Commercial lenders have been bruised in the last three years by bankruptcies in the broadband telecommunications sector, but venture capitalists say a new generation of firms will soon be ready for bank financing.
These emerging companies are using the broadband networks built by their busted predecessors, including WorldCom Inc., Winstar Communications LLC, and Global Crossing Ltd.
Because they can keep costs down by using networks far overbuilt by their predecessors, they stand a better chance of making the business work, private equity sources said.
"There are now niche companies that are using the existing broadband network in innovative ways," said Bill Rouhana, Winstar's former chairman and chief executive officer, who is now a broadband venture capitalist.
He draws a comparison with the railroad bubble of the late 1800s, when the builders of the coast-to-coast rail system went under but left their tracks in place. "Many new businesses emerged because of the railroad network, and it's starting to happen with broadband."
The question is, will banks again be lending to the sector?
Since the new economy's bubble burst in 2000, soured loans and equity investments in the telecom industry in general, and not just the specific broadband subsector, have hurt several large lenders.
J.P. Morgan Chase & Co. and regional banks like FleetBoston Financial Corp. felt the sting most directly. Over the last year J.P. Morgan Chase and Fleet have promised to scale back their lending and to curb private equity investments in the industry.
But other bankers are taking notice of the new trends in broadband. Matt Maloney, a senior vice president and the national coordinator for communications and electronics lending at Silicon Valley Bancshares in Santa Clara, Calif., said he has noticed the emergence of many companies, particularly service providers, that use broadband as the core of their business.
Silicon Valley, with its close connections to the telecom and technology sectors, has already begun eyeing these companies as future customers. It has even begun financing some, Mr. Maloney said. "Ultimately, that bandwidth will be used, and our job is to support the technology industry."
However, Suzanne Labarge, the vice chairman and chief risk officer at Royal Bank of Canada in Toronto, was a little more skeptical about how some of these companies can succeed.
"A lot of the fiber will never be used. It doesn't connect at the other end," said Ms. Labarge, who was recently appointed the chairwoman of RMA-the Risk Management Association, which sets risk guidelines for banks in areas including lending. Established telecom companies generally still own the last mile of cable connecting the networks to individual homes, she said.
Other sectors of the telecom industry are showing signs of life. Wireless companies that provide mobile phone and PDA support, such as Triton PCS and AT&T Wireless, are attracting a lot of attention. In fact, J.P. Morgan Chase's private equity division holds stakes in both firms. (Wireless is not the same as broadband; though some hope that wireless networks will eventually carry broadband-like quantities of data, they currently do not.)
And there are still many profitable broadband companies that have long-standing relationships with banks. Nearly all of these companies operate in the so-called transport or connectivity part of the business - the services that allow businesses and individuals to do things like surf the Internet. The traditional telephone companies or large media and cable conglomerates dominate this market.
But that isn't stopping venture capitalists from buzzing about the next generation of broadband firms, like Voxiva Inc. of McLean, Va., which uses broadband technology to create a database that medical workers can access remotely to report disease outbreaks from anywhere in the world.
Paul Meyer, the chairman and CEO of Voxiva, said it does not have to build out a broadband network, "because everybody else has already done it."
Other companies tapping the broadband networks include Trans Media Exchange Inc., a New York browser and data exchange company that serves the news media industry; Virdais Inc., a broadband videoconferencing company in Charlottesville, Va.; and Landel, a data collection and delivery company in San Jose.
"In each case, these companies have raised venture capital and are getting a good reception," Mr. Rouhana said. Many of these companies will seek bank financing once they build up their accounts receivable and cash flow, he predicts.
Todd Dagres, a general partner with Battery Ventures in Wellesley, Mass., said banks will decide to "loosen the purse strings" and fund the new companies, because some of them have "very viable business models that will require financing."
But it's going to take years for the traditional telecom industry to recover from the broadband collapse, he predicts. There were "too many companies building too much capacity with too much money.
Bankers support this conclusion. Eugene McQuade, Fleet's president and chief operating officer, said in an interview this month that he would take a wait-and-see approach to lending in the telecom sector. "There's still a substantial amount of overcapacity in the United States."
There is some activity among European companies, but it will be "another few years" before much of the current telecom debt needs to be refinanced, and more consolidation is needed, he said.
