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January 18, 2005

The Well Deserved Crash of Worldcom

With the bankruptcy of Worldcom and the indictment of its executives for fraud, we've had many retrospectives like today's NY Times account:

Mr. Ebbers's business demise continues to reverberate well beyond the courtroom. WorldCom - doing business again as MCI, the company's original name - is half its former size and struggling to survive. And whether or not one believes that he masterminded an accounting fraud, there is little doubt that the telecommunications industry, whose 1990's boom Mr. Ebbers help fuel with his deal making, is in a shambles - riddled with heavy debt, sagging stock prices and network overcapacity.
The sad thing is that the media loves to kick such companies when they fall, but before that, during the Internet hype, the media ignored Worldcom's manipulation of the technology world. And largely ignored is how much WorldCom (through its predecessor MCI) were products of government subsidies. As I wrote back in 1998(in my Ph.D. dissertation on the Internet economy):
There was no technological innovation, no business efficiency that made MCI into a multi-billion dollar competitor. That is the major fact to understand about telephone deregulation in the 1970s.

MCI's profits and growth (as well as that of Sprint and other new competitors) came purely from convincing regulators to give them discounted interconnection to the Bell system and allow it to shift resources from ordinary ratepayers into the hands of its business customers in the 1970s...Even as the official policy of the government was to favor investments in local expansion of the phone network, universal access, and low-cost service to rural and poor communities, MCI would use divided regulatory structures and economic confusion to expand its markets at the expense of such investments and universal rates.

The Internet would just continue that government subsidies at the expense of established phone carriers:
What is remarkable is that as the Internet was privatized, all the major companies who would take over running the physical architecture of the Internet would have deep lineages as offspring of government initiatives...MCI was using its involvement in the ANS project to develop its own national backbone Internet service. Having hired Internet Protocol co-developer Vint Cerf to head its data networking division, MCI would takeover much of the traditional university and government Internet service as the NSF ended funding for the NSFNET backbone service.

...a company called UUNET Technologies started life as a spin-off from a Department of Defense funded seismic research facility but be came one of the key backbone providers of national Internet services. After a short alliance with Microsoft, UUNET was bought for $2 billion in 1996 by MFS Communications, which in turn was soon purchased by WorldCom as the core of its Internet service in competing in the global telecommunications battle.

When Worldcom took over MCI, you had the accumulation of formerly government-owned assets privatized into the hands of financial manipulators.

So much for the efficiency of the market over government managing those assets.

Posted by Nathan at January 18, 2005 06:59 AM