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Book Review: The Great Telecom Meltdown

TELECOM Digest Editor (
Fri, 01 Apr 2005 09:25:45 -0500

Author: Fred R. Goldstein
Publisher: Artech House, Boston
ISBN: 1-58053-939-4

Fred Goldstein, a long time participant in TELECOM Digest has recently
written a new book on the state of affairs in telephony. The book is
entitled, 'The Great Telecom Meltdown'. Published by Artech House,
this 200 page book describes, in sometimes vivid detail, exactly
what went wrong in the telecom industry, particularly in the past
decade. Although Fred does touch on the earlier history of the Bell
System, beginning in 1876 and continuing through and beyond the
divestiture in 1982, the book's major emphasis is on the time frame
of the 1990's through the present.

In today's telecom business environment, you have to have a good grasp
of _what went wrong_ and caused the failure of so many telecom firms
between 2000 and 2002 if you now expect to succeed. Some of the
topics covered in this book include:

Chapter 1: Ma Bell and her Natural Monopoly, 1876-1969.
Chapter 2: The Rebirth of Competition.
Chapter 3: Divestiture: Equal Access and Chinese Walls.
Chapter 4: The Internet Boom and the Limits to Growth.
Chapter 5: The Deutoronomy Networks.
Chapter 6: Losing by Winning: Wireless License Auctions.
Chapter 7: Competitive Access Providers, A Costly Way to Local Competition.
Chapter 8: DLECS and ELECS: An Exercise in Oversupply.
Chapter 9: CLECS Winning Strategies are Met by Rule Changes.
Chapter 10: Focusing on the Bottom Line.
and subchapters here are: Asset Valuation is Risky.
Accounting was Scandalous.
WorldCom and the Limits to Mergers.
AT&T Acted in Good Faith on Worldcoms Numbers.
Global Double Crossing.
New Services Need to Fit into the Food Chain.
Old Dinasaurs Die Hard.

Fred speaks in a rather blunt way and explains what has gone wrong
with the telecom industry, especially in the past few years. Fred and
I have been on radio 'talk shows' together in years past, so I had
some correspondence with him in email recently and asked him a few
questions which are covered below:

PAT: What were the most important legal or regulatory changes that led
to the meltdown?

Fred: The Meltdown happened because several bubbles burst at once. The
telecommunications industry isn't one thing, it's really several sectors.
They all benefited from the late 1990s boom, and they all melted down
together. A lot of people have assumed that the Telecom Act of 1996 was
the main culprit. But that turns out to have played a minor role. Two
things really had more to do with it. First off, the 1984 AT&T divestiture
created a fully competitive long distance sector, which enabled anyone to
string fiber. Second, the Internet was opened to the public in 1992 and
privatized. That created a huge demand for bandwidth, which got people
interested in stringing more fiber. By 1998, supply was starting to
overwhelm demand. This led to cheaper long distance calling rates, which
killed the industry's cash cow.

PAT: How were so many investors, entrepreneurs, and even economic
journalists led so far astray?

Fred: Capitalism feeds on greed and foolishness. The stock market was
booming, investors were looking for places to put their money, and
entrepreneurs were willing to take it. People were looking for
excuses to jump onto the bandwagon. Some industry analysts even drank
the flav'r'ade by believing the story that the Internet was doubling
every hundred days. That one factoid helped justify billions of
dollars of investment. Yet it was not based in reality. It came from
a Worldcom UUNET salesman's "best case scenario", what would happen
*if* the Internet were doubling every hundred days. But it got retold
and retold until the 1998 Worldcom annual report stated it as fact. Of
course we now know that Worldcom's reports could be an exercise in
creative writing.

PAT: Was the meltdown a surprise? What are the warning signs of a new

Fred: No, it wasn't really a surprise at all, because too much money
was being spent irrationally. Equipment vendors and network operators
were gearing up to handle increasing demand for dial-up ISP
connections, just as the big users were starting to shift to
broadband. Venture capital-fed DSL operators were lining up next to
each other in crowded telco central offices, putting in several times
as much equipment as the local market could possibly support.
Competitive access providers were trenching fiber atop each other down
the same "NFL city" streets. And the big European operators formed a
round firing squad when they overbid in the 2000 UK and Germany "3G"
license auctions.

PAT: What public telecom policies would be best for consumers and

Fred: Policies need to encourage competition where it is economically
sustainable, while regulating monopolies to prevent them from abusing
their customers. The current FCC gets it entirely wrong, emphasizing
the private-property nature of the telephone company's wire plant, and
is moving to allow the incumbent telephone companies to take control
of Internet service and even content that traverses "their" wire. The
FCC then encourages competitors to string their own parallel
facilities. This is entirely wrong, as the history of the past decade
shows that overbuilding is rarely profitable. The only winners were
the early investors who sold out to greater fools.

The outside plant is a natural monopoly, a public utility, that should be
available on a cost-based nondiscriminatory basis. The FCC's
"hypothetically efficient competitor" policy only works during a boom cycle
like that of 1996-1999, which can never be sustained. Once the local wire
or fiber is properly regulated, innovation can take place over that wire,
making more efficient use of capital and therefore having a reasonable
chance at becoming profitable.

PAT: And how are your sales going on the book? Is the price per copy
seriously $79 per copy?

Fred: Yes, list $79, not that it was my idea -- Artech House does
technical books which tend to have a small audience that is really,
really interested, and can get the company to pay. Textbooks often go
at that price too, since they know the audience has little choice,
once they manage to get the book assigned. If the book does well
enough, maybe I can talk them into a lower price for another printing.

It is moving rather well for Artech, several hundred so far, and its Amazon
number has gone as high as 13,000 or so, before drifting down of course,
which means they've moved a few copies.

PAT: Thanks for talking with me about this.

Fred: And thank you!


You can look on Amazon for 'The Great Telecom Meltdown' or you can
inquire of the publisher, Artech House .

Patrick Townson

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