The telecommunications sector is in the doldrums, alarming some analysts and those investors who put major portions of their net worth into firms such as 3-Com, Worldcom, ADC Telecommunications, Sprint and even AT&T.
The good news is that a severe downturn of this type is common in sectors booming with new technology. The national economy will survive unscathed, and the long-term impact of cellular and fiber optic technology will be to improve productivity and total output.
The bad news is that history tells us some firms will go bust and some investors will lose their shirts. The decline in the sector has been precipitous.
In 1999, the last year I worked in Minneapolis, fiber optic installation crews seemed to fill downtown Minneapolis. Every street apparently had someone sawing slits in the pavement or operating directional boring machines. Construction crew pickups had license plates from as far away as Texas and Oregon.
Last summer, whenever I ventured onto I-94 near my home, I saw a major project installing multiple sets of flexible conduit for fiber optics. One shoulder of the interstate was torn up from downtown St. Paul west into Minneapolis as crews worked double shifts to get the plastic tubing in the ground.
All this activity was an indication that new-generation telecommunications — largely based on cellular technology or fiber optics rather than copper wire and largely carrying Internet or other data traffic rather than conversations — was a booming sector of the new economy.
Locally based ADC Telecommunications was riding the boom.
When Alan Greenspan came to address a sellout crowd in Minneapolis in early 1999, ADC chief executive William Cadogan was chosen to introduce him. ADC stock was on a long run, hitting the after-split equivalent of $44 a share in June of 2000. Today ADC is off 87 percent from its high less than two years ago.
The I-94 project, not yet complete, lies moribund. Light-rail construction is tying up Minneapolis traffic, but fiber optic crews are scarce. Qwest announced first-quarter losses of nearly $700 million. Nortel and Lucent, two hardware manufacturers, have laid off 100,000 workers between them. Ericsson and Motorola reportedly will fire another 80,000.
Anyone looking at the sector is moved to ask, “What happened?” The answer is that telecommunications is going through the cyclical downturn that affects nearly every sector that booms because of new technology.
Take railroads, as a historical example.
The basic steam locomotive came out in 1897. Working railroads were not established until 1823 in England and 1827 in the United States. By 1840 there were 2,800 miles of track in the United States. This increased to 9,000 miles by 1850, 30,000 miles by 1860, and hit a peak of 254,000 miles in 1916.
That recitation of spectacular growth over decades conceals thousands of bankruptcies, failed dreams, venal financial scams and ruined stockholders, particularly between 1840 and 1860, when the technology was new and the boom was most intense.
The overall sector grew strongly and the new technology increased output and standards of living, but the road was bumpy. Why does long-term growth and success often include sharp short-term reverses? The answer is that good decision-making depends on good information, and good information is particularly scarce when new technology opens possibilities that no one had even thought of only a few years before.
Inevitably, some will make errors in judgment. Inevitably, in the heady enthusiasm of irrational exuberance about the new technology, too many firms will embark on installing too much capacity. Capacity overshoots demand, particularly when the underlying economy hiccups, and firms that were overly optimistic in projecting revenues bite the dust.
This clearly happened in fiber optic and cellular infrastructure. Usage is still being defined. Two or three years ago, no one anticipated how popular text messaging, still more important in Europe than here, would become. But many firms went deep into debt to finance third-generation hardware or secure licenses.
The red ink will flow for quite some time in telecommunications. More firms will go broke. Some may be large and famous. Individuals and institutions, such as pension or mutual funds, will have to write off parts of portfolios.
But in the longer term, the sector will grow and thrive. Our children already take for granted things that seem miraculous to us.
History will record the opening decades of the 21st century as ones of great transformations wrought by communications technology.
But some of us will have stock certificates useful only for papering the guest bathroom.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.