Elstrom, Peter. 2001. "Telecom Meltdown." Business Week (23 April): pp. 100-10.
105: "The model for how to make a fortune in the new world of telecom was set by
one oft-forgotten telephone company: MFS Communications Co. Led by James Q. Crowe,
MFS laid telephone lines around major cities that would allow long-distance companies
to bypass the Baby Bells. By the time the Reform Act passed in 1996, MFS had networks
in most of the big cities in the U.S., and WorldCom agreed to buy the company for a
staggering $14 billion, only slightly less than what SBC had paid for Baby Bell
Pacific Telesis Group earlier that year. What WorldCom was paying for was not
an operating business but strategic assets that would save it hundreds of millions of
dollars it otherwise would have paid the Bells to deliver calls. The figure that
stuck out for every would-be telecom entrepreneur was that WorldCom paid more than six
times the value of the assets MFS had put in the ground."
105: "The math was simple. You didn't need to build a business. You just needed to
raise money, put telephone lines in the ground, and you could make a bundle. Some
giant would pay you a multiple of every dollar you invested. The MFS model seemed to
work for the next couple of years. In 1997, WorldCom bought another competitive
upstart called Brooks Fiber for about $7 billion, or nine times the company's assets
in the ground--the property, plant, and equipment."
105: "When Net mania hit in the late 1990s and data traffic started doubling every
few months, the telecom buildout became a free-for-all. Companies such as XO
Communications (XOXO) and Focal Communications (FCOM) sprang up to build local
telephone networks throughout the U.S. RSL Communications (RSLCF) and Viatel Inc.
(VYTL) started building telecom systems in Europe. Global Crossing (GX), Flag Telecom
(FTHL), and others started stringing fiber-optic cables through the world's oceans to
carry the booming data and voice traffic. At the same time, megacarriers were
investing heavily: WorldCom, for example, was building its own metropolitan phone
networks from Stockholm to Madrid. All told, telecom players worldwide have raised
$650 billion in debt and equity since 1996, according to Thomson Financial Securities
Data."
105: "In their rush, many execs built less-than-steady foundations for their
companies. Rather than sell stock, they found the quickest way to get capital was to
issue junk bonds. "It was high-yield heroin," says Royce J. Holland, former president
of MFS and now CEO of Allegiance Telecom Inc. (ALGX), which provides voice and data
services to businesses. "You didn't need to do a road show with investors. You just
had a conference call and you could get a few hundred million bucks." While having
debt equal to a company's equity value is reasonably healthy, telecom
upstarts took on debt that was 5, 10, or even 20 times their equity. They figured the
more they could invest, the higher the price a giant would pay for their company."
105-8 [sic]: "Last year, the signs of trouble began. With so many networks being
built on both sides of the Atlantic, prices started to tumble. Howard Jonas, CEO of
international phone company IDT Corp. (IDT), estimates that an STM-1 -- a phone line
that can carry 576 conversations at once -- between the U.S. and Britain costs $1.8
million today, down 85% from $12 million in 1999. "Prices have gone through the
floor," says Jonas. Why? The economics of telecom are very similar to those for the
railroad industry: Once you sink the money into the ground, it costs almost
nothing to provide the service. "If there's a glut, it's going to be brutal," says
the University of Chicago's Goolsbee."
Margaret Coleman wrote:
> The Corporate and Telecom debt has been increasing steadily for the last decade. As
>Henwood's Wall Street book shows, the increase in corporate debt has risen far faster
>than the increase in consumer debt -- hard to imagine since consumer debt is so high.
> Telecom debt began when more and more business customers began demanding fiber
>networks. Fiber is much, much more expensive to maintain-- fiber cables deteriorate
>at the rate of about every 15-20 years. In lay terms, the glass gets cloudy and the
>fiber under the street is more easily destroyed by animals (squirrels,
> rats, mice). Old copper cables lasted for a century or more. Also, the nature of
>optical to electronic transformation required by fiber cable transmission (the
>transmission is electronic out of the central office or customer equipment, then it
>becomes light in the fiber itself) requires extensive equipment at the end point of
>all fiber, copper only required extensive equipment at the central office. Finally,
>manufacturing contracted throughout the 90s and only began expanding again in 1998 --
>manufacturing only expanded for about 2 years of the expansion. In short, the
> bad 'stuff' you list in the below messages are nothing new. They have been
>happening throughout the 90s. maggie coleman
>
> Rob Schaap wrote:
>
> > G'day Maggie and Doyle,
> >
> > > Margaret Coleman briefly remarks, The unemployment rate fell by a tenth last
>month, instead of going up as everyone predicted. This is despite all the tech
>closings and lay offs. Anyone want to guess why? I think that the layoffs this time
>are amongst the white collar, skilled workers and that's why they're getting so much
>press. However, the real effect of these layoffs seems pretty minimal so far. So is
>this economy really heading into a recession or is this just a market fall and sector
>downturn (tech) which is not affecting the rest of the economy very much? <
> >
> > AS Doug Noland compellingly argues at
> > http://www.prudentbear.com/credit.htm
> >
> > Today’s economic data was certainly indicative of a highly imbalanced U.S.
> > economy. On the jobs front, 129,000 manufacturing jobs were lost during May,
> > while service sector employment increased by 70,000 and construction jobs
> > added 31,000.
> >
> >
> > The unemployment rate declined one-tenth to 4.4%. The Commerce Department
> > reported record construction spending for April, with total spending up 5%
> > year over year. While residential construction increased 1% from a year ago,
> > nonresidential spending was up almost 10%. Industrial construction spending
> > was up 19%, with office and educational both up 11%. Compared to 1995, current
> > construction spending is up more than 50%, with nonresidential construction
> > rising about 70%. Auto sales were interesting as well, with Ford sales down
> > 12% and Chrysler falling 8%. GM total vehicle sales actually increased 1%,
> > with record truck sales up 10%. GM stated that the industry is on track for
> > its "third-best year ever," while increasing its second-quarter production
> > schedule due to stronger than expected demand. Toyota had its best month ever
> > in the U.S., with sales of 166,000 more than 10,000 above its previous record.
> > Lexus enjoyed its best May, with sales up 20%. BMW enjoyed its second-best
> > month ever in the U.S., with sales up 32%. It was the best May on record for
> > Mercedes-Benz. It was also a record May for Honda, with sales up 5%. Acura
> > sales were almost 20% above last year. Audi had its best May since 1985, and
> > Subaru had its best May since 1987. It was a record May for Volvo and Suzuki,
> > while Volkswagen sales were up 4% from last year and Porsche sales increased
> > 12%. Hyundai sales jumped 35%.
> >
> > As the latest credit numbers begin to trickle in, it is clear that May was
> > another extraordinary month for the U.S. credit system. Corporate bond
> > issuance of $88 billion surpassed the previous record of $80 billion set in
> > January. May corporate issuance was more than double the $37.9 billion issued
> > during the same month last year. Bloomberg quoted a managing director from
> > Salomon Smith Barney (the top-ranked underwriter this year): "I can't think of
> > a friendlier environment for the corporate bond market." Well, as long as one
> > ignores pesky fundamentals such as extreme corporate debt loads, deteriorating
> > profits, and poor economic prospects, the environment is "friendly" indeed.
> > With the continuing boom in real estate finance, it is worth highlighting the
> > clear deterioration in some key sectors. According to Torto Wheaton, the
> > national office vacancy rate increased to 9.5% during the first quarter, up
> > from 8.3%. Hotel occupancy in New York is said to have dropped to 75% during
> > the first quarter, a 7-point decline from last year. According to Cushman and
> > Wakefield, 19% of total Silicon Valley office space is currently under
>construction.
> >
> > In the future, curious minds will ponder why the commercial building boom
> > continued despite an obvious sharp turn in underlying fundamentals. There’s
> > one reason: the interplay of massive monetary expansion and speculative demand
> > for securities. Monetary processes continue to provide abundant availability
> > of credit. From Bloomberg: "The flood of sales came as the average yield
> > spread between 10-year company debt and top-rated government bonds shrunk 0.17
> > percentage points to 1.29 points in May, and narrowed almost a full point this
> > year, a Merrill Lynch & Co. index shows."
> >
> > Sprach Doyle
> > > Layoffs in Dot.coms, and Telecoms were staggered from their
> > annoucements. The effects will be cumulative over the coming year. The first
> > phase of the NASDAQ crash produced an un-expected overhang of production in
> > the U.S. This was worked out rapidly after the beginning of the year. Indeed
> > last month may reflect the ending of inventory buildup problem. It is also
> > true that this month week by week unemployment has increased. And the two
> > major factors involving slow down, are excessive debt and credit tightening
> > gradually undermining consumer spending as unemployment inches up.
> > Manufacturing has not yet stop contracting, and the layoffs in car production
> > are still increasing. This contraction in production seems from news accounts
> > to be global in proportions.
> >
> > The contraction I would bet will continue through the summer and have
> > a heavier and heavier impact upon the U.S. economy as time goes by. The
> > Telecom debt problem amounts to about 700 billion dollars and needs a solution
> > on the same level as the Savings and Loans debacle a decade
> > ago. That will drag the U.S. economy more than anything, as well as seems to
> > be affecting Europe also. <
> >
> > Along with a nonsensical real estate boom, this sounds pretty convincing to
> > me, Doyle. Where'd you get the Telecom debt numbers, mate? I need this stuff
>urgently.
> >
> > Cheers,
> > Rob.
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
