Subject: [NEXTEL-1] Amid telecom ruins, a fortune is buried

From: Marcel <[email-masked]>
Date: Mon, 09 Dec 2002 02:12:50 -0500

Amid telecom ruins, a fortune is buried

12/08/02

JEFFREY KOSSEFF

Oregon experienced one of the most extravagant building booms in its
history during the late '90s. But today the state has little to show for about
$1 billion invested in what was billed at the time as essential
infrastructure.

The money is buried -- most
of it along the Interstate 5
corridor -- in the form of more
than 140,000 miles of
fiber-optic cable. At most, 5
percent of the fiber is being
used.

Forget dot-coms. The truly
excessive overinvestment of
the technology boom was in
the Internet's pipeline, the
hair-thin strands of glass that
snake across the state and
nation, carrying pulses of light
that translate into huge
volumes of e-mail messages,
Web pages and online video.

Dozens of companies invested billions in fiber-optic networks. As it turns
out, one or two would have been more than sufficient to meet consumer
demand.

Many lost in this race to build the information superhighway. Of the 33
companies that laid fiber in Portland, 14 have filed bankruptcy, and their
investors are unlikely to ever earn any of their money back.
Telecommunications stocks nationwide are worth about $1 trillion less
than their peak valuation in early 2000. And thousands of Oregon telecom
employees saw their high-paying jobs vanish.

"It was very much like the gold rush," said John Walker, an economic
historian at Portland State University. "For any one of them, it makes
sense to build the fiber. For all of them to build separate fiber, it doesn't."

The jobs and money are gone, but the high-tech fiber remains.

Ten long-distance fiber-optic routes, totaling more than 4,000 miles, run
through the state, usually with two or more companies each stringing
dozens of strands of fiber within the same piece of conduit, according to
The Oregonian's review of data from government agencies and telecom
companies.

Even applying conservative estimates to costs of construction, the
companies spent more than $570 million laying long-distance fiber cables
across Oregon, and they shelled out at least $265 million more equipping
the 5 percent of fiber that is used. Then they spent more than $170 million
more digging up Portland streets to connect mainly downtown
businesses.

If they need the remaining 95 percent of the fiber in the future, companies
will have to spend tens of billions of dollars more to make it usable by
placing lasers and amplifiers on the route.

It's the financial equivalent of building 10 Fox Towers, one next to another,
only to be surprised by a 95 percent vacancy rate.

"You feel everybody involved either knew or should have known the
spectacular risks that were taken," said Reed Hundt, chairman of the
Federal Communications Commission from 1993 to 1997 and now a
senior adviser at the high-profile business consulting firm McKinsey & Co.

The fiber-optic building boom took place nationwide, but it was particularly
frenzied in Oregon, the most direct path to run fiber between two high-tech
meccas -- Silicon Valley and Seattle. And telecom carriers also use
Oregon to connect their U.S. networks to undersea cable from Asia.

The shakeout from these disastrous investments partially explains
Oregon's deep economic problems. Not only did the fiber carriers slash
thousands of jobs in the state, but thousands more were cut at the area's
numerous equipment makers such as Tektronix and now-defunct Oresis
Communications.

Economic historians say that while the amount of money invested and
lost in fiber is staggering, such reckless spending is not unprecedented.
Canals, railroads and telegraphs all sparked similar investment rushes in
their technological infancy.

And the overindulgent spending did create a reward for consumers -- at
least those in metropolitan areas. The cost of transporting data has
plunged, as the supply has far outpaced demand.

But two questions linger. How did it happen? And was the money wasted
or will the fiber-optic lines eventually be used?

Deregulation opens door The door opened to the telecom boom in 1996.
The federal government deregulated the telecom industry, making it
possible for any new company to lay fiber across the nation and compete
against the giants, such as AT&T and the Baby Bell local phone
monopolies.

Like teenagers who throw wild parties when their parents go out of town
for the weekend, telecom companies and their investors put on their
dancing shoes as soon as the regulators went away.

"The only regulation was the free market," said David Leatherwood, who
built Enron Broadband's portion of the $150 million FTV network, which
runs through Oregon on its way to Boise, and now is president of
Intelepoint, a Portland telecom consulting firm.

At the time, research firms -- which often counted telecom companies as
their top clients -- predicted Internet traffic would double every few months.

Stock analysts such as Jack Grubman, the former Salomon Smith
Barney analyst, were bullish on telecom stocks while they were involved
with the companies' business deals. (Congress and stock exchanges are
now investigating Grubman for possible conflicts of interest.)

Some telecom companies, including now-bankrupt WorldCom, misled
investors as to how much of their networks were being used.

Investors saw a brilliantly lit future. They poured billions of dollars into new
and established companies. Level 3 Communications and Qwest
Communications International, both of Colorado, emerged and built fiber
along railroad tracks. The Williams Cos., a Tulsa, Okla., energy
conglomerate, strung cable along gas pipelines. And the established
companies -- AT&T, MCI-WorldCom and Sprint -- continued to expand.

"This was the most deregulated, competitive story we've ever seen literally
since the railroads," Hundt said.

The fiber glut looks like ridiculous oversupply now. But the companies that
buried all that cable weren't seen as foolhardy at the time. Quite the
opposite. Wall Street rewarded them. In 1999 and 2000, shares of most
companies with large fiber networks, such as Level 3 and Qwest, soared
despite weak balance sheets and income statements.

The companies all rode the market on the belief that the Internet would
rapidly become not just another form of communication, but a way of life.

"The hope was all these e-commerce models would take over and there
would be massive downloading of video and music on the consumer side,"
said Glen Macdonald, vice president of Adventis, a Connecticut telecom
research firm. "Everyone would be buying everything online instead of
going to stores to shop."

Even the government got into the act. The Bonneville Power
Administration spent $50 million building a fiber network in Oregon, which
it leases to telecom carriers and rural public utility districts. And the state
of Oregon deregulated Qwest's profits in the state to help persuade the
company to invest $120 million in the state, including $70 million worth of
long-haul fiber and other network upgrades in rural areas.

Demand falls short According to Telegeography, a Washington, D.C.,
research firm, the long-haul networks that run through Oregon can carry
1,148 terabits of data per second -- enough bandwidth to run about 15
always-on, high-speed Internet connections for every person in the United
States.

The demand for Internet-supplied information has not proven that great.
Although Internet use has increased, it hasn't doubled every few months.
And most of the use has occurred not with high-speed cable modems but
with dial-up connections, which gobble up less bandwidth.

Adventis estimates that telecom companies nationwide spent $70 billion
too much on long-haul networks.

Ironically, the success of telecom technology research has contributed to
the glut.

A process called dense wavelength division multiplexing enables
companies to cram more data onto a single fiber.

On fiber-optic lines, voice and data travel over lightwaves. Every time a
carrier is able to add another color to the spectrum, it adds another
channel, capable of handling the equivalent of 32,000 phone calls at once.
Some of AT&T's fibers carry traffic on 160 colors, spokesman Dave
Johnson said.

So it's not surprising that, according to Telegeography, less than 2
percent of the state's long-haul fiber is lit, and the remainder is dark,
waiting for companies to spend billions more equipping it with amplifiers
and other technology that enables it to carry data. The companies that
use the fiber and some other experts estimate slightly higher use --
maybe 5 percent at most. Today's loss, tomorrow's gain? Investors have a
long history of investing in hot, unregulated technologies until there is a
glut. And that history tells us that investors' losses may eventually
become society's gain.

In the early 19th century, U.S. businesses built canals throughout the
East to cut costs of delivering coal, said Mark Clark, associate professor
of history at the Oregon Institute of Technology.

"If you wanted to build a canal, people were more than willing," he said.
"They said, 'If canals were a good idea, let's keep building them.' "

Toward the end of the century, companies invested in yet another hot new
form of transportation -- trains, which Hundt said closely parallel the fiber
boom because of the huge number of builders and large investment.

And fiber's earliest ancestor, the telegraph, also spawned tremendous
excess investment, said Walker, the Portland State professor. After a
telegraph line between Washington, D.C., and Baltimore received
attention, cities across the nation built lines, even though they were rarely
used, he said.

In all three cases, the short-term result was lost money, consolidation and
economic pain.

The collapse of the canal industry rocked the economy, Clark said. Even
state governments suffered from their canal investments.

"You got this craze, and they built too much," he said. "The shakeout led
to one of the first major recessions."

Once the railroads were built, their owners couldn't make enough money
to survive.

"More than half of all the railroad mileage in the 1870s was in bankruptcy,"
Hundt noted.

Many telegraph lines sat idle, because, as with fiber-optic lines, many
companies built along the same route.

But under each of these disastrous investments is a bright spot.

Although many of the canals were never completed, some, such as the
Erie, eased transportation for years to come. The remaining railroad giants
bought up the assets of those that failed and became an economic force.
Western Union amassed telegraph lines and became a long-standing,
successful monopoly.

Despite the investor casualties of the free market, Walker thinks it's the
only way for new technologies to develop.

"It is a part of how market systems work," Walker said. "When you have
one of these discontinuous leaps in technology, you get one of these gold
rush reactions. In some short-run sense it's wasteful, but doing things this
way is better than central planning." Treasure awaits discovery Benefits of
the telecom boom have begun to show in the form of lower prices, but it's
still unclear whether all the fiber will ever be used.

Bandwidth prices have plunged to where it costs 10 percent or 20 percent
of what it once did to carry data. For businesses especially, that has
resulted in huge savings.

The survivors, Hundt said, are buying up fiber assets at low prices, and
they'll be ready to meet any demand for bandwidth for centuries to come.

"It's not a good story for investors," Hundt said, "but it's a great story for
the rest of the economy."

Of course, that will require tens of billions of dollars more in investments
to equip the fiber with lasers, amplifiers and other gadgets that carry
bursts of light along the narrow glass strands.

About 85 percent of the cost of building a fiber network comes from
lighting it, said Kevin Dennehy, vice president of networks at
Montana-based Touch America, which has fiber on the FTV route and is
considering bankruptcy.

"We'll be doing additional lighting as business demand dictates," Dennehy
said.

But in much of Oregon, it's difficult to take advantage of the long-haul fiber,
because local connections are either unavailable or too expensive.

Outside of the Portland, Salem and Eugene areas, it's rare to find much
competition for local broadband connections, creating high monopoly
pricing that reduces the number of services sold.

"In many communities, the connections aren't there," said John Irwin,
chairman of the Oregon Telecommunications Coordinating Council, which
has proposed legislation to increase broadband availability in rural parts of
the state. "In other communities it's there, but it's so expensive that
businesses and consumers can't afford it."

Another problem is that many homes and businesses don't have access
to high-speed Internet connections, because phone companies have not
yet upgraded many of their local networks.

"You've got all these superhighways out there, but you've got dirt roads
leading up to them," said Jere Retzer, executive director of Northwest
Access Exchange, a consortium that connects university and corporate
networks in Portland.

"There would have been good business models and potential for
profitability if there were access out to the homes and small businesses."

Jeffrey Kosseff: 503-294-7605; [email-masked]

http://www.oregonlive.com/news/oregonian/index.ssf?/xml/story.ssf/html_standard.xsl?/base/business/1039179342248063.xml

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News

Amid telecom ruins, a fortune is buried

12/08/02

JEFFREY KOSSEFF

Oregon experienced one of the most extravagant building booms in its history during the late '90s. But today the state has little to show for about $1 billion invested in what was billed at the time as essential infrastructure.

The money is buried -- most of it along the Interstate 5 corridor -- in the form of more than 140,000 miles of fiber-optic cable. At most, 5 percent of the fiber is being used.

Forget dot-coms. The truly excessive overinvestment of the technology boom was in the Internet's pipeline, the hair-thin strands of glass that snake across the state and nation, carrying pulses of light that translate into huge volumes of e-mail messages, Web pages and online video.

Dozens of companies invested billions in fiber-optic networks. As it turns out, one or two would have been more than sufficient to meet consumer demand.

Many lost in this race to build the information superhighway. Of the 33 companies that laid fiber in Portland, 14 have filed bankruptcy, and their investors are unlikely to ever earn any of their money back. Telecommunications stocks nationwide are worth about $1 trillion less than their peak valuation in early 2000. And thousands of Oregon telecom employees saw their high-paying jobs vanish.

"It was very much like the gold rush," said John Walker, an economic historian at Portland State University. "For any one of them, it makes sense to build the fiber. For all of them to build separate fiber, it doesn't."

The jobs and money are gone, but the high-tech fiber remains.

Ten long-distance fiber-optic routes, totaling more than 4,000 miles, run through the state, usually with two or more companies each stringing dozens of strands of fiber within the same piece of conduit, according to The Oregonian's review of data from government agencies and telecom companies.

Even applying conservative estimates to costs of construction, the companies spent more than $570 million laying long-distance fiber cables across Oregon, and they shelled out at least $265 million more equipping the 5 percent of fiber that is used. Then they spent more than $170 million more digging up Portland streets to connect mainly downtown businesses.

If they need the remaining 95 percent of the fiber in the future, companies will have to spend tens of billions of dollars more to make it usable by placing lasers and amplifiers on the route.

It's the financial equivalent of building 10 Fox Towers, one next to another, only to be surprised by a 95 percent vacancy rate.

"You feel everybody involved either knew or should have known the spectacular risks that were taken," said Reed Hundt, chairman of the Federal Communications Commission from 1993 to 1997 and now a senior adviser at the high-profile business consulting firm McKinsey & Co.

The fiber-optic building boom took place nationwide, but it was particularly frenzied in Oregon, the most direct path to run fiber between two high-tech meccas -- Silicon Valley and Seattle. And telecom carriers also use Oregon to connect their U.S. networks to undersea cable from Asia.

The shakeout from these disastrous investments partially explains Oregon's deep economic problems. Not only did the fiber carriers slash thousands of jobs in the state, but thousands more were cut at the area's numerous equipment makers such as Tektronix and now-defunct Oresis Communications.

Economic historians say that while the amount of money invested and lost in fiber is staggering, such reckless spending is not unprecedented. Canals, railroads and telegraphs all sparked similar investment rushes in their technological infancy.

And the overindulgent spending did create a reward for consumers -- at least those in metropolitan areas. The cost of transporting data has plunged, as the supply has far outpaced demand.

But two questions linger. How did it happen? And was the money wasted or will the fiber-optic lines eventually be used?

Deregulation opens door The door opened to the telecom boom in 1996. The federal government deregulated the telecom industry, making it possible for any new company to lay fiber across the nation and compete against the giants, such as AT&T and the Baby Bell local phone monopolies.

Like teenagers who throw wild parties when their parents go out of town for the weekend, telecom companies and their investors put on their dancing shoes as soon as the regulators went away.

"The only regulation was the free market," said David Leatherwood, who built Enron Broadband's portion of the $150 million FTV network, which runs through Oregon on its way to Boise, and now is president of Intelepoint, a Portland telecom consulting firm.

At the time, research firms -- which often counted telecom companies as their top clients -- predicted Internet traffic would double every few months.

Stock analysts such as Jack Grubman, the former Salomon Smith Barney analyst, were bullish on telecom stocks while they were involved with the companies' business deals. (Congress and stock exchanges are now investigating Grubman for possible conflicts of interest.)

Some telecom companies, including now-bankrupt WorldCom, misled investors as to how much of their networks were being used.

Investors saw a brilliantly lit future. They poured billions of dollars into new and established companies. Level 3 Communications and Qwest Communications International, both of Colorado, emerged and built fiber along railroad tracks. The Williams Cos., a Tulsa, Okla., energy conglomerate, strung cable along gas pipelines. And the established companies -- AT&T, MCI-WorldCom and Sprint -- continued to expand.

"This was the most deregulated, competitive story we've ever seen literally since the railroads," Hundt said.

The fiber glut looks like ridiculous oversupply now. But the companies that buried all that cable weren't seen as foolhardy at the time. Quite the opposite. Wall Street rewarded them. In 1999 and 2000, shares of most companies with large fiber networks, such as Level 3 and Qwest, soared despite weak balance sheets and income statements.

The companies all rode the market on the belief that the Internet would rapidly become not just another form of communication, but a way of life.

"The hope was all these e-commerce models would take over and there would be massive downloading of video and music on the consumer side," said Glen Macdonald, vice president of Adventis, a Connecticut telecom research firm. "Everyone would be buying everything online instead of going to stores to shop."

Even the government got into the act. The Bonneville Power Administration spent $50 million building a fiber network in Oregon, which it leases to telecom carriers and rural public utility districts. And the state of Oregon deregulated Qwest's profits in the state to help persuade the company to invest $120 million in the state, including $70 million worth of long-haul fiber and other network upgrades in rural areas.

Demand falls short According to Telegeography, a Washington, D.C., research firm, the long-haul networks that run through Oregon can carry 1,148 terabits of data per second -- enough bandwidth to run about 15 always-on, high-speed Internet connections for every person in the United States.

The demand for Internet-supplied information has not proven that great. Although Internet use has increased, it hasn't doubled every few months. And most of the use has occurred not with high-speed cable modems but with dial-up connections, which gobble up less bandwidth.

Adventis estimates that telecom companies nationwide spent $70 billion too much on long-haul networks.

Ironically, the success of telecom technology research has contributed to the glut.

A process called dense wavelength division multiplexing enables companies to cram more data onto a single fiber.

On fiber-optic lines, voice and data travel over lightwaves. Every time a carrier is able to add another color to the spectrum, it adds another channel, capable of handling the equivalent of 32,000 phone calls at once. Some of AT&T's fibers carry traffic on 160 colors, spokesman Dave Johnson said.

So it's not surprising that, according to Telegeography, less than 2 percent of the state's long-haul fiber is lit, and the remainder is dark, waiting for companies to spend billions more equipping it with amplifiers and other technology that enables it to carry data. The companies that use the fiber and some other experts estimate slightly higher use -- maybe 5 percent at most. Today's loss, tomorrow's gain? Investors have a long history of investing in hot, unregulated technologies until there is a glut. And that history tells us that investors' losses may eventually become society's gain.

In the early 19th century, U.S. businesses built canals throughout the East to cut costs of delivering coal, said Mark Clark, associate professor of history at the Oregon Institute of Technology.

"If you wanted to build a canal, people were more than willing," he said. "They said, 'If canals were a good idea, let's keep building them.' "

Toward the end of the century, companies invested in yet another hot new form of transportation -- trains, which Hundt said closely parallel the fiber boom because of the huge number of builders and large investment.

And fiber's earliest ancestor, the telegraph, also spawned tremendous excess investment, said Walker, the Portland State professor. After a telegraph line between Washington, D.C., and Baltimore received attention, cities across the nation built lines, even though they were rarely used, he said.

In all three cases, the short-term result was lost money, consolidation and economic pain.

The collapse of the canal industry rocked the economy, Clark said. Even state governments suffered from their canal investments.

"You got this craze, and they built too much," he said. "The shakeout led to one of the first major recessions."

Once the railroads were built, their owners couldn't make enough money to survive.

"More than half of all the railroad mileage in the 1870s was in bankruptcy," Hundt noted.

Many telegraph lines sat idle, because, as with fiber-optic lines, many companies built along the same route.

But under each of these disastrous investments is a bright spot.

Although many of the canals were never completed, some, such as the Erie, eased transportation for years to come. The remaining railroad giants bought up the assets of those that failed and became an economic force. Western Union amassed telegraph lines and became a long-standing, successful monopoly.

Despite the investor casualties of the free market, Walker thinks it's the only way for new technologies to develop.

"It is a part of how market systems work," Walker said. "When you have one of these discontinuous leaps in technology, you get one of these gold rush reactions. In some short-run sense it's wasteful, but doing things this way is better than central planning." Treasure awaits discovery Benefits of the telecom boom have begun to show in the form of lower prices, but it's still unclear whether all the fiber will ever be used.

Bandwidth prices have plunged to where it costs 10 percent or 20 percent of what it once did to carry data. For businesses especially, that has resulted in huge savings.

The survivors, Hundt said, are buying up fiber assets at low prices, and they'll be ready to meet any demand for bandwidth for centuries to come.

"It's not a good story for investors," Hundt said, "but it's a great story for the rest of the economy."

Of course, that will require tens of billions of dollars more in investments to equip the fiber with lasers, amplifiers and other gadgets that carry bursts of light along the narrow glass strands.

About 85 percent of the cost of building a fiber network comes from lighting it, said Kevin Dennehy, vice president of networks at Montana-based Touch America, which has fiber on the FTV route and is considering bankruptcy.

"We'll be doing additional lighting as business demand dictates," Dennehy said.

But in much of Oregon, it's difficult to take advantage of the long-haul fiber, because local connections are either unavailable or too expensive.

Outside of the Portland, Salem and Eugene areas, it's rare to find much competition for local broadband connections, creating high monopoly pricing that reduces the number of services sold.

"In many communities, the connections aren't there," said John Irwin, chairman of the Oregon Telecommunications Coordinating Council, which has proposed legislation to increase broadband availability in rural parts of the state. "In other communities it's there, but it's so expensive that businesses and consumers can't afford it."

Another problem is that many homes and businesses don't have access to high-speed Internet connections, because phone companies have not yet upgraded many of their local networks.

"You've got all these superhighways out there, but you've got dirt roads leading up to them," said Jere Retzer, executive director of Northwest Access Exchange, a consortium that connects university and corporate networks in Portland.

"There would have been good business models and potential for profitability if there were access out to the homes and small businesses."

Jeffrey Kosseff: 503-294-7605; [email-masked]

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