Notebaert hints at partnerships
Qwest needs to boost traffic on fiber optic network, analysts say
By Jeff Smith, Rocky Mountain News

Friday, May 27, 2005

Qwest's plan after its failed $9.75 billion bid for MCI Inc. is to build gradually by buying smaller companies and other assets.

But Qwest Chief Executive Dick Notebaert also in cryptic fashion mentioned the possibility of new "partnerships" at Tuesday's annual shareholders meeting.
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Media coverage or what "we see on our (computer) screens from the bloggers has conjecture that Qwest may initiate partnerships, mergers, acquisitions of smaller companies," Notebaert said.

There is precedent for Qwest bolstering its business through partnerships:  Microsoft MSN in the case of high-speed DSL Internet service;  Sprint for reselling wireless services;  and DirecTV in the recent launch of satellite-TV services.

And it makes sense, said telecommunications analyst Donna Jaegers of Janco Partners in Greenwood Village, although she has been thinking more along the lines of a Qwest acquisition of Douglas County-based Time Warner Telecom.

"A partnership is easier to wrap up (than an acquisition)," Jaegers said.  "And if you can strike a (good) partnership, it will enhance the stock price and give the company a better currency to look at better acquisitions."

Put simply, Qwest would have more flexibility to offer stock or a combination of stock and cash for a company if Qwest shares were stronger than they are today.

Qwest stock has been stuck in the $3 to $4 range for the better part of a year.  In fact, the stock was trading higher, at $4.20, in early February when MCI takeover reports first surfaced.

Analysts agree Qwest needs to find a way to increase customer traffic over its long-haul fiber-optic backbone.  But it's unclear what kind of partnership possibilities exist for Qwest to do that.

Atlanta-based BellSouth already uses Qwest's network to connect some of its Southeast customers, such as Delta Airlines, to operations and offices they have elsewhere in the country.

"But I'm not aware of BellSouth going (for business customers) out of its region in a large way;  they tend to follow customers where they are," Jaegers said.

Maybe BellSouth will think about changing that strategy in the wake of two mammoth competitors being created by Verizon-MCI and SBC-AT&T, she said.

Another intriguing possible partner might be British Telecom.

Qwest and BT announced an agreement in January to exchange international residential and business telephone traffic between the two companies.  That agreement alone fueled merger speculation.

The January announcement followed BT's agreement last November to buy Infonet and gain such large business customers as the drug giant Bayer and the technology manufacturer Hitachi.  In general, BT has been trying to make the shift from residential phone service to being a communications provider, like an AT&T, to large businesses.

Then there's the area of Internet-based telephone services, or voice over Internet protocol.

Qwest has both the backbone to carry VoIP traffic as well as its own VoIP services to residential and business customers in many cities.

The Massachusetts-based technology research firm IDC recently noted Microsoft is gearing up its VoIP initiative.  Could Qwest and Microsoft be partners in VoIP as well as DSL?

Perhaps, but in its report IDC named BT and MCI as the carriers Microsoft was closest to.

(Broomfield-based Level 3 Communications already is far ahead of Qwest on VoIP, winning in 2004 parts of seven of nine major VoIP deployments.  Customers include cable-TV companies such as Charter Communications.)

There also has been speculation that Google, the most-used Internet search engine, will go into VoIP and is seeking to buy long-haul fiber capacity.

Google spokesman Steve Langdon declined comment this week.

"Companies like Microsoft and Google could drive a lot of traffic over the Net," Jaegers said.

No matter which step is next for Qwest - an acquisition, a partnership or something else - this much is certain:  The telco, burdened by $17 billion of debt, doesn't have a lot of time to waste.

Said Jaegers:  "They've got about two years to figure out a way out of this box."