnewsweektech.com.
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