[Because of its relevance and since most list members are probably not WSJ subscribers, I've taken the liberty of posting the entire article. sds]
> From the Wall Street Journal -- > >For Telecom Workers, Burst Of Bubble Takes Heavy Toll >By REBECCA BLUMENSTEIN > >RICHARDSON, Texas -- Two years ago, J. Michael Dugan spread the word to >his fellow optical engineers in North Texas that he was starting a company >that could make them all rich. The telecommunications business was hot, >and optical engineers were the hottest commodities of them all, commanding >big signing bonuses and six-figure salaries. > >Mr. Dugan, a burly Texan with more than 20 years under his belt at the >giant French equipment maker Alcatel SA, was persuasive. So many flocked >to his annual summer party in July 2000 to learn more about Latus >Lightworks that he ran out of food. The start-up took off quickly, hiring >120 employees as the engineers raced to devise ways to squeeze more data >and voice traffic through a hair-thin strand of fiber-optic glass. > >Then the bubble burst. > >A few weeks ago, when all those engineers gathered again in Mr. Dugan's >backyard, it was to commiserate and swap job leads. Ken Maxham, a cheery >59-year-old who comes from a long line of engineers, was worried about his >unemployment benefits running out as his savings dwindle. He had cut back >expenses as much as possible, but basic health insurance costs $750 a >month and his wife was putting off going to the dentist for a toothache. > >David Wolf, who at 37 is one of the youngest optical engineers around, was >counting the days until his second start-up was due to run out of money. >The fresh-faced father of three young children was pruning expenses such >as his daughter's gymnastics lessons and worrying about the future. Mr. >Dugan, whose work as a temporary consultant was about to end, was >contemplating returning to school at age 50. > >And the party was buzzing about a cruel twist of fate: Two of the former >colleagues had just gone head-to-head for one of the few remaining telecom >jobs out there. The one in the more precarious financial position didn't >get it. > >"When I see someone I haven't seen in a while, my first question is, 'Do >you have a job?' " said Bruce Raeside, a 46-year-old Michigan native who >also worked as a Latus engineer. "It's almost like Detroit in the '70s." > >In many ways, it's worse. Like the massive declines in the nation's steel, >oil and automobile industries in decades past, the disintegration of the >telecom business is leaving deep wounds in the U.S. work force. But labor >historians say telecom stands out for the unprecedented speed of the >boom-and-bust cycle. After telecom was deregulated in 1996, it quickly >expanded by some 331,000 jobs before peaking in late 2000. Since the >downturn started, though, companies have announced layoffs that have wiped >out all those new jobs and more -- a total of well over 500,000 workers, >according to a tally by The Wall Street Journal. By contrast, it took two >decades for the ranks of the United Auto Workers to fall to 732,000 from >1.5 million, as the auto industry was forced to become much more efficient >in the face of foreign competition. > >The number of telecom jobs grew faster and has fallen much harder than the >overall job market, according to James Glen, an economist with >Economy.com, a West Chester, Pa., research firm. He says the 12% drop in >telecom jobs is still gaining steam, especially as the rout claims bigger >and bigger companies such as Global Crossing Ltd. and WorldCom Inc. And >the economic and human cost of the telecom bust far exceeds that of the >highly publicized Internet crash, which by and large involved smaller >companies. > >Telecom has turned into one of history's biggest bubbles because so much >money poured into the industry during the stock-market boom, creating some >$470 billion in debt and a vast glut of capacity. Once a sleepy industry >known for its modest growth, telecom took off like a rocket in the late >'90s as companies rushed to lace the world with ultra-fast fiber-optic >networks to carry an expected onslaught of Internet traffic. But after a >frenzy of spending and hiring, it suddenly became clear in mid-2001 that >the Internet wasn't growing nearly as fast as the 1,000-fold annual >increases originally predicted. The huge run-up has now been replaced by a >merciless ride down. Rumors of foreclosures and marital problems have >replaced word of the latest IPO. Some laid-off telecom workers are even >turning up in local homeless shelters. > >So much money was spent buying telecom gear during the frenzy that there >is now seven years' worth of excess inventory, says Lonnie Martin, chief >executive of White Rock Networks, a Richardson start-up that is trying to >hang on. He values the excess supply at some $160 billion. "That is an >awful lot of exuberance to get rid of," he says. > >There are few places where the hangover is more severe than here in the >sun-blasted plains north of Dallas. Back during the boom years, developers >couldn't throw up office buildings fast enough to keep pace with the >demand. Telecom jobs doubled to 90,000 between 1995 and the peak of the >bubble as big names such as Cisco Systems Inc. stormed into town and >companies such as Nortel Networks Corp. quadrupled their work forces. >Money was flowing so freely that countless start-ups emerged from nowhere. >Now, vacancy rates in the area known as the Telecom Corridor have shot up >to 34%. The vast expanses of empty parking lots make the area look like a >corporate ghost town. > >And the layoffs keep coming. While the Latus workers left stable jobs to >join the start-up, they know plenty of colleagues who stayed behind and >lost their jobs anyway. Big suppliers such as Nortel and Alcatel had >already shed half their work forces before WorldCom's collapse. Xalted >Networks Inc. just laid off most of its Texas engineers and issued a press >release saying it's moving its software development to Bangalore, India, >where it plans to hire 70 engineers in a bid to conserve cash. > >Change of Fortune > >The change of fortune is especially jarring to telecom's engineers, many >of whom chose their profession because it promised a stable paycheck and >seemingly limitless growth. Mr. Dugan, who has degrees in physics and >electrical engineering, shifted into telecom after down-sizings in NASA's >space program and the Texas oil industry, where he built support >electronics for the oil diggers. Mr. Raeside came on after surviving >layoffs at semiconductor companies through the 1980s. > >During the boom, no one was more in demand than the eclectic band of >optical engineers who had worked for years in relative obscurity >transmitting millions of calls a second through tiny hairs of glass by >using lasers of light invisible to the human eye. Their value soared in a >climate where any innovation could quickly become the next hot IPO. >Suddenly, companies were paying salaries well over $100,000 to lure top >talent. > >As some of the early start-ups were purchased by bigger companies in deals >that made their founders rich, the walls of the big companies started to >feel a bit confining. Mr. Dugan left Alcatel in January 2000, >contemplating a few offers. He was hanging around his house one February >morning when he was contacted out of the blue by Michael Zadikian, who had >sold his company, Monterey Networks, to Cisco Systems Inc. for $500 >million in 1999. > >Mr. Zadikian had a new plan to launch four start-ups at once to develop a >single system that phone companies could use for all of their needs. He >wanted Mr. Dugan to focus on the so-called long haul, the cross-country >and undersea networks that companies were racing to build. Mr. Dugan >signed on. > >Latus was following in a rich tradition. The former MCI Communications >Inc. started here in the late '70s, using the microwave technology >deployed by Collins Radio to challenge AT&T Corp.'s monopoly. But >microwave towers couldn't be placed more than 35 miles apart because of >the curvature of the earth, leading MCI to push for advances in >fiber-optic technology. In the early '80s, MCI embraced a new technology >that used light waves to transmit calls on one strand of fiber, a signal >that was so strong MCI only needed to install equipment to boost it every >1,000 miles or so. Companies rushed into Richardson to help give MCI a >competitive edge, a customer and supplier relationship that has flourished >for years, but which is now in jeopardy with the collapse of MCI's parent, >WorldCom. > >The goal of Latus was ambitious: to develop a system that could send data >and voice traffic at higher speeds and longer distances than ever before. >Optical networking was all abuzz about a technology called dense wave >division multiplexing that could divide a single strand of fiber into >dozens of channels by beaming different colors of light through it. The >Latus system had 256 different channels, and was designed to go more than >1,200 miles before the signal needed to be boosted again so it could >continue on. > >The company didn't have a name until March, when Mr. Dugan, flying home >from a convention, bought a Latin-English dictionary at an airport and >found the word, "latus," meaning wide, open and expansive. Latus got $28 >million in its first round of funding in July of 2000 from a group of >investors eager to follow Mr. Zadikian's success. > >David Wolf knew he was at a turning point as he decided whether to follow >his former boss to Latus. A friend of his late father told him to do it >because it was a once-in-a-lifetime opportunity. His wife, Susan, advised >making the leap as well. The couple had just purchased some property north >of their home in Allen, Texas, to build a bigger house to accommodate >their expanding family. > >"Do it, as long as you get paid the same," Susan told her husband. Even if >it didn't work out, the couple reasoned that Mr. Wolf could take advantage >of one of several other job offers. In a matter of days, Mr. Wolf found >himself plunking down $5,000 on his credit card to buy a laptop so he >could start work at Latus on Monday. He remembers thinking with amusement >that there were no expense forms to fill out to get the money back, but he >trusted Mr. Dugan. > >They found some office space to rent and began hiring workers. "At every >board meeting, they said, 'Spend the money. Spend the money,' " recalls >Mr. Wolf. "The engineers were the hardest to find." Latus had to pay at >least $100,000 and as much as $120,000, plus bonuses, for the very senior >engineers, who often were playing more than three job offers off each >other. The start-up handed out 20% of its total shares to employees, and >those who joined first were given the largest number of options. Another >start-up raffled off a new BMW to employees who referred their colleagues >to the company. > >Money seemed to be everywhere -- and in many senses, it was. Capital >spending by telecom companies at the height of the boom soared to 106% of >revenue, according to Mr. Glen at Economy.com. Historically, that figure >had been just 38%. > >At Latus, Ken Maxham jumped in as employee No. 11, Bruce Raeside as >employee No. 16 and Amy Dugan as employee No. 47. Mrs. Dugan joined >despite some nervousness about perceptions of nepotism. A respected >engineer herself, she reasoned that joining her husband's company meant >the two could work day and night on Latus. > >The scramble began to get the technology ready for viewing at Supercomm, a >huge trade show in June of 2001. The engineers sometimes put in 20-hour >days working out kinks in the product, which looked like a bunch of >refrigerators full of wires. "Our entire existence was hinged on meeting >our claims," says Mr. Dugan. "I said there is no way we can go back and >tell the board there appeared to be fundamental physics limitations." > >What they didn't realize was that economic limitations would prove the >bigger threat. Latus was launched precisely at the peak of the bubble, >when money was flowing so freely in telecom that companies seemed willing >to buy anything. > >It was at Supercomm in Atlanta that the big buyers began showing signs of >flagging demand. Mr. Dugan had to rush out to California in the middle of >the show to give a funding pitch to one of the original investors. But the >second round of financing for Latus became almost impossible as the spigot >of capital shut off. An initial public offering became a distant dream. > >Mr. Dugan was hoping the uncertainty was just a slight fluctuation in the >market. That summer, the Dugans threw an even bigger party than before, >and catered it for the first time, bringing in trays of Mexican food under >a huge rented tent. Around that time, Susan Wolf started joking with Mr. >Dugan about whether her husband would still be able to bring home a >paycheck. An accountant, she works only during tax time to bring in a few >thousand dollars. Mr. Dugan knew it was a joke, but he began feeling the >responsibility on his shoulders. > >The first layoffs hit the Richardson area in the middle of 2001. Susan >Wolf began hearing stories in her neighborhood. "It is like the black >plague. You hear it happening to someone your neighbor knows. Then her >brother is laid off, and then it happens to you," she told her husband >over dinner recently with a guest. "It goes from the edges in -- closer >and closer -- and finally gets here." > >The company was notified that it lost its funding the morning of Sept. 11. >Mr. Dugan was waiting for a conference call among the Latus board when the >second plane hit the World Trade Center, but the call went on as investors >notified them that funding would be cut off. The founders were given only >10 days to find a new backer -- an almost impossible feat because any >potential bidders would have had to travel by bus to visit the company, >since all flights were grounded for days by terrorism fears. "We got >bombed twice," says Mr. Dugan, who doesn't blame the investors for their >decision given the climate. > >On Sept. 12, he called an all-hands meeting and told his fellow Latus >employees to update their resumes and finish their projects. "It's not >over, but it doesn't look good at all," he told them. > >On Sept. 23, Mr. Dugan invited them all to the local Omni Hotel, the place >where all the deals were made during better times. He told them that Latus >would be shut down, and its doors padlocked as the bank cleared out its >equipment. Everyone would lose their jobs immediately. Mr. Dugan made >arrangements to sign them up for unemployment benefits on the spot, and >then the Dugans paid for drinks for all. "A lot of these people were my >friends. They didn't hold it against me," says Mr. Dugan. "But I felt >badly for them." > >When Latus shut down, the Wolf family cut down on spending as they could. >They stopped hiring babysitters and going out to dinner, and cut back on >groceries. > >David Wolf stayed at home looking for a job, surprising his children the >first time that he picked them up from school. To fill his time, to the >slight irritation of his wife, he plunged into another start-up with Mr. >Dugan and a few others to develop another optical product. They even paid >out of their own pockets for Mr. Dugan to present the product at a show in >California earlier this year. But with the downturn so pronounced, they >received little interest. The fiber-optic amplifier is now sitting in a >case in Mr. Dugan's living room. > >As he flung himself into a new start-up, Mr. Dugan and others held >meetings at the local Starbucks, which had become the unofficial meeting >place for the unemployed. He says it is a strange experience to run into >people during the middle of the day. "It is like, 'Oh, this happened to >you, too,' " he says. > >Mr. Maxham started looking for a job immediately. Even though he is 59, he >was perhaps worst off financially because he had invested 30 years of >retirement savings in tech stocks after leaving Alcatel. "I was a >believer, but that was a bad decision," says Mr. Maxham, who lost >"hundreds of thousands" of dollars. Initially, he was mystified by the >scarcity of jobs because he had turned down seven job offers before >joining Latus. As he searched every day for jobs, unemployment benefits of >about $300 a week kicked in. > >To ease the tension, Mr. Maxham plays electric bass guitar in a band of >engineers called Signal2Noise. But it wasn't much of an escape: At one >point, half of the band was out of work. He felt increasingly guilty about >his precarious financial situation and apologized at one point to his >wife, Penny. "I am not angry," she told him. "I sort of know that we are >going to be OK." Still, it was rough recently when she had to accept money >from her parents to travel back to Idaho to visit them. > >For months now, the bottom has been getting deeper. Robert Shapiro, head >of the local telecom branch of the national engineering association, >thinks the cycle must be at the bottom. "How could it get any worse?" asks >Mr. Shapiro, who is working a temporary job after months of unemployment. >Attendance at the group's monthly meetings at the local Holiday Inn has >doubled since engineers now have extra time. Mr. Shapiro estimates that >half of the association's members have been laid off. Meetings now start >with job-hunting tips. > >Part of the problem is that there is no place for the highly specialized >engineers to turn as the tech industry continues to slump. Krish Prabhu, >the former chief operating officer of Alcatel who lives in the Dallas >area, hears the desperation as companies ask for money and former >colleagues call for job tips. A partner with Morgenthaler Ventures, a >venture-capital firm, Mr. Prabhu says it will be tough for any start-up to >survive. "There is a nervousness about whether this downturn is part of a >cycle or a fundamental change that telecom has become a commodity like the >computer industry," says Mr. Prabhu. > >The ripples are spreading. The city of Richardson is being hit by a drop >of more than 20% of its sales tax and a coming hit to its property taxes >from all the empty office buildings. Foreclosures in Collin County, where >many telecom workers live, are up 79% over last year, especially for homes >worth $250,000 or more. The process is brutally efficient in Texas: Once a >house is posted for foreclosure, the owner has only 21 days to come up >with the money before it is auctioned. > >Howard Dahlka, executive director of the Samaritan Inn, a homeless shelter >in nearby McKinney, is seeing the shell-shocked faces of telecom workers >who have lost their homes. "It is a whole new breed, what we are seeing >here," he says. > >People in Trouble > >Just in the past week, Samaritan has received 15 calls from people who are >expecting to lose their homes, and he worries whether his 58-bed shelter >will have to turn people away. Bill Kewin, an engineer who was laid off >from WorldCom six weeks ago, says many WorldCom workers are in very bad >financial shape because their 401(k) plans are worth virtually nothing. >Many have put their homes on the market and don't know where they are >going next. "There are a lot of people who are in trouble," he says. > >As November turned into December, Mr. Dugan had found no work. His wife, >Amy, thankfully did land a job for $100,000 a year at a telecom >manufacturer, giving them a degree of financial stability they are >grateful for. But it isn't easy for Mr. Dugan, who has 13 patents to his >name. He eventually got a little work consulting for a start-up, but >expects to lose that job in about a month. Something permanent feels >pretty far off. He's even thinking of going back to school to study >medicine. "I don't have a sense of accomplishment," he says. "I still have >more to do." > >Across town at the Wolf household, tension rose as Christmas approached >and David still didn't have a job. The couple fretted about Christmas, and >how to contribute to the gift-giving rituals with their extended family. >They didn't want to ask for help but were happy to accept cash gifts to >help ease the pinch. Susan Wolf was most worried about the $10,000 bill >for private school for one of their children with some special needs. Her >parents stepped in to help foot the bill late last year. > >Finally, in January, David got a job at Yotta Networks, another local >start-up that is focusing on long-haul networks. He makes about $100,000 a >year, but Yotta has gone through two sets of layoffs and is set to run out >of its funding in a matter of weeks. Company officials are negotiating >with a promising new customer, but the start-up is burning through $1 >million a month. > >The Wolfs estimate they have only enough savings to last three months. >"I'm getting nervous," says Mr. Wolf. "I've got a lot of people who are >telling me just to get out of telecom. I don't want to end up on the >street again." Susan Wolf says that if she needs to, she will resort to >anything to pay this year's school tuition. "I'll move into an apartment >if I have to." > >In April, Mr. Maxham thought his prayers had been answered. A company >called Celion Networks Inc. needed an engineer. He quickly called to >arrange an interview. Then a friend tipped him off that Mr. Raeside, his >old colleague from Latus, was also in the running for the job. After >agonizing the day before the interview, he decided to deal with the >competition head-on. "I put a good word in for him," says Mr. Maxham. > >He felt the interview went well. The job seemed like a perfect fit. They >needed a systems engineer -- a big-picture guy who supervises the hardware >design of a new product. But while he was waiting to see if he'd get >another interview, the phone rang with some disquieting news. It was Mr. >Raeside, letting him know as a courtesy that he'd been asked back for a >second interview. He called again when he got hired. > >The two men remain friends, but Mr. Raeside seemed sheepish when he >spotted him this year at Mr. Dugan's party. "I was lucky," he said softly. >"I am really convinced that it came down to either one of us. We were both >perfect for the job." > >The job only lasted four months. Mr. Raeside was laid off on Friday. > >The party itself was much tamer this year. Guests were asked to bring >potluck dishes, and the biggest attraction was a big tent Mr. Dugan >designed himself to save money. > >Mr. Maxham attends job workshops run by various churches in the area. As >every week passes, he notices more and more of the unemployed coming. Lisa >Miller, the executive director of Career/HiTech Connection, the biggest >workshop in the area, makes it her mission to keep spirits high. "You will >find a job," Ms. Miller told the crowd packing the Preston Hollow >Presbyterian Church one recent Tuesday night as she explained the >importance of networking. But as the telecom crisis deepens, Mr. Maxham >becomes less convinced there are even jobs to be had. He sat with a grim >look one recent night as job openings were called off, none of them for >engineers. > >As Mr. Maxham's savings account dwindles to under $10,000, things are >getting very shaky. He now buys only food that is on sale, looks for the >cheapest gas and has put off replacing his wife's 10-year-old car. He >won't go to a food bank because he says they give away too much meat, >which he doesn't like. Repairs are going undone. Recently, Mr. Maxham set >out with sealant to repair some leaks on his roof. If he doesn't find any >work by September, he says that money will "get very tight." > >It already has. Penny Maxham says that she is trying to ignore a toothache >because the couple has no dental coverage. She quit her job a couple of >years ago to fulfill a dream of getting a Ph.D. in neuroscience, but she >is considering going back to work. > >Once there was a time when Mr. Maxham vowed never to leave engineering. >His father was an engineer, and his three grown children are engineers. >But a month ago, Mr. Maxham's unemployment benefits ran out, and he is >reconsidering. He recently applied to teach physics at a community >college. A friend recently asked him to help install some computers in >cars. He is open to anything because he really needs the money. > >"It's frustrating," says Mr. Maxham, who in his 30 years as an engineer >earned seven patents. An eighth just arrived in the mail last week. "I >just enjoyed being an engineer so much. I was born like that and I passed >it along to my children. ... But maybe I will become a teacher, just like >my dad did in the Depression." > >Write to Rebecca Blumenstein at [EMAIL PROTECTED] > >Hyperlinks in this Article: >(1) mailto:[EMAIL PROTECTED] >(2) ><http://online.wsj.com/article/0,,SB1029102020679872395,00.html>http://online.wsj.com/article/0,,SB1029102020679872395,00.html >(3) ><http://online.wsj.com/article/0,,SB10281640071014240,00.html>http://online.wsj.com/article/0,,SB10281640071014240,00.html >(4) ><http://online.wsj.com/article/0,,SB1015984276246327360,00.html>http://online.wsj.com/article/0,,SB1015984276246327360,00.html