Buffet to lead telecoms consolidation?

Where Warren Buffet leads others follow, and investors took note when the notorious technology cynic sunk money into a telecommunications company, of all things, this week.

After all, Buffet was one of about three people who refused to get caught up in the dot-com cycle of envy, where the profits others made lured more and more investors into the technology pyramid. Then he was scoffed at as old-fashioned; now respect for his judgement has doubled.

The investors have made no secret that Level 3 will be turned into a predator with $1.5 billion to play with and an array of down-and-out competitors just begging for a cash injection.

Phillip de Wet, News Editor, ITWeb

Some see Buffet and friends` $500 million in bonds to Level 3 Communications as final proof that the telecoms market has found its bottom. Buffet probably hopes this is not the case; the investors have made no secret that Level 3 will be turned into a predator with $1.5 billion to play with and an array of down-and-out competitors just begging for a cash injection.

That was even before the Buffet magic kicked in, of course. After Level 3`s share price jumped almost 60%, it is in an even better position to gobble up whatever it can find an appetite for.

And acquire it will. Worldcom`s woes have put telecommunications` consolidation out of favour for a short while, but it is still inevitable. Much like the Internet providers space of a few years ago, the massive sudden growth of telecoms has left the landscape littered with small players that cannot sustain themselves, but who are providing vital services. It is more than an analogy - the Internet market learnt the phrase "economies of scale" from the telecoms world where it has the status of a natural law.

But then, these days it is ridiculous to make a distinction between telecommunications operators and Internet providers. Each needs the infrastructure and profits, respectively, that only the other can provide. Their consolidation into a single entity is just as much of a given, although that may be a longer-term change, made all the more glacial as regulators dig in their heels for the sake of diversity.

Buffet-induced optimism has made this and many others things clearer in the minds of those who wield the money. Telecommunications companies have spent the hell out of trillions of dollars by laying down more fibre than anyone could possibly use right now. But it is not as if they are not going to make money out of it in the long run. Communication is still, as it was in the 1990s boom, non-discretionary spending. The "knowledge economy" was the baby that got thrown out with the dot-com bathwater, but information is not going away as the currency of world trade. Bar Armageddon, or everyone simultaneously deciding to become tripped-out hippies and getting back to nature in a big way, telecommunications traffic volumes can only grow. Somebody will have to carry it.

There may be a lot of dark fibre under the Atlantic right now (just ask Global Crossing) but somebody will find a use for it some day. It is there, it costs virtually nothing to maintain when not in use and the suckers, er, investors, who originally paid for it have already written off their losses.

Buffet has spotted the opportunity and others will follow. Welcome to the post-telecoms-boom-bust boom.