The glut of fiber-optic networks is good for users, bad for telcos.
Thirty cents a minute. That's how much it cost me to call home when I was in college about 20 years ago. That was for a 400-mile domestic call. Overseas calls were obviously much more expensive. And I learned just how expensive they were when I kindly let the grad student next door use my telephone (his was on the blink) to ring up Tokyo. He started the call at 11:53 pm and ended it at midnight exactly. Unfortunately, AT&T's recording and billing software systems recognized 12:00 am as the start and the end of different days. So I got billed not for 7 minutes, but for 24 hours and 7 minutes - at $2.42 a minute, for a total of $3,501.74. (When I went to straighten it out, I was treated to a rare sight: an entire telephone billing office convulsing with laughter.)
Today, if I actually want to make a 1,447-minute phone call to Tokyo, it will run me $92.61 - or just 6.4 cents a minute. Turns out the cost of calling Tokyo has halved roughly every four years for the past two decades. Likewise, the price of dialing long distance within the US has also plummeted. Now it's not hard to get a rate of 3.9 cents a minute, which is nearly eight times less than in my college days.
Why the mammoth fall in telecommunications prices? Part of the answer is what you'd expect: computers, switches, and fiber optics. The unexpected part: irrational exuberance, overbuilding, and excess supply.
In the late 1990s, WorldCom reported enormous profits. The company and others forecast huge demand for telecom services, demand that they projected would grow at extraordinary rates. WorldCom's numbers were rigged; competitors' forecasts were overly optimistic. WorldCom kept on investing, adding credibility to its overstated profit numbers. Competitors saw WorldCom's apparent success as evidence that business prospects were very bright, and this encouraged them to take on more debt and continue to invest in infrastructure.
Meanwhile, telecom software improved much faster than most thought possible. Also, fiber-optic cables and network switches became capable of traffic loads that could only have been imagined a decade earlier. The result: enormous overbuilding. Blaik Kirby, of consulting firm Adventis, estimates that $70 billion in excess equipment was installed from 1996 to 2001, equal to perhaps one-quarter of all investment in US telecom during that period.
Whenever things are in excess supply, it is horrible for producers. Workers get fired. Stock prices plummet. The producers themselves go bankrupt, erasing debt holders' wealth. If they're lucky, the producers emerge from bankruptcy with lower cost structures - they pay less interest on reduced debt. But how do they get rid of all that extra inventory? They cut prices, forcing competitors to do the same and sending them into bankruptcy as well, which starts the cycle anew.
Still, there is a very large silver lining to this. When things are in excess supply, it is wonderful for buyers. What's "destructive competition" for producers is a bargain bonanza for consumers - be they individuals or corporations. That's what happened at the end of the 19th century, when overbuilding US railroads created spectacular bankruptcies and crashes. Amazingly low railroad freight rates and high profits were available to anyone whose business model could capitalize on centralized mass production and nationwide distribution. That's what is happening now as desperate telecom firms slash prices by what could turn out to be an extra 50 percent. For anyone who pays for telecom services, the millions of miles of unused cable laid around cities and across oceans are not a problem – they're an opportunity.
College students wanting to call home (or Tokyo), and entrepreneurs seeking to exploit low-cost communications as part of a business plan, should cheer each time an ailing telco renegotiates its debt or talks to a bankruptcy judge. These are healthy moves. Telecom assets need to be priced to market - and stockholders and bondholders forced to eat their losses - as soon as possible. This not only would end the vicious cycle of bankruptcies faced by slumping carriers, but it would also open access to a world awash in bandwidth.
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