This article is fascinating. Market enthusiasts proclaim that markets are magnificant processors of information. This article desribes how markets are driven by frenzy more than by information.
TELECOMMUNICATIONS Wildly Optimistic Data Drove Telecoms to Build Fiber Glut By YOCHI J. DREAZEN Staff Reporter of THE WALL STREET JOURNAL Of all of the myths that drove the 1990s technology boom -- dot-coms made good investments, the New Economy would never experience a recession, small telecom companies could beat the mighty Bells -- the most damaging may have been the fallacy that Internet traffic was doubling every three months. The belief that Internet traffic could grow so quickly -- if true, it would have meant annual growth of more than 1,000% -- led more than a dozen companies to build expensive networks as they rushed to claim a piece of the next gold rush. The statistic sprouted up in reports by industry analysts, journalists and even government agencies, which repeated it as if it were the gospel truth. "Internet traffic," the Commerce Department said in a 1998 report, "doubles every 100 days." Except that it didn't. Analysts now believe that Internet traffic actually grew at closer to 100% a year, a solid growth rate by most standards but one that was not nearly fast enough to use all of the millions of miles of fiber-optic lines that were buried beneath streets and oceans in the late-1990s frenzy. Nationwide, only 2.7% of the installed fiber is actually being used, according to Telegeography Inc. Much of the remaining fiber -- called "dark fiber" in industry parlance -- may remain dormant forever. That capacity glut has sent bandwidth prices plummeting an average of 65% each of the last two years. It also has led most of the long-haul data-transmission companies to file for Chapter 11 bankruptcy protection. Even WorldCom Inc., the granddaddy of all fiber companies, is sinking under the weight of more than $7.4 billion in accounting irregularities. "This was the clincher, the myth that justified all of the other excesses of the dot-com era," says Andrew Odlyzko, a researcher at the University of Minnesota who was among the first to question the statistic. "The times were good, so why question it? No one wanted to acknowledge that the emperor had no clothes." The issue isn't simply a matter of setting the historical record straight. The amount of unused capacity is so vast that it will be virtually impossible for any new fiber company, no matter how good its technology or business plan, to raise funds in the foreseeable future. And as the first wave of data carriers begins to emerge from Chapter 11 this year, these now debt-free companies may undercut rivals even more, potentially leading to a new wave of bankruptcies or liquidations. WorldCom, whose future is already in doubt, may have even more to answer for. The earliest company to state that Internet traffic was doubling every 100 days was WorldCom's UUNet subsidiary, and the statistic became a mantra for top executives like John Sidgmore, WorldCom's current chief executive. A closer look at Commerce Department and Federal Communications Commission reports that repeat the statistic reveals that WorldCom was their only source. But people familiar with the situation say that UUNet routinely counted fiber-optic capacity as traffic, rendering the statistic essentially worthless as a barometer of the Internet's growth. WorldCom officials now concede that Internet traffic rarely, if ever, was doubling every 100 days, but they deny the company intentionally provided misleading data. Instead, they insist that number referred to total capacity of the company's backbone network, which was growing extremely fast as UUNet raced to keep up with a flood of orders from Internet service providers and others in the mid and late 1990s. "The actual traffic growth was never close to 1,000% per year," says Vint Cerf, an early Internet architect who is a senior vice president at WorldCom. "But I don't think it was an attempt to misstate anything -- it was an honest characterization of what kind of demand we were seeing from these companies." That point appears to have been lost on the analysts and investment bankers who reaped untold millions of dollars helping companies like Global Crossing Ltd. fund their fiber networks. In April 1998, then-Salomon Smith Barney analyst Jack Grubman wrote a research report touting Level 3 Communications Inc. shortly after the company's initial public stock offering. "Like the attic of a house gets filled, no matter how much bandwidth is available, it will get used," he wrote. Level 3's stock has lost more than 95% of its value, but the company appears to be one of the survivors: a recent $500 million infusion from a group led by superstar investor Warren Buffett has given it the money to begin buying up weaker rivals. Many rivals aren't as lucky, and the data-transmission market is littered with the carcasses of companies that have either filed for Chapter 11 reorganization or decided to liquidate. The casualty list includes former high-fliers 360networks, E.spire Communications Inc., XO Communications Inc., Velocita Corp. and McLeod Inc., in addition to marquee names like Global Crossing and WorldCom. "The markets bought lock, stock and barrel that Internet traffic would double every three months forever," says former FCC Chairman Reed Hundt. "There was just no way there was enough traffic to justify all of these huge networks." The first formal mention of the statistic was an Inktomi Corp. white paper in 1997, which quoted Michael O'Dell, then UUNet's chief scientist, as saying that "the capacity crunch is real and will continue for quite some time," and estimating that network traffic was doubling every 100 days. "Demand will far outstrip supply for the foreseeable future." The statistic spread like wildfire, giving reporters, analysts, executives and policy makers a handy shorthand for describing the Internet's seemingly limitless potential. UUNet officials were using the figure as late as September 2000, when the company's chief operating officer, Kevin Boyne, told the Washington Post: "Over the past five years, Internet usage has doubled every three months. We're seeing an industry that's exploding at exponential rates." Messrs. O'Dell and Boyne have since left UUNet and couldn't be reached for comment. The problem was that growth rate had long been a thing of the past. Looking back at network data records from the 1990s, experts like Mr. Odlyzko believe that Internet usage actually did grow at 1,000% per year in 1995 and 1996. The torrid pace those two years was driven by the Internet's transformation from a tool of scientists and academics to a mass-market consumer service thanks to Web browsers like Netscape and the introduction of flat-rate pricing for Internet access. But growth subsequently slowed dramatically, and now, Internet traffic is likely to grow even more slowly as broadband, or high-speed, service hasn't prompted the big spike in consumer usage experts had predicted. As a result, Mr. Cerf now estimates traffic growth as low as 40% in 2003. As bruised investors survey the wreckage of the telecom market, many are searching for someone to blame. But several longtime industry observers believe that such scape-goating may be misplaced. "Its like there are a lot of Olympic sprinters who died and people are trying to blame the guy who fired the starting pistol," says Kevin Werbach, a former FCC official who now edits the technology newsletter Release 1.0. "Nobody forced these companies to build so many redundant networks." -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
