Interesting post from another board
nytimes.com
June 20, 2001
Creative Destruction and the Web
By DANIEL GROSS
Companies that supply, build and operate fiber optic networks are burning. Level 3 Communications, groaning under an $8 billion debt load, is cutting
25 percent of its staff. Last week 360networks ominously delayed an interest payment. Nortel Networks of Canada could lose $19.2 billion — yes,
billion — in the current quarter.
Anticipating rapid growth in demand for high-speed connections to the Internet, these companies aggressively rushed to build global fiber optic
networks. It is tempting to view the travails of these companies, coming on the heels of last year's dot-com bust, as further evidence that Internet-related
businesses are a spent force. We shouldn't.
After all, in virtually every generation, new technologies have arisen that promised to transform the way Americans conducted business, exchanged
information and entertained themselves. Each inspired an exuberant investment boom, which led to a glut of capacity, ruinous competition, falling prices
for consumers and, ultimately, bankruptcies and consolidation. Most competitors contributed to a technological transformation while failing as
short-term investments.
Today's boom and bust is merely the latest in a series that have characterized America's phenomenal economic and technological development. The
difference? In today's 24-7 environment, the rags-to-riches-to- rags cycle is shorter than ever before. And with the democratized markets, the damage
caused by failing investments may be more widespread.
Companies like Level 3 Communications and 360networks were formed in the late 1990's. Kicked into permanent overdrive by the stimulant of
abundant capital, they manically laid conduits, dug trenches and then buried fiber optic cable under the seas and the prairies: some 39 million miles at a
cost of $90 billion. But with only 5 percent of the new fiber being used, prices for network access have plummeted faster than rents for San Francisco
lofts. Inventories of routers and fiber optic cable are piling up at suppliers like Cisco and Nortel. And one-time fiber barons are quickly becoming
conversant with the arcana of the bankruptcy code.
A similar set of circumstances affected the pioneers of the original information superhighway, the telegraph. Soon after Samuel F. B. Morse invented it,
hundreds of local service providers popped up like wildflowers. Their network-building efforts in the 1840's and 1850's were financed by the
antebellum version of venture capital: government subsidies and hundreds of millions of dollars raised by stock sales.
But strikes, competition and the Civil War disrupted business. By 1866, Western Union, with its solid balance sheet, control of patents and 44,000
miles of telegraph wire, became a consolidator par excellence. It absorbed its two remaining principal rivals, and went on to control 90 percent of the
telegraph business. The only value in the stock certificates of upstart companies like the Washington and New Orleans Telegraph Company proved to
be historical.
Between 1860 and 1890, investors poured nearly $9 billion into the next new thing: railroads. In those years, the nation's rail network grew from
30,626 miles to nearly 200,000 miles — a 653 percent increase. The hyper- construction led to competition and excess capacity, which was good for
freight shippers and passengers. But when the financial panic of 1893 hit, it spelled disaster for investors. In 1895, 169 railroads, owners of nearly 20
percent of the nation's tracks, were operated by bankruptcy receivers. Those that became insolvent at that time included the storied Baltimore & Ohio,
the Union Pacific and the Santa Fe. J. P. Morgan cleaned up the mess and cleaned up in the process.
By 1908, the year Henry Ford started his company, some 515 car manufacturers had entered the decade-old auto industry — and half of them had
already failed. Now-forgotten pioneers like the Hudson Motor Company and the Duryea Manufacturing Company were among the market leaders.
Twenty years later, when the Ford Model T sold for a mere $290, the Big Three — General Motors, Chrysler and Ford — controlled 80 percent of
the market.
Similar evolutions occurred with revolutionary technologies like telephony, radio and the personal computer: remember the Commodore and the
TRS-80?
But just as the failure of 99 percent of the automakers in the early decades of the 1900's didn't signal an end to the car's influence on society, the demise
of the fiber optic entrepreneurs doesn't mean the Internet is done transforming the way we live. Internet usage is still growing, albeit at a slower pace
than originally predicted. New products and services that use this immensely powerful scaffolding are introduced each month.
Unfortunately, the aggressive first movers may not be around to reap the ultimate profits. It's a safe bet many of today's fiber optic companies won't be
around in five years. Very few of them will exist as independent entities in 2010. The vast majority will end up as crossword puzzle clues, like Ransom
E. Olds, or as parts of a larger merged entity, some Global- Level-360networks.
Creative destruction, the term coined by economist Joseph Schumpeter to describe the workings of innovation and technology, justly became a
buzzword of the New Economy. Many new companies have been created; almost as many will be destroyed.
Daniel Gross, a fellow at the New America Foundation, is co-author of ``Generations of Corning: The Life and Times of a Global Corporation.''
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