INSIDE TRACK: The tangled legacy of a derailed revolution: THE TELECOMS CRASH PART III: Future economic historians will decide if today's telecoms carnage qualifies as creative destruction. But in the last of his three part series Dan Roberts sees only meagre pickings:
Financial Times; Sep 7, 2001
By ED CROOKS, MICHIYO NAKAMOTO, DAN ROBERTS and GARY SILVERMAN
Deep in the New England hills, the picture postcard town of Great Barrington is an ideal advertisement for the telecommunications revolution. Far from the job losses of technology parks further south or city streets brought to a standstill by cable diggers, George Gilder uses a high-speed internet connection to disseminate his influential views via e-mail and video conference.
Unlike many of the gurus and analysts who fed the flames of the great telecoms bonfire, Mr Gilder remains unrepentant about the carnage caused by forecasts of insatiable demand for broadband telecoms capacity.
"This is one of the most phenomenal inventions in the history of the human race and was received by justifiable enthusiasm in many quarters," the 62-year-old consultant says.
Like 1950s forecasts of flying cars and food pills, his predictions now somehow manage to sound both dated and futuristic.
He believes that households will ultimately need up to a gigabit of constantly available bandwidth each. A gigabit, or one billion bits of data per second, is nearly 20,000 times more than the typical 56 kilobits per second that most families use to dial up to the internet today.
"Video teleconferencing will be virtually as common as current audio telephones and it will overthrow television and the mass media by changing the architecture of top-down communications," he predicts.
As a result, Mr Gilder scoffs at estimates of a glut of optical fibre. "Measures of the fibre glut are misconceived. The existence of the glass in the ground is a huge resource that gets more and more valuable with each improvement in optics. All ideas that this was somehow wasted effort will look silly. I think they already look silly."
But views like this look increasingly isolated, as bruised telecoms equipment makers, network operators, investment bankers and investors look back ruefully on the excesses of the past few years. For them, the waste is obvious.
The biggest sufferers are, of course, the 350,000 people made redundant by large telecoms companies since the beginning of this year and another 200,000 in related information technology industries.
The equipment manufacturers have shed most staff. Not only did the established telecoms operators suddenly stop buying equipment early this year but the bankruptcies of dozens of start-up operators also caused a lot of nearly new equipment to appear on the market at distress prices.
Analysts estimate it will take at least two or three years for the surplus manufacturing capacity to shrink enough for growth to return. Telecoms operators everywhere seem paralysed by a hangover of debt and sluggish demand.
The suddenness of the downturn means that those furthest down the manufacturing supply chain have suffered most - like a motorway pile-up caused by each slowing car hitting the brakes a little later than the one in front. But the contagion that started with chip manufacturers and networking equipment companies is quickly spreading to the wider economy as job losses in the technology sector become the biggest contributor to fears of recession in the US and Europe.
The credibility of global capital markets has also suffered, as the cheerleading of investment bankers' analysts for telecoms-related shares now looks embarrassing, to say the least.
Jack Grubman, a Salomon Brothers analyst who became known as the biggest booster of alternative telecoms operators, comes within inches of a confession: "Everybody was culpable: the debt markets, the equity markets, the issuers, the companies. Anyone who tries to point a finger at a single group is not being fair," says the man who was called a "demigod" in the May 2000 issue of Business Week.
Dan Reingold, chief telecoms analyst with Credit Suisse First Boston and previously Merrill Lynch, was equally famous for his role as the main supporter of incumbent phone company shares during the long bull market.
He rejects the "analyst bashing" now sweeping Wall Street, on the grounds that even if the market was acting irrationally, it was still rational to recommend shares that were likely to go up in the short or medium term.
"An analyst's job is to predict what's going to happen and then when the market is going to see it and buy or sell equities on that basis," he says.
Both analysts are uncomfortable about the widespread practice of recommending shares on the grounds that lots of other people were - but they stop short of saying that it was wrong.
"In the late 1990s investment advice became more about trying to predict the irrational behaviour of the mass market than trying to predict the fundamentals of an industry," says Mr Reingold.
But behind the hand-wringing and excuses, the investment community has few answers to explain why so much money was given to companies whose business models were based on such unproven assumptions.
For all the excess on Wall Street, the world's financial system has so far proved remarkably resilient to the telecoms slump. In spite of a fall in share prices four times deeper than occurred during the Asian crisis, there have been no banking or investor near-collapses like those that put the world's central banks and regulators on alert in the autumn of 1998.
The increase in telecoms borrowing in the space of less than three years was greater than the entire national debt of Britain accumulated over two centuries. And banking regulators on both sides of the Atlantic remain worried that the borrowing binge is uncomfortably reminiscent of the property lending mania of the 1980s, or the emerging market boom of the 1990s.
But fear of a big banking collapse has subsided somewhat over the past year as companies have refinanced their borrowings at longer maturities and sold assets to improve their balance sheets, while the banks have been reducing their exposures.
On Wall Street, the growth in popularity of corporate bonds as a source of debt in recent years has helped because it means risk is dispersed, rather than falling on only a few banks.
Although European telecoms lending is still dominated by big utilities backed by large banks, US deals were more likely to involve newer companies tapping market sources of finance - equities, junk bonds and the kinds of loans sold to investors.
The Federal Reserve estimates that telecoms and other high-technology loans now account for only 8 per cent of the commercial and industrial loans held by US banks. By contrast, the Fed found that telecoms and other high-tech loans made up 14 per cent of the commercial-and-industrial portfolios at branches and agencies of non-US banks.
"The diversification is better than it was in the last credit cycle when just about every bank had 25 to 30 per cent of its portfolio in commercial real estate," says David Gibbons, who looks at credit risk for the US Treasury Department's Office of the Comptroller of the Currency.
Unfortunately, the diversification of credit makes its harder to track who ended up carrying the risk and absorbing the pain from defaults. Regulators worry that the pain will show up in unexpected places and could still de-stabilise the global financial system.
To understand how one industry could wreak such economic havoc and yet be absorbed by the financiers, it is important to view the telecoms bubble in a longer historical context.
This was a transport revolution that depended, like others before it, on men digging holes in the ground. In spite of the "virtual reality" of "cyberspace" and the "weightless economy", the telecoms bubble has a solid, physical underpinning - just as did past manias for building railways and canals.
Ditches were cut for fibre-optic networks, masts were erected for mobile phone antennae and elaborate engines were assembled in microchip "foundries" to power the flow of data around the world. There was even a short-lived craze for building carrier "hotels" and data storage centres at optical transport nodes - echoing the grand hotels and warehouses built alongside docks and railway junctions.
The question for future economic historians will be whether this was a period of creative destruction, or just a period of wealth destruction.
Rather as the railway boom left unfinished bridges and stretches of track that petered out only yards from the station, many of the companies scrambling to build new telecoms networks have run out of money before switching them on. Those assets that have been completed are languishing, underused and neglected, by an industry reeling from massive overcapacity.
For the telecoms bubble to qualify as a period of creative destruction, the enthusiasts would need to show, first, that it had been improving wider economic productivity; and, second, that large numbers of consumers had been able to benefit through faster and cheaper internet access.
Yet the first of these criteria is far from proven. The productivity increase that is the foundation of the new economy is about computers and software. Nobody has yet been able to measure the effect of broadband telecoms networks.
And the second criterion is patently unfulfilled. As anyone who has attempted to find a cheap broadband internet connection from their home or small business will know, not much has changed. The formerly dominant telecoms operators are still largely in control of local access and still charge high prices for low-speed capacity.
In the US, analysts argue that the Federal Communications Commission, the main US telecoms regulator, is to blame for discouraging investment in local infrastructure. Instead, it allowed new entrants to piggyback on existing operators, such as the Baby Bells, rather than invest in new capacity of their own.
Mr Reingold explains: "There were certain things the FCC did that really harmed the incentives for true local competition. It's as if highways were built with lots of lanes but poor exit and entrance ramps meant nobody could get to them."
A similar pattern occurred in Europe, where there is strong evidence that regulators were not aggressive enough in tackling the entrenched, formerly state-owned monopolies.
That is a depressing conclusion. In spite of the huge sums that poured into telecoms infrastructure and the Dollars 4,000bn (Pounds 2,800bn) in stock market wealth that has been destroyed, still more investment will be needed before the heady vision of Mr Gilder and other gurus can become reality. Worryingly, many analysts believe that it will not be long before investors are tempted once again. "In six or seven years there will be another bubble," Mr Grubman concludes. "And we will be surprised how few lessons have been learnt." |
