Net Loss: Internet Profits, Private Profits and the Costs to Community
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by Nathan Newman
September 15, 2001
At the beginning of the 1990s, before most people had even heard the word "Internet", the vision of the imagined "Information Superhighway" was one of high-speed interactive multimedia-- movies on demand, interactive video, instantaneous downloads of music. Cable and phone companies would connect every home with high-speed technology with "broadband" technology to bring this new world into every living room.
After a decade of deregulatory hype, the results could only be described as dismal. Despite all the promises by cable and phone companies, by 2001 only six percent of homes had high-speed Internet access, with phone companies servicing less two percent of homes. This column in the June 15th Progressive Populist noted the hope that new legislation mandating access may provide the solution in coming years, but the economic effects of the mismanaged investments in broadband may be with us for a number of years.
The sad fact is that these dismal results were the product of one of the largest historical capital investments binges in telecommunications in a period when the market capitalization of upstart fiber optic and high-speed telecom firms topped trillions of dollars. Between 1997 and 2001, firms invested over $90 billion in high-speed optical fiber, laying over 100 million miles of fiber or enough to reach the sun. Under the slogan, "If you built it, they will come", investors rushed to support an ever expanding spiral of investment in high-speed bandwidth.
Unfortunately, hundreds of millions of fiber were laid everywhere but to the homes of the consumers who were supposed to use the high-speed Internet services. The chronic underinvestment in local infrastructure remained, making this fiber optic investment essentially useless. By 2001, only 2.6% of fiber capacity was actually in use, much of it destined to remain "dark" forever. As this reality of speculative stupidity sunk into the financial markets, telecom firms suffered some of the most severe crashes of the NASDAQ plunge. One of the most high-flying of the new upstarts, JDS Uniphase, whose market capitalization had topped $200 billion, in July 2001 reported the largest loss in corporate history, $50.6 billion for its fiscal year, as its market value plunged to $11 billion. Of the high-flying fiber firms, only Qwest survived because it had used its pumped up market value to acquire the "old economy" Baby Bell US West which provided the revenues necessary to, if not provide profitability, at least allow Qwest to avoid complete financial hemmoraging.
The failure of private deployment of broadband services was foretold in the failure of local phone competition. Similar promises after the 1996 Telecommunications Bill promises competition and better local phone services. Billions were invested, yet by 2000, out of 191 million phone lines in the country, only 6.4 percent were served by competitive phone companies. And over two-thirds of those lines connected big businesses, since the profit margins for average users were seen as too low to justify investments in that sector. While the 1996 law had required the Baby Bells to lease use of their wires to competitors, few competing companies were interested in doing anything but cherry-picking the higher-profit business customers. A few companies even built their own local phone networks as an alternative to the Bell local infrastructure, but again they were serving almost exclusively downtown urban areas and business customers. According to F.C.C. data, where 17.5 percent of big business had competitive local phone options, only 3.2 percent of residences and smaller business had any competition.
With high-speed Internet access, the problem was there was no existing infrastructure to which other companies could even interconnect. While competitors complain that Bell opposition to competition was the source of slow broadband deployment, it seems unlikely that the Bells would forego their share of the much hyped profits from high-speed deployment merely out of spite. As well, a number of studies have supported the view that it was poor investments by competitors that led to their failures.
There is a historic déjà vu to this process, since over a hundred years ago, speculative private investment in railroads followed a similar pattern. Companies built rail lines between various cities without linking them to downtown railyards. In an echo of the proprietary fight for control of the fiber lines, different companies would use different rail widths, thereby increasing the costs for switching trains between lines. In the 1870s, a massive overbuilding of rail lines led by mid-decade to mass bankruptcies in the rail industry, helping to plunge the whole nation into depression as it recovered from the speculative excesses of the private investors. Unfortunately, we may be repeating that pattern today as the world slips into recession from the glut of speculative technology investments.
Back in 1992, then Vice Presidential candidate Al Gore had suggested that the government should take an active role in building the infrastructure for the proposed Information Superhighway, a position the administration soon backed off from once elected under pressure from corporate lobbyists. Summing up the corporate critique, then Chairman of Ameritech William L. Weiss in 1993 argued, "The government seldom manages anything as well as a private enterprise does. We think we (in private industry) should build it and manage it." It is hard to imagine how the government could have done worse than wasting over $90 billion on unused capacity while delivering services to less than ten percent of the population.
Maybe the 1990s can be a lesson that private industry often doesn't manage public investments as well as the government. Government may make mistakes, but it has rarely built highways while forgetting to build the offramps.
Nathan Newman is a former Project Director at NetAction, a National Vice President of the National Lawyers Guild, and author of the forthcoming book NET LOSS on Internet policy and economic inequality. Email firstname.lastname@example.org or see http://www.nathannewman.org.
Posted by Nathan at September 15, 2001 10:55 AM