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Too Much, Too Soon for Telecom

Survey: The problems of WorldCom and other firms have wiped out more than 400,000 jobs and obliterated trillions in shareholder wealth.

June 30, 2002|KAREN KAPLAN and JON HEALEY | TIMES STAFF WRITERS

From 1996 to 2001, the telecommunications industry spent nearly half a trillion dollars building a monumental high-tech network to ferry phone calls, e-mail and faxes around the world at the speed of light.

But that investment--roughly twice what the federal government spent on the interstate highway system over the last 50 years--turned out to be a far bigger bust than anyone expected.

And the nearly $300 billion in debt that piled up during this dramatic build-out is wrapped like an anchor around the neck of the sinking telecom industry as it suffers one of the most dramatic collapses in U.S. corporate history.

The meltdown was punctuated last week with a fraud lawsuit filed by the Securities and Exchange Commission accusing long-distance provider WorldCom Inc. of improper accounting that masked its true health. In January, telecom network builder Global Crossing Ltd. filed the fourth-largest bankruptcy case in U.S. history. Firms such as AT&T Corp. and Qwest Communications International Inc. remain on shaky ground.

For The Record
Los Angeles Times Tuesday July 02, 2002 Home Edition Main News Part A Page 2 National Desk 11 inches; 408 words Type of Material: Correction
Level 3--A story in Sunday's Business section described Level 3 Communications Inc. as being on the verge of bankruptcy. Some analysts expect the telecommunications firm to file for bankruptcy protection, but the company says it has no liquidity problems and no plans to file for bankruptcy.
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The total cost of this wipeout--to investors, consumers and taxpayers--may not be clear for years. But "we're looking minimally at several hundred billion dollars of real investment that has gone south," said Lee Selwyn, president of Economics & Technology Inc., a telecom consulting firm.

A Times analysis of six years worth of financial statements of 116 telecom companies reveals an industry that spent furiously to exploit new technology and capitalize on the rising appetite for voice and data traffic. But it built too much too quickly, and demand is years from catching up with supply. The result is an industrywide implosion that has wiped out more than 400,000 jobs and obliterated trillions in shareholder wealth.

The numbers tell the tale:

* The industry devoted more than $444 billion to capital expenditures from 1996 to 2001. On average, companies spent more than $3.8 billion each on long-term assets such as factories to build equipment and communications networks. By comparison, $3.8 billion could fund National Park Service operations for almost 2 1/2 years.

* Investors threw $49 billion at start-ups through venture capital firms and public stock offerings.

* Telecom companies' return on their capital investment has been dismal. In 2001 the average was a negative 82.8%. That's like spending a dollar to end up with 17 cents.

* Trillions of dollars of telecom companies' market value has vanished since 2000.

* Industry debt ballooned throughout the late 1990s, growing at double-digit rates before peaking at $306 billion in 2000. Much of it may never be repaid.

Much of this spending and speculation was fueled by the Telecommunications Act of 1996, a landmark reform that opened up markets, such as local and long-distance phone service, to greater competition. At the same time, new technology was making it possible for start-ups to challenge entrenched companies.

Beginning of an Era

Taken together, these developments created a gold-rush mentality among entrepreneurs and investors who believed they were witnessing the birth of a new era. The opportunities seemed limitless, and the massive hype obscured the true risks.

"Any time there's great changes in the society--like with railroads in the early 1890s or the auto industry--you saw a lot of investment being thrown at new industries, and then there was a shakeout," said James Alleman, a visiting associate professor at Columbia Business School in New York. "That's a nice analogy with what's going on today with telecom. Everybody was trying to get in and find the gold. Some will and most won't."

That's not to say the investments were a total loss. Some observers, such as Johannes Bauer, associate director of the James H. and Mary B. Quello Center for Telecommunication Management and Law at Michigan State University, believe that profit motives will persuade companies to find a productive use for all the excess network capacity, or bandwidth, built during the boom.

"The networks are not lost," Bauer said. "These are assets that are still available. Someone will come in and buy them cheaper, and it will very likely benefit the public in the future.

"If they can be reutilized in the next year or two, then the physical losses will be fairly limited. But those who bought at high stock prices and then lost money in the process--that money is probably unrecoverable."

At the heart of the telecom revolution were the entrepreneurs with long-shot dreams and the venture capitalists who financed them. The number of venture-backed start-ups focused on building equipment and networks grew from 30 in 1996 to 42 in 1997 and then spiked to 62 a year later, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Assn. Money Tree Survey.

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