Serialisation: The Great Telecoms Swindle - part 2

In the second excerpt from The Great Telecoms Swindle, Keith Brody and Sancha Dunstan consider just how over-inflated the telecoms market became...

Taken separately, each thread which - woven together - created the bright tapestry known as the new telecoms market by 1999, collectively augured for an exciting future for all concerned. This was an industry built on optimism, confidence, innovation and a sense that nothing could go wrong.

As a result, money poured into telecoms. Share prices soared. Millionaires were made overnight as successful IPO followed successful IPO and companies in all corners of the market announced little but good news. Corporate giants who weren't already involved in telecoms sought to move urgently into the space. The financial markets devoured every optimistic projection thrown at them and, unquestioningly for a time, opened their purses again and again. But the telecoms bubble was, in fact, about to burst in spectacular fashion.

Its collapse, especially in the early stages, was overshadowed by the largely simultaneous fall of the dot-com market which, though far smaller and less significant, was perhaps the 'glamour' industry of the day and thus attention was deflected from the early stages of the telecoms problem.

In truth, dot-bomb was small fry, as the world was about to find out. Between 1997 and 2001 it is estimated more than $4,000bn dollars were spent on telecoms equipment and services in Europe and the US. The collapse of such an investment was to be far more than a minor bump on the general economic road.

What was actually at stake, where the health of the telecoms market was concerned, was little short of staggering. The Financial Times has stated that between 1996 and 2001, banks agreed $890bn in syndicated loans. A further $415bn of debt was drawn from bond markets and $500bn from private equity and stock market issuance. Even more money came from the likes of Marconi and other blue chip companies which, in the belief that telecoms was a 'can't-miss' proposition, turned cash piles into massive pools of debt in pursuit of a piece of the action.

By 1999 around half of bank lending in Europe was directed to sources related to the telecoms industry. Over three quarters of all junk bonds issued in the US were telco-derived. Five of the ten largest mergers in corporate history up to that point in time involved phone companies. Put very simply, if the telecoms market collapsed, it wasn't go to go down alone and it wasn't going to go down quietly. Still, no one seemed worried that anything could go wrong.

In truth, the prospect of serious problems or worse simply wasn't even considered. The blind optimism we encountered in that period (and, in fairness, which we did not always question ourselves) seems laughable today. The over-riding sense was that business planning was a matter of dreaming the most expansive dreams possible because the cash would be there to fund their transformation into reality. With money so easy to come by, the industry simply came to believe its own hype. For banks and telcos alike, the telecoms market was little more than a licence to print money.

And yet, within less than 18 months after 1999, the pendulum had swung dramatically to the other extreme. It turned out the money pouring into the industry had been used to buy the emperor not so much a set of new clothes as an entire wardrobe.

And what was in that wardrobe? For a start, bandwidth (and copious quantities of it at that) was everywhere. Bandwidth - fibre optic cable which in many cases had been built but had never been lit up - was probably as responsible as anything in the end for turning out the lights on the entire telecoms boom.

Bandwidth is the raw material required to transmit volumes of data across communications networks. As such, it is the raw material of telecoms itself. Bandwidth is to telecoms what roads are to the transportation industry. During the course of the boom, huge amounts of money were invested in increasing the availability of bandwidth, effectively building new roads in anticipation of cars that were certain to use them. Building and owning networks was to be at the head of the gold rush.

Yet by 2001 there was such a severe glut of bandwidth it was estimated six billion people could talk continuously on the telephone for a year and their calls could be transmitted over the capacity available within a few hours. Less than 4 per cent of the fibre optic cable that had been laid (and financed) during the boom had even been activated. (There is now a real possibility it may remain 'dark' permanently. It is, for now, simply not needed.)

You might well ask how the industry got it so wrong? To overbuild by 5-10 per cent might suggest a mixture of poor judgement and bad luck. To overbuild by 95 to 98 per cent suggests little more than a combination of ignorance and recklessness. Oh, and greed. In chasing miracles, the bandwidth builders simply lost the plot.

With such a glut of capacity, what happened next was easy to predict: the price of bandwidth collapsed. Already debt-laden companies (such as WorldCom) who had fuelled the explosion were sitting on what were almost totally worthless assets, investments which would likely never return anything near their original value. At the same time, mobile phone companies were indulging in a bandwidth explosion of their own, committing over $200bn to boost their brand of bandwidth and thus enable wireless internet services for which there was no hard evidence of consumer demand.

This excess of bandwidth was the straw that broke the camel's back. It exposed the fact that the telecoms economy was a false one and contradicted the basic balances of supply and demand. It was the same story across other segments of the market. The industry had been funded at countless levels to create product for which there was little evidence of need. There was a domino effect - if this happens, that will happen but with the bandwidth glut the first domino was never knocked over. 'Progress' had become self-perpetuating, change anticipated on the basis of what 'could' be done, rather than what anyone needed to do.

Just how false was the false economy? At the height of the boom in 2000, the stock market value of all telecoms related businesses was in the region of $6,300bn. Within a year, it had virtually halved. Billions of dollars of loans were in default. Half a million people had lost their jobs. Countless telecoms operators had filed for bankruptcy, having built networks which now, to all intents and purposes, have barely any value.

Tomorrow: Deregulation and glut.

Part 1 - A swindle exposed - http://www.silicon.com/a57095