Dot-com and Telco Bubbles: Telcos

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telecommunications

This page considers telecommunication booms and busts of the past twenty years, encompassing network operators such as WorldCom and equipment suppliers such as Cisco.Between 2001 and 2004, 165 telecom companies with $749-billion (U.S.) of assets filed for bankruptcy

It covers -

introduction - rational exuberance and excess in the telco sector since the 1980s
earlier telecoms booms - a perspective on contemporary market dynamics
competition and deregulation - economies of scale, opportunism and defensive action in the epoch of deregulation
the international dimension - global networks, uneven traffic and dark fibre
convergence - forecasting, 3G fantasy and expectations about equipment markets
confusion and collapse - ending another telco sector bubble
Enron and others - some of the high profile disasters
aftermath - what happened to the operators, infrastructure and equipment suppliers
power and other benchmarks - points of comparison from the electricity, water and oil sectors
studies - some major works on the telco boom

Enron and others

Perspectives on the telecommunications industry - or merely on the folly of individual and corporate investors- are provided by looking at some high profile operators.

Enron - hailed by Fortune as "America's Most Innovative Company" for five consecutive years from 1996-2000 (which perhaps says as much about Fortune's cheerleading as it does about Enron's managers and auditors) - resulted from the merger of two rather stodgy natural gas pipeline operators in the late 1980s but was repackaged as an voice, data and power giant during the next decade. At its peak in 2000 Enron's value approached US$100 billion, although most of its units guzzled cash and were unlikely to ever generate a substantial profit.

Competitor Global Crossing, formed in 1997 as a connectivity specialist, had a market value of US$10 billion in 1998 before reaching US$50 billion in early 2000 (greater than the market capitalisation of General Motors). It boasted 165,000 kilometres of fibre in 200 cities in 27 countries. On 28 January 2002, after declaring losses of US$4.6 billion for the first nine months of 2001 and debts of US$12.4 billion, its shares fell from US$65 to a mere thirty cents.

Deutsche Telekom announced the redundancy of 30,000 of its 260,000 workers. Its shares, in March 2000 worth more than 100 Euros, sank to 13.1 Euros and its losses increased in the first quarter of 2002 to the Croesus-like sum of 67.2 billion Euros. France Telecom announced losses of around 70 billion Euros in June 2002, following news that Vodaphone had a deficit of US$19.7 billion.

Marconi paid $6bn for two US telecoms groups, Reltec and Fore Systems, in 1999 but wrote off the assets in 2001. In 2003 Marconi shareholders were all but wiped out in a $4bn debt restructuring, although its US operations did return to profit in 2004.

aftermath

The aftermath of the telco bubble saw -

decline in the profitability and size of major equipment suppliers (and the departure or absorbtion of some competitors)
sale of some infrastructure at fire-sale prices
large-scale corporate restructuring of some connectivity providers
questions about the future of some connectivity providers, particularly those struggling with debt in sluggish markets
calls for reduced regulation or for government support of incumbent telcos

The telecommunications industry invested heavily until 2000, when spending on infrastructure reached around US$230 billion in the OECD (about 4% of total business fixed investment). Starting in 2001, long-distance carriers slashed their capital expenditure, with investment falling to US$194 billion in 2001. Spending by US telecommunications service providers may have dropped by 47% in 2002, bringing it back to the level recorded in 1997.

Corporate reorganisation in North America typically cancelled existing shares, with an exchange of bonds against new shares at a fraction of face value. Some enterprises bought back or traded their liabilities at a significant discount from face value. Others allowed affiliates and subsidiaries to go into receivership before acquiring their assets at a discount. In Europe, incumbent connectivity providers such as Deutsche Telekom and France Telecom with very large debts have adopted a less stringent approach, centred on debt refinancing (sometimes with government guarantees), issue of new equity, sharply reduced investment and sale of non-essential assets.

OECD economist Sam Paltridge commented that by funding boom-time construction Wall Street "inadvertently financed more telecom infrastructure overseas than the World Bank and other international agencies". The OECD estimates that from 2000 to 2004 over US$30 billion in international telecommunications infrastructure owned by US companies was sold to non-US entities for an aggregate US$4 billion.

Global TeleSystems' European network (valued at US$1.7 billion in 2000 and supposedly carrying a quarter of Europe's internet traffic) was for example sold to the KPNQwest joint venture in 2002. Dismantling of KPNQwest in 2002 saw sale of Qwest's part of the network (notionally valued at US$1.3 billion) to European carriers such as TeliaSonera for around US$50 million. 360networks' transatlantic cable, constructed for US$850 million, sold for US$18 million.

SingTel (and thus Optus) parent Singapore Technologies paid US$250 million to rescue Global Crossing (with a US$10 billion global fiber network that included around 20% of all undersea capacity leaving the US), with much of the Asian assets sold to Asia Netcom, a spin-off from China Telecommunications Corporation, China's largest fixed-line carrier. Paul Allen invested US$1.6 billion in US broadband provider Starpower, subsequently selling 40% of his stock for a mere US$2 million.

power and other benchmarks

A perspective on telco debacles is provided by the experience of other network operators during the same timeframe, characterised by

opportunistic acquisitions, often justified as producing economies of scale
defensive acquisitions in an 'eat or be eaten' environment
problems associated with unrealistic expectations about market growth or scope for cutting costs.

A note elsewhere on this site offer detailed benchmarks from acquisitions and sales in the oil, electricity, gas and water sectors. There is a supplementary note on utilicoms.

Motorola-backed Iridium which had invested around $6bn in setting up LEO satellites.Its constellation was launched in November 1998, yet by August 1999 the company had filed for bankruptcy - the largest collapse in the telecoms industry at that time. Private investors eventually bought the company out of bankruptcy for a paltry $25m. Its rivals Globalstar, ICO and Orbcomm all followed Iridium into bankruptcy

McLeodUSA had a market value of over US$5 billion before the bubble burst in 2000, operating under bankruptcy protection in 2002 and again in 2005, with private equity firm Forstmann Little losing over US$1 billion on its 1999 investment in the company.

studies

For an overview of connectivity developments see Martin Fransman's lucid Telecoms in the Internet Age: From Boom To Bust To? (Oxford: Oxford Uni Press 2002), The Internet Upheaval (Cambridge: MIT Press 2001) edited by Ingo Vogelsang and The Second Information Revolution (Cambridge: Harvard Uni Press 2003) by Gerald Brock.

There is a more acerbic account in Broadbandits: Inside the $750 Billion Telecom Heist (New York: Wiley 2003) by Om Malik and Telebomb: The Truth Behind the $500-Billion Telecom Bust and What the Industry Must Do to Recover (New York: Amacom 2005) by John Handley.

Creative Destruction: Business Survival Strategies in the Global Internet Economy (Cambridge: MIT Press 2001) edited by Lee McKnight, Paul Vaaler & Raul Katz, Telecommunication Policy for the Information Age: From Monopoly to Competition (Cambridge: Harvard Uni Press 1994) by Gerald Brock, The Fall of the Bell System (Cambridge: Cambridge Uni Press 1988) by Peter Temin and the 1997 thesis by Robert Ward on The Chaos of Covergence: A Study of the Process of Decay, Change, and Transformation within the Telephone Policy Subsystem of the United States offer insights into regulatory and market changes in the US.

Writing about Enron has overshadowed the rather thin literature on the other failed bandwidth giants and the bruised survivors.

Accessible introductions include Enron: The Rise and Fall (New York: Wiley 2002) by Loren Fox, Power Failure: The Inside Story of the Collapse of Enron (New York: Doubleday 2003) by Sherron Watkins & Mimi Swartz, Pipe Dreams: Greed, Ego, Jealousy and the death of Enron (New York: Public Affairs 2002) by Robert Bryce, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in US History (New York: Wiley 2002) by Peter Fusaro & Ross Miller, The Enron Failure and the State of Corporate Disclosure (PDF), Innovation Corrupted: The Origins and Legacy of Enron's Collapse (Cambridge: Harvard Uni Press 2008) by Malcolm Salter and papers in Corporate aftershock: the public policy lessons from the collapse of Enron and other major corporations (New York: Wiley 2003) edited by Christopher Culp & William Niskanen.

Other accounts include Anatomy of Greed: The Unshredded Truth from an Enron Insider (New York: Carroll & Graf 2002) by Brian Cruver, House of Cards: Confessions of an Enron Executive (College Station: Virtualbookworm 2002) by Lynn Brewer, The Smartest Guys In The Room: The Amazing Rise and Scandalous Fall of Enron (New York: Portfolio 2004) by Bethany McLean and Peter Elkind, Conspiracy of Fools: A True Story (New York: Broadway 2005) by Kurt Eichenwald or the solipsistic 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies That Destroyed Faith in Corporate America (New York: HarperBusiness 2004) by Rebecca Smith & John Emshwiller.

The Enron audiotapes (eg energy traders chatting about the joys of depriving elderly citizens of electric power) are online at enrontapes.com. Sceptics at rtmark.com feature Enron tv commercials, ironically built around the slogan "Enron: Ask Why ... Why? Why? Why?"

For WorldCom see in particular Disconnected: Deceit and Betrayal at WorldCom (New York: Wiley) by Lynne Jeter and The Great Telecoms Swindle: How the collapse of WorldCom finally exposed the technology myth (Capston 2003) by Keith Brody & Sancha Dunstan (Oxford: Capstone 2003).

There has yet to be a major study of Australia's Telstra or partner PCCW. For Vodafone see Anytime, Anywhere: Entrepreneurship and the Creation of a Wireless World (New York: Cambridge Uni Press 2002) by Louis Galambos & Eric Abrahamson and Rollercoaster: The Turbulent Life & Times of Vodafone & Chris Gent (New York: Wiley 2003) by Trevor Merriden.

For Lucent see Optical Illusions: Lucent and the Crash of Telecom (New York: Simon & Schuster 2004) by Lisa Endlich

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