ANALYSIS: Media Watch - Qwest's credibility slides as media attacksaccounting tactics

Much of the telecom industry is in tatters, hit by a "perfect storm

Much of the telecom industry is in tatters, hit by a "perfect storm

of a glut of broadband fiberoptic capacity, decreased demand, plummeting stock prices, massive debt, and rampant bankruptcy. In a broader context, the nation is struggling to get out of the recession in the post-Enron, post-September-11 environment.

Qwest has been hit in the press for a number of these things, but lately the Denver-based company, which bought the local Baby Bell US West in 2000, has also earned the media's attention for an SEC inquiry into its aggressive accounting methods.

In fact, The Denver Post (March 17) quoted Qwest CEO Joseph Nacchio as blaming the media for the investigation. Nacchio said, "Regulators would not look into matters if the media had not written about them ad nauseam."

Media coverage has reflected concerns about the reasons the company engaged in controversial capacity sales or "swaps

of fiberoptic capacity with other companies. Reporting has reflected suspicions that Qwest only engaged in some of these deals to artificially inflate its revenue through aggressive accounting tactics.

To make matters worse, being grouped together with other red-flag companies tainted Qwest's coverage. BusinessWeek (March 25) reported, "A case of Enronitis may now be spreading to Qwest.

Several other reports mentioned that Andersen had been the accounting firm that cleared Qwest's accounting practices, which The Wall Street Journal (April 5) labeled "arguably the most aggressive

in the telecom industry.

In the eyes of The New York Times (March 19), the outcome of the SEC inquiry, which was upgraded from informal to formal earlier this month, is "the biggest unknown hovering over the company."

An analysis of Qwest's coverage shows that it has clearly been put on the defensive, forced to use its media opportunities to say that it has done nothing wrong in its business and accounting methods. Coverage routinely quoted Qwest spokespeople saying the SEC's charges were "without merit."

Aside from the SEC inquiry, coverage in recent weeks has addressed a number of other unfavorable topics that contributed to portraying Qwest as embattled on a number of fronts.

Journalists often cited the company's stock performance as a measure of how poorly it was faring lately. Some reported that Qwest's shares were down about 85% from their 52-week high, while others noted that the stock is hovering near record lows.

Finally, coverage in recent weeks has addressed the company's unexpected tapping of its entire $4 billion credit line in the wake of the Enron and Global Crossing bankruptcies. When Qwest renegotiated those loans in mid-March, the Rocky Mountain News (March 19) described the revised deal "as an agreement that averts a probable bank default.

But shortly thereafter, Qwest was again in the headlines as it was forced to write down the value of its goodwill by $20 billion-$30 billion.

Qwest, like many others in its industry, is facing an uphill battle to regain the confidence of regulators, investors, its customers, Wall Street, and the media. As Money (April) reported, "Qwest faces what you might call a qwedibility gap.

The company's chances of closing this credibility gap will likely depend on developing a new level of cooperation with the media, as well as a new transparency in its business practices.

Evaluation and analysis by CARMA International. Media Watch can be found at www.carma.com.

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