On February 8, 1996, President Bill Clinton signed into law the Telecommunications Reform Act of 1996. This Act was a 128-page bill designed to restructure the entire telecommunications industry. Actually, he signed it twice—once with a presidential pen, and then again on computer screen with an electronic stylus, instantly posting the new legislation on the Internet. Lily Tomlin, who attended the historic signing via Internet video, jokingly predicted the following morning’s headline as “Bill signs Bill!”
Congress had been trying to pass such a law for nearly a decade; a new law to transform the legal framework that historically regulated the telephone, cable TV, and broadcast industries. It would promote the advancement of a modern telecommunications and information infrastructure. It would create jobs and help connect every child in a school classroom to the information superhighway. Consumers would see lower prices, better quality, and more variety of choice in telephony, data, and video services.
Of course, the Federal Communications Commission (FCC) still had to write detailed rules of engagement, not in its previous role as a monopolistic supervisor but rather as a judge of competition. The creation of simplified, clear, and fair rules would make competition real and not rhetoric. While much of that work was six months or more away, the disruptive impact had already begun in the minds of America’s boardrooms and on Wall Street, because suddenly local could go long, long could go local, cable could play back dial tone, telephony could talk video, fixed-wireline could untether, wireless could tether up, and broadcasters could expand their markets. In effect, all were invited to a new, open market opportunity with liberty and Internet for all. In a historical, electronic moment, the fences were down.
In the mid- to late 1990s, dot-coms were popping up everywhere on the Internet and on the Initial Public Offering (IPO) radar. Internet access was exploding from businesses and con- sumers, as web servers, HTML, and personal computer browser software created needed transparency, colorful graphical user interface (GUI), and autonavigation of the Internet. Service providers of all kinds were caught in the middle, as the challenge of “connect the dots with the dollars” became the new objective of nearly every incumbent, and the golden
The Fences Are Down 9
fleece of every new telecommunications entrant. Soaring on the effervescence of the current stock market, bandwidth angels sent seemingly free “pennies from heaven” in search of business plans for advanced telecommunications services that would carry wave after end- less wave of Internet surfers across a new, global ocean of information offerings.
According to the Telecommunications Industry Association’s annual market forecasts, by 1997, the overall telecommunications market grew by more than 11 percent, generating revenues of $406 billion. Services represented about 74 percent of the 1997 total with equipment comprising the remaining 26 percent.1 By the end of 1998, the market had grown to $467 billion.2 By the turn of the century, the market was $518 billion, growing at a pace more than twice as fast as the U.S. economy. Competitive Local Exchange Carriers (CLECs) had grown to 158 operators from only 20 in 1996. With 24 million fiber miles laid in 1999, CLECs had also grown their fiber share to 22 percent from 10 percent in 1996.3 It appeared that local competition was taking root as many new entrants joined the bandwidth, services, and subscriber race by creating new wireline, wireless, and optical networks of their own. Telecommunications was now valued at about one sixth of the U.S. gross domestic product (GDP) at the divide of the centuries.
Not to be silenced, cable system operators invested nearly $20 billion in system upgrades in the three short years post-Act, and by 1999 touted 1.2 million cable modem subscribers. The Incumbent Local Exchange Carriers (ILECs) made significant mergers and began aggressive Digital Subscriber Line (DSL) build-outs, totaling about 250,000 DSL subscrib- ers that same year. Wireless communications spending had increased from $27 billion in 1996 to $45 billion in 1999.4
By the Christmas season of 2001, the overall market reached revenues of $663 billion. Double-digit growth was tallied in specialized services such as DSL and cable, and high- speed Internet access gained a whopping 78 percentage points. But this was provisioned mostly across premillennium capital infrastructure, as spending on network equipment and facilities lost 13 percentage points that same year.5 A sharp falloff in equipment spending was barely offset by a welcome surge in wireless services, eking out only a 3.5 percentage gain to a total U.S. telecommunications revenue mark of $681 billion by January 1, 2002.6 Beginning in late 2000, sharply lower growth in carrier capital expenditures (CAPEX) and operating expenditures (OPEX) began to deteriorate return-to-capital ratios, spooking investors who responded with investment reduction or abandonment. Many of the new CLECs, ISPs, and dot-coms were highly leveraged and overextended, still needing substantial amounts of debt and equity capital to maintain operating expenses. With access to that nurturing capital all but dried up, many a storybook tale ended suddenly in Chapter 11 bankruptcy. Other carriers attempted to use “creative” accounting to mask the growing revenue problem. As allegations reached the public tabloids, investors were left with absolute uncertainty regarding actual telecom market growth and earnings.
All of these negative influences were converging about the time that the overall U.S. economy ran out of both steam and track. The U.S. stock market’s NASDAQ index deflated in April 2000, about 20 percent in less than two weeks, almost instantaneously wiping out
$1.2 trillion in market value and net worth. As a major contributor to GDP, the communications industry would not be spared. Three years later, the index was 71 percent of that historic year-2000 high, with its aggregate market value reduced to $2 trillion of a once-lofty $6 trillion high. As an example of downstream effects, in 1999 Corning had increased its optical fiber manufacturing capacity by 50 percent and again by another 50 percent in 2000. By year-end 2002, Corning had decreased optical fiber manufacturing capacity by 80 percent. In short, telecommunication’s stellar boom went super bust, and like a ribbon of dominoes, it reverberated throughout the industry and its food chain.
Hindsight has always been most revealing, and many now agree that several issues appeared to change postderegulation excitement to turn-of-the-century disappointment:
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Competitive carrier business models suffered from “fundamentals” fractures, creating a massive waste of investor capital.•
The new regulatory models, severely underexecuted, fell short of stimulating true competition for advanced services.•
Incumbents and competitors alike overreached and over invested, as a predicted exponential rise in bandwidth demand came up short of a few exponents.•
A substantial number of dot-coms spouted like geysers, then sputtered and fumed from a sudden shortage of visitors.•
The money bubble gained too much altitude and then burst, deflating values and net worth and disintegrating options for quick debt retirement.The rest of the story lends itself to overarching, significant causes of the telecom meltdown. While the Telecommunications Reform Act of 1996 intended more unilateral deregulation and less FCC micromanagement, the reality appears to be more of a forced “competition” or reregulation in which no one could make any money. The topics of “unbundling,” lingering antitrust decrees, and merger orders were still on the FCC agenda and still burdensome to cable and telephony companies, stifling investment in last-mile broadband for America. While the explosive, new telecom competition was highly leveraging itself with new broadband networks, the U.S. economy began a slide into deflation, forcing debtors to pay back loans in dollars 30 to 40 percent more expensive than the ones they borrowed, resulting in significant bankruptcy proceedings.7 Many service providers, though positioned to survive the telecommunications downturn, experienced a significant debt load with the infrastructure capacity build-outs of 1998–2000 causing them to be slow to reinvest again until excess capacity could be absorbed. With a comet-like 150 percent plus explosion in telecom debt during the boom years, chased by a deflationary tail of up to 40 percent dollar value, a shot at a stationary orbit rapidly decayed until the fireball hit something.
The explosive growth of telecom during the latter 90s also gave way to falling prices. While many carriers had factored price declines into their business financial plans, no one expected prices to fall so fast. Deflation appears at the surface to be dangerous in that falling prices often lead to falling wages, making it difficult for companies and households to pay