"Breakdown in Communications"

Below is an article which appeared in the New York Times

November 24, 2002
By SUSAN WARNER

Laura and Ken Jewell have entered the Lucent afterlife.

After more than 20 years in the telecommunications industry, the Fair Haven residents are now out on their own. Ms. Jewell, who was laid off just three months before she would have been eligible for early retirement, is running her own marketing business, promoting the Red Bank Jazz and Blues Festival and helping startup businesses. Her husband, who retired before he was even 50, is now selling his hand-carved wooden ducks and teaching banjo.

The Jewells are small players in the great New Jersey telecom crash that has ravaged one of the state's leading industries, leaving thousands of highly skilled workers jobless or underemployed.

"At first it was a shock," said Ms. Jewell, who owns up to being in her 40's. "We all grew up in this company. There were so many opportunities you never really looked anywhere else. Now the situation is that the company is shrinking and there's no other place to go."

In just two years, telecommunications executives saw option packages worth tens of millions of dollars - and their jobs - evaporate. Some of the most prestigious companies in New Jersey were thrown into turmoil, most notably Lucent Technologies. Lucent, parent company of the state's research icon, Bell Labs, plans to slash its global workforce to 35,000 by March, from 153,000 three years ago.

AT&T and Verizon, the state's second and third-largest employers respectively, are also scaling back. AT&T, after spinning off Lucent and other businesses over the past several years, including its cable operations, let 10,000 employees go worldwide. And Verizon is also reducing staff to cope with declining business in New Jersey.

New Jersey - which ranks among the nation's top telecom clusters along with San Francisco, Boston, Dallas, Atlanta and Washington - is not suffering more than the others. All of them are reeling in the aftermath of a global investment binge that lead to today's industrywide hangover.

Nor are the mammoth companies the only ones suffering. The once high-flying startups that flourished in their shadows are sputtering, and manufacturers of telecommunications equipment are scrambling to reposition their products for other industries.

"It's been a catastrophe," said former Representative James Courter, president of IDT Corp. a Newark-based company that provides long-distance service and prepaid calling cards. "It is probably the largest implosion of an industry in the history of this country."

Even now, two years into the slump, the industry shows no signs of coming back.
"We were so used to growth, even hyper-growth for awhile," said Matt Desch, chief executive of Telcordia Inc. of Morristown, a software and service provider that has cut its staff to 4,869 from 8,657 in February 2001. "Now we're in a state of decline."

Mr. Desch added, "Most of us see signs it has leveled out, but we don't see any signs that there's going to be growth any time soon."

While the crash of the once-thriving telecom business is a global phenomenon, the effect on New Jersey has been particularly pronounced since it is one of the state's leading industries. From 1992 to 2000, employment grew from to 71,000 from 63,700. Since then, however, the number of employees has dropped to 66,800, according to the New Jersey Department of Labor.

"Telecom has been one of the pillars of the New Jersey economy along with pharmaceuticals and tourism," said Joseph Gonzalez, president of the New Jersey Business and Industry Association, a trade organization. "The downturn has had a significant effect. The difference from five years ago and today has been dramatic."

Ever since the nation's first long-distance telephone lines were stretched across the state from New York to Philadelphia in 1885, New Jersey has had a long and prosperous involvement in the telecommunications business. In 1941, Bell Labs, the research arm of the American Telephone and Telegraph Company, moved to Murray Hill from New York City, and New Jersey went on to nurture such life-altering innovations as the transistor, communication satellites and the computer language, UNIX.

In the 1970's and 1980's, the office staff of American Telephone and Telegraph also migrated from New York to new suburban office space in Bedminster. By the late 1980's, AT&T's chief executives were all based in New Jersey, although the company's official headquarters to this day remains in New York.

"New Jersey is ground zero of the telebomb," said Peter Bernstein, president of Infonautics Consulting Inc. of Ramsey, which specializes in the telecommunications industry.

To Joseph Seneca, chairman of the New Jersey Council of Economic Advisors, the current industry chaos is the result of three major factors:

Vast overinvestment in telecommunications equipment - particularly in fiber-optic networks, which occurred in the late 1990's - similar to the bubble experienced by dot-com businesses that eventually lead to that industry's bust.

Deregulation, resulting in fierce competition among local and long-distance carriers, driving down prices and profit.

The flood of such new technology as wireless communications and computer-based telephony, putting pressure on companies using traditional landlines.

"These three factors - combined with the general economic downturn - have really made the industry significantly exposed," Mr. Seneca said.

Of course, the state's most widely known telecom problems have focused on Lucent, which makes telephone equipment for such service providers as AT&T and Verizon. In addition to the loss of jobs, Lucent's stock has dropped from $84 a share in 1999, when it was one of the nation's most widely held companies, to below $1 this fall.

Lucent was created in 1996 when it was spun off from AT&T into a market that was set to explode with growth - fed by optimism about the Internet and another round of deregulation.

"There was dot-com mania and start-up frenzy going on," said William Price, a spokesman for Lucent. "There was almost unlimited capital from venture capital firms."

In the supercharged environment, Mr. Price explained, the company went from having a few hundred customers to several thousand around the world, and it was projecting growth rates of 15 to 20 percent. But by 2000 the company was in trouble.

He said the downturn began when Lucent miscalculated the design on a crucial product that transmits information and watched as buyers showed a clear preference for the same product made by its Canadian competitor, Nortel Networks. Lucent lost business on that just as the entire industry was becoming buried in a glut of unneeded equipment and high debt taken on to build it.

But when the bottom fell out at Lucent, it fell rapidly. As 2001 dawned, Lucent employed 106,000 people worldwide, but by this September that number had dropped to 47,000. And last month the company announced plans to cut back again. The bulk of Lucent's New Jersey employees work at three locations: 2,300 in Holmdel, 2,000 in Murray Hill and 2,500 in Whippany.

Trying to put the best face on a grim situation, Mr. Price noted that 55 percent of Lucent's downsizing was done with layoffs, with the rest of the staff reductions coming through the sale or spin-off of businesses and outsourcing programs - in which workers moved with their jobs to a new owner. Voluntary incentive plans encouraged 8,500 employees to leave the company, he said, of which about 30 percent came from New Jersey; those who left with early retirement packages are earning about 30 percent their salary and are covered by Lucent's health plan, but they worry that they could lose those benefits if the company does not recover.

While some analysts have raised the possibility that Lucent will file for bankruptcy protection, the company emphasized in its October earnings announcement that it had enough cash to pay its bills. After completing its most recent cost cuts, Lucent said it expected to be profitable by the end of next year.

"When this all clears," said Mr. Price, "Lucent will still be standing."

Cutbacks have also taken a toll on Bell Labs, the research arm of Lucent. Mr. Seneca said Bell's scientists, who were once encouraged to pursue far-out science in hopes of making breakthroughs, have been reined in.

"Bell Labs was the long-standing icon of superb research, and that has been threatened and changed in terms of focus to much more of an immediate pay-off," said Mr. Seneca. "That has an effect on the company, but also on the overall research capability of New Jersey as the state where basic science and cutting-edge science is done in telecom."

In the meantime, AT&T has been paring back to become more of a pure service provider for businesses and residential customers. The latest slimming down began in 1996, when it spun off Lucent along with Avaya of Basking Ridge, which serves large business clients, and Agere, AT&T's computer equipment business, now based in Bethlehem, Pa.

Last year AT&T Wireless, with headquarters in Redmond, Wash., split off from AT&T, and just this last week AT&T Broadband, a cable television company that also provides Internet service, merged with Comcast.

In addition, AT&T has let 10,000 employees go in the past two years, bringing its global workforce to 72,000. Of those 72,000 employees, 16,000 work at 108 facilities in New Jersey, including 3,500 at AT&T's corporate headquarters and its global network operations center in Bedminster. The center is the size of a football field and transmits 310 million voice calls a day and data equal to the Library of Congress every 11.5 minutes.

But AT&T, like Verizon, its local service rival, is losing ground to new competitors and technology including wireless and the Internet. In the third quarter, AT&T said its residential business was down $2.8 billion, or 25.9 percent.

Verizon, which has its headquarters in New York, is the descendent of New Jersey Bell and several other regional operators spun off from AT&T in the original 1984 divestiture. The company, along with others, has been moving steadily into its former parent's long-distance businesss. In New Jersey, Verizon has 6.8 million lines, and employs 18,720, including staff at its wireless joint venture with Britain's Vodaphone in Bedminster.

But Verizon is also losing basic business.

"The traditional landline telephone business is in pretty rapid decline in New Jersey," said Dennis Bone, president of Verizon New Jersey. He said the company had lost 350,000 lines in the state since January 2001 as a result of customers switching to wireless or getting rid of their second line when they switched to cable Internet service.

"As a result, we need to manage our business down to a smaller company," said Mr. Bone. He said capital spending in New Jersey will drop to $800 million this year, 40 percent below its 2000 peak. The company has already cut more than 300 jobs in New Jersey by offering early-retirement incentives and is seeking 900 more volunteers.

In addition to wireless and computers, Verizon is also facing new competition in local service in several states, including New Jersey, where regulators have reduced the prices Verizon can charge competitors to use its local lines. Mr. Bone said the rates were now below cost and would put Verizon at a disadvantage. "In the long run this model will simply not work," he said.

Jeff Roberts, a spokesman at AT&T, said local competition had exploded in New Jersey as well as other states, which have ordered a reduction in the wholesale rates that local carriers can charge competitors for access to that crucial last mile of access to customers. AT&T and other carriers are aggressively marketing in Verizon's territory.

Mr. Roberts objected to Verizon's argument that the new model in New Jersey and elsewhere required the company to subsidize competitors. "It is disingenuous for Verizon to claim that reselling others' networks is not sound," he said, "since that's exactly how Verizon got into the long distance business."

Beyond the industry's big names, the telecommunications bust has also hit thousands of other companies in the state that feed off the industry.

Fred Barre, chairman of The Barre Company in Mountainside, a 51-year-old family-owned operation that makes metal parts for the telecom industry, said business was off 70 percent from two years ago.

In July and August 2000, Mr. Barre said his company shipped more than $300,000 in inventory to Ericsson, the Swedish mobile telephone company. In September, he added, orders had dropped to $10,000.

"It didn't slow down," said Mr. Barre. "It just stopped."

To make matters worse, the company expanded during the boom, opening a new plant in Virginia that Mr. Barre has since had to close, putting all 45 employees out of work. In Mountainside, he has cut the number of employees to 45 from 100.
Sales are down to $6 million a year, half what they were in 2000, he said, but about the same as in 1995.

"This is certainly the longest and the deepest recession we've seen," said Mr. Barre. "People have talked about whether this is really a recession or a slowdown, but from a manufacturer's standpoint it's really been a recession-depression since 2000, and it is certainly exacerbated by telecom or what used to be telecom."

But it is more than a story about sagging profit margins numbers.

Ms. Jewell, the former Lucent employee from Fair Lawn, organizes regular meetings of Lucent refugees and now has an e-mail list approaching 700. She said she has seen waves of laid-off workers pass through distinct stages of shock, disbelief and anger that usually, within a few months, mellow into contemplation as the workers try to figure out what to do next.

Many former Lucent executives have begun teaching or are starting their own small businesses, said Ms, Jewell. Some are relying on a spouse's paycheck, or have gone to work part-time. She said many Lucent engineers had tried their hand at Home Depot, including her husband, who worked there for six months.

"Others are trying to act as consultants in what remains of the telecom industry," said Ms. Jewell, "or they're going to the technology piece in other types of companies like pharmaceuticals."
Despite the jump in unemployment Ms. Jewell said that so far there had not been a large migration out of New Jersey.

"That's because there's nowhere for them to go," said Donald Peterson, chief executive of Avaya, the AT&T spinoff that reduced its global workforce by 2,500 jobs - to 19,500 - this year.

Mr. Peterson said he did not expect a recovery in the industry until it leapfrogged over the current equipment glut with new breakthrough technology that customers demand. The development cycle, he noted, usually takes three to five years.

In that time, he said, New Jersey - with its marquee-name telecom companies - might be better poised to recruit the most talented young people who several years ago were lured to dot-com startups. But by then, time might have passed by many of those currently jobless who are in their 40's and 50's.

"How will these guys stay fresh?" he asked. "To stay in it, you need to be current and that's not easy to do with just a personal computer."

As Mr. Bernstein of Infonautics put it, there can be no recovery until the industry has worked off several trillion dollars in debt.

"The good news is that the inevitable trends are working in favor of the people who survive," he said.

The world is becoming increasingly "network-centric," said Mr. Bernstein, with huge developing countries like India and China demanding more telecom equipment and services. As demand recovers, New Jersey is likely to again take a leading role. The hemorrhaging at the state's large telecom employers has given birth to a wealth of small startup working in new areas of technology. Not all of them will survive, said Mr. Bernstein, but those that do will be ready to grow.

Mr. Bernstein pointed to IDT as an up-and-coming company that was experimenting with voice service over computers. Founded in Hackensack as an international phone service provider, IDT now employs 1,500 in the former Mutual Benefit Life building in Newark.

IDT and others that can survive the current climate, said Mr. Bernstein, are likely to grow through the misfortune of others. Mr. Courter said IDT recently bought Winstar, a Virginia wireless provider for commercial buildings, for $45 million. Three years ago the company was worth $7 billion.

Mr. Bernstein also said New Jersey was a leader in nanotechnology, which will also be in the leading edge of the coming generations of telecom. He said several companies, including a division of IDT, are working on bringing voice service to residential personal computers. And, he said, the United States lagged the rest of the world in broadband. When it begins to catch up, New Jersey companies will capture a significant share of that market too.

Owen Kurtin, a telecommunications specialist at the Salans law firm in New York, said research was crucial to any recovery.

"We are in a period where research and development is suffering," Mr. Kurtin said. "I don't think it will dry up completely and the good news for New Jersey is that it has sufficient critical mass in telecom and intellectual capital between AT&T and Lucent that New Jersey is not going to lose its relative market segment in telecom."

He added, "Eventually, companies are going to have to start spending on equipment again if for no other reason than the old equipment will wear out."
But by then, many workers may have given up any hope of working in their once-thriving industry - at least in New Jersey.

"We were all living nicely and we were enjoying the benefits, but there was a cost as well," said Ms. Jewell. "We were all working incredible hours and maybe we weren't doing the exact thing we wanted to do. This has been the opportunity to go out and spread our wings. One door closed, another opened."