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
