Telecom's big fall

Dim future: The once mighty telecom industry shows no sign of reviving soon. Its New Economy has been sobered by Old Economy rules.

April 07, 2002|By Bill Atkinson and Stacey Hirsh | Bill Atkinson and Stacey Hirsh,SUN STAFF

"One planet. One network. A million possibilities."

That motto greets customers at Global Crossing Ltd.'s Web site, reflecting not just the company's vision, but an entire industry's conviction that it can transform the way people work and live, making life better and easier for everyone.

Telecommunications companies made a spectacular entrance six years ago, raising billions of dollars in capital, expanding rapidly, hiring hundreds of thousands of workers and creating a worldwide network with thousands of miles of fiber-optic cable on land and across the ocean floor.

The lure was reminiscent of the California gold rush of the 1800s - so great were the promises that cities and even states staked much of their futures on the industry and what became known as the New Economy.

In the past 24 months, though, the industry has been pummeled as time-tested principles of the Old Economy have taken hold.

More than 50 telecom companies have filed for bankruptcy or are in reorganization, and more are expected; more than 400,000 jobs have disappeared, and since February 2000, $500 billion in investors' money has vaporized.

The worst may not be over. Federal regulators are investigating whether telecom companies have intentionally inflated their revenue reports.

The carnage in the telecommunications industry has ravaged all sectors, from component makers to network builders to wireless companies. Some of the biggest and best-known names have been victims: Lucent Technologies Inc., PSINet Inc., Ciena Corp., JDS Uniphase Corp. and WorldCom Inc.

While experts remain confident that the industry's future is bright, they say it could be years before it recovers and even longer before some of its promises are realized.

Like other booms before it, the telecom industry's grandiose plans were oversold, and many bought into the hype.

Telecom was "going to lead us all to world peace and prosperity, that is how big it was, changing the way we live completely, never mind the promises of riches for everybody," said Fred Hickey, editor of the High-Tech Strategist, a newsletter that follows the industry. "In addition to that, we were going to solve world hunger. It was as big as any promise made at any time in world history.

"Everybody was guilty. The media obviously obsessed with this, Wall Street fed everyone a phony baloney story of buying stocks at any price, the investment bankers all wanted to get those deals done so they would get these massive bonuses. All of these companies with dreams and no profits all wanted to sell their shares. Who is responsible? The whole country is responsible; there were very few people who said no. Everybody decided to ignore reality for a while."

Alluring technologies

It was easy to forget reality with the alluring technologies the telecom industry promised to deliver.

Television would become a large computer, allowing people to surf the Internet, send e-mail, watch movies and maybe even vote.

Baby boomers would monitor their aging parents from thousands of miles away on their home computers with a video hookup.

Tens of millions of consumers would have super-fast Internet connections piped into their homes. Corporations would save millions of dollars because executives would never have to travel to meet clients, but would simply hold a teleconference in a boardroom or office.

It was "the Jetsons kind of thing," said Jerry Paul, managing partner at Quixote Capital Management LLC, a hedge fund in Greenwood Village, Colo.

Seeds for expansion were sewn when President Bill Clinton signed the Telecommunications Act of 1996, a bill that overhauled the telephone industry and opened the gates to all-out competition.

The day Clinton signed the bill, GTE Corp., a giant local telephone company, announced an agreement with WorldCom Inc., a big long-distance carrier, to resell long-distance services. The No. 1 long-distance company, AT&T Corp. countered, saying it would zero in on the country's $90 billion local phone market within weeks.

There seemed little to lose, especially since the Internet was expanding and expectations were sky-high that billions of dollars in commerce would be conducted through phones and computers.

Phone companies spent heavily to build and improve networks and corporations upgraded their systems, as well.

Billions of dollars poured in from investment banks and venture capital firms, such as Goldman Sachs Group Inc., Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. Inc.

A flood of new companies entered the market to make routers, switching devices and expand communications networks across the globe - all essential for a thriving "information superhighway."

In 1998, 29 telecom companies went public, raising $16 billion, according to Dealogic LLC, an investment banking research firm in New York. A year later, 79 telecom companies brought in $23.7 billion, and 82 companies raised $46 billion in 2000.

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