Boom and Bust: The Telecommunications Industry
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AUCTIONEER: We have an opening bid of $750 from the Internet. $1,000, $1,050… Sold for $1,100!
TOM BEARDEN: A bankrupt telecommunications company auctioning off its property in northern Virginia. The company is Winstar, a provider of high-speed Internet access, a business not long ago considered practically a license to print money. Its failure is just one example among hundreds in the once high- flying telecommunications industry. Winstar is selling just about everything– fax machines, office furniture, even pricey specialized Internet equipment– at fire sale prices.
AUCTIONEER: A Cisco 2600…
TOM BEARDEN: Two or three years ago, this kind of equipment was hard to get. Demand exceeded production capacity. That’s because there was a frantic expansion going on all across the telecommunications industry. A decade ago, telecomm mostly meant telephone calls traveling over copper wire and microwaves. Those early networks have been transformed by fiber optic technology. A single fiber, a hair-thin strand of glass that carries pulsing laser light, can handle 30,000 telephone calls simultaneously.
Fiber optic networks not only carry telephone calls, but also provide the backbone for the Internet between cities and under the oceans. They transmit e-mail and video, and provide the facilities that make Internet commerce possible. As a result, fiber networks can move huge amounts of music, video, and data traffic like this Harry Potter movie trailer at unprecedented speed.
ACTOR: You’re a wizard, Harry.
HARRY POTTER: I’m a what?
TOM BEARDEN: William Kennard sees an unlimited future for all that capacity. As an example, he uses his wireless devices to link up to the Internet every day. The former chairman of the Federal Communications Commission is now with the Carlyle Group, an investment firm.
WILLIAM KENNARD: This is my… My PDA, which I access my Rolodex. I have my calculator, my calendar in here, my date book. I have my little blackberry, which allows me to check my e- mail virtually anywhere in the United States. There’s more processing power in this little device than the rocket that put a man on the Moon. This is a profound change in the way people are communicating and doing business in this country and around the world, and it is resulting in huge productivity gains for the economy, which we are all enjoying.
TOM BEARDEN: A few years ago, the capital markets were just as excited about the potential as Kennard. Investors were throwing money at companies almost faster than they could spend it. Kevin O’Hara is president of Level 3 Communications, a Denver company that began building a new fiber network three years ago.
KEVIN O’HARA: Capital became very, very, very easy to get for anybody that had a business plan that mentioned Internet or mentioned optical technologies.
TOM BEARDEN: Level 3 raised $10 billion to build its new network. They’re laying the last section of it near Santa Barbara, California. The company chose to lay much of its cable along railroad tracks, routes that offered the easiest way to connect major American cities.
KEVIN O’HARA: The network encompasses about 16,000 miles of inter-city capacity here in the United States. We also have a similar footprint throughout Western Europe. We have cables underneath both the Atlantic Ocean, under the Pacific Ocean. We have rings around North Asia connecting some of the major North Asian markets.
TOM BEARDEN: But Level 3 was only one of many companies racing to build new fiber networks. The result is that there are now 39 million miles of fiber, enough to circle the earth 1,500 times, so much that some observers wonder if all that capacity will ever be used or whether the companies that own it will ever turn a profit. Late last year, the financial bubble burst. Investors lost confidence in the industry, sold off their stock, and share prices collapsed. Kennard says too many fiber optic network companies were overoptimistic about future demand.
WILLIAM KENNARD: I call it the “if they build it, they will come” mentality, that if you… If you get funding and build a nationwide network and get there first, then there would be lots of demand for your… for your capacity on that network. Well, that has really changed.
TOM BEARDEN: The woes of the network builders quickly spread. Cisco Systems, which makes equipment that directs Internet traffic, saw its stock plunge 85 percent, reducing its corporate worth from $500 billion to $150 billion. Other equipment makers like Lucent and Nortel have seen similar declines. Internet access companies like Rhythms and PSI Net collapsed under their debt load and declared bankruptcy. The industry as a whole has an estimated $500 billion in outstanding loans. Some observers are worried that the potential default of the telecom industry’s enormous debt, like the savings and loan debacle, could drag down the entire U.S. economy.
For Level 3 Communications, the downturn has battered its stock price. It was $130 in the spring of 2000; this June it was down to $4. That’s when the company said it would cut 1,400 jobs, 25 percent of its workforce. In all, an estimated 250,000 telecom workers have lost their jobs in this year, three times the losses in the dot-com industry, which was focused on Internet commerce and was expected to use a lot of fiber network capacity as they expanded.
TRADE TABLE: We ask if you could drop your business card because there will be a drawing this evening.
TOM BEARDEN: 7,000 of the telecom job cuts have occurred in the Denver area alone. This is the monthly meeting of the Denver Telecom Professionals, an organization designed to allow industry workers compare notes and to network. About a half of the people in the room have been laid off recently, and many are finding it difficult to find new jobs. That includes Howard Wallace, who was let go from Level 3.
TOM BEARDEN: You’ve been out of work since when?
HOWARD WALLACE: Since April 3, at 5:00 P.M.
TOM BEARDEN: How many companies have you talked to since then?
HOWARD WALLACE: Well, I have had three interviews, but I have approached, via the Web site Hotjobs, Monster, Wall Street Journal, 200 companies.
TOM BEARDEN: Gary Gaessler’s also looking. He helped start up a high-speed Internet access company that went under. He says the industry got caught up in a land grab.
GARY GAESSLER: I think we just got a little sidetracked. We forgot what we learned in business school which, you know, we’ve got to satisfy the customers’ need at a competitive price and show a profit doing it.
TOM BEARDEN: The losses are starting to affect the Denver regional economy. In a high-tech office parks like Interlocken, almost 40 percent of the office buildings sit vacant. And there’s now a three-year supply of homes priced over $500,000 on the area real estate market. Some see disturbing parallels between the fiber boom and bust and what happened to the railroads in the 19th century. The seminal event for the railroads was the 1869 completion of the Transcontinental Railroad, when officials drove the golden spike at Promontory Summit in Utah. The completion of the link between East and West helped settle the West, expanded commerce, and made the US a continental power. It also created a railroad building frenzy.
Financed by large loans from the bond market, four additional routes were laid to the Pacific. Historians say they built twice as many tracks as the country needed at the time. The bust came just four years later, in 1873, with the collapse of the Northern Pacific Line. Investors deserted the industry en masse, and 89 heavily indebted railroads went under, sparking a four-year depression. To economist Michael Goldstein, of Boston’s Babson College, both the railroad and telecom industries were victims of their own unsupportable optimism.
MICHAEL GOLDSTEIN: If you have a lot of competition, everyone is just going to compete themselves to death, and they’re going to create too much in the beginning, and then they’re going to fall apart. It’s inefficient to build five times what you need and then wait to grow into it as a society.
TOM BEARDEN: Goldstein says the telecom industry is going through corporate natural selection: Survival of the fittest.
MICHAEL GOLDSTEIN: That’s part of what capitalism has. I mean, if you want smooth sailing, you better go with communism. That’s all centrally planned. It might not be very good, but it will be very smooth. If you actually want to have good stuff, you’re going to have to live with little booms and busts every once in a while, and that’s just part of the process we have.
TOM BEARDEN: While observers think dozens of companies won’t survive the shakeout, Level 3 says it will survive because it has enough cash on hand to make it through. Level 3 also says it’s network is unique. The company didn’t put just one conduit in the ground filled with fiber. They put dozens of empty pipes in the same trench, giving them the ability to add better technology and new capacity as the market develops. Bob Berger plans to be a survivor, too. He’s the CEO of Citynet, a rare example of a telecom company that is still able to raise venture capital. Citynet uses robots to put fiber in, of all places, city sewers.
They use the existing pipes to connect office buildings rather than dig up the streets. Berger’s network will provide the so-called “last mile,” the connection between office buildings and the big Internet backbone networks like Level 3′s. Today’s connections are usually quite slow, and in the case of individual homes, they’re often telephone dial-ups.
BOB BERGER: If you look outside the window where we’re sitting or in any city in the country, you’ll find an asphalt and concrete jungle. So to build within the city in an efficient manner, means you are basically ripping up every street and every sidewalk. For 20 years, people have been trying to solve the holy grail, the great enigma, of telecom: How do you build not between cities, that’s easy – you’re trenching along railroad right-a-ways – through dirt – but how do you build in cities without devaluating the roadway infrastructure and the sidewalks of a community, because if you can’t bring your telecom traffic, your communications traffic not between city to city but really to the doorstep of the end user, you’ve built highways to nowhere. And that’s kind of where we are today.
SINGER: When I think back on these times -
TOM BEARDEN: This side-by-side comparison shows the last mile difference. The fiber connection on the right downloads this Faith Hill video twice as fast as traditional dial-up Internet access on the left. The fiber connection also permits higher quality. But fast connections cost more money.
MICHAEL GOLDSTEIN: If you add your cell phone bill and your cable bill and your cable modem bill, if you have one, and maybe a second phone line, we’re getting up to like $200 a month. Well, if you ask yourself, “what else do you pay $200 a month for?” I mean, not a whole lot. You have your rent, or your mortgage, your food. You know, $200 a month is a sizable amount, so each one of these telecom people think consumers will pay $2 more a month for having this service. Well, you know, I don’t know about other people. But I’m getting to my saturation point.
TOM BEARDEN: The ultimate question is how long will the shakeout of the telecommunications industry take? Some say a year; others, up to three. For now, the remaining players are trying to avoid the auction block and hold on till demand catches up with supply.