This Ought To Be A Glorious Moment For The Telecommunications Industry

By Author: sadas
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This ought to be a glorious moment for the telecommunications industry. Around the world, people are spending record amounts of money to use its networks to talk and e-mail and exchange immense amounts of information. The pace of technological innovation is positively breathtaking. Trillions of dollars have been invested in its growth. Instead, the industry is in the midst of a financial meltdown. It has become a significant factor holding back the economic recovery, not just in the United States but also globally. The stock market's current funk stems in significant part from concern over telecom stocks, which drove the late 1990s rally but since their peak have generated paper losses of more than $ 1 trillion, by some estimates.
In the boom years, there seemed no limit to telecom's prospects. Success bred success, confidence led to more confidence, growth produced growth. Now the same feeding-on-itself dynamic is at work in reverse, dragging with it not only weak companies but the strong as well. The problem traces its origins back to Wall Street, where lenders and investors, eager to get in on the next Microsoft, simply ...
... provided too much money to too many companies to build too many competing networks. What few realized, however, was that with so many companies following roughly the same strategy, it was unlikely that all that capacity would be needed or that any one company would achieve the critical mass necessary to survive and prosper.
In desperation, companies began to try to "buy" market share by cutting prices-unlimited minutes for $ 39.99 a month, free phones, no roaming charges, long-distance priced the same as local. In time, however, everyone was forced to do it, creating a price war that eventually left many companies with barely enough revenue to pay operating expenses, let alone interest on their huge mounds of debt. According to industry executives and analysts, things are likely to get worse before they get better. As more companies "restructure" their finances under the bankruptcy process, they will be able to reenter the competition with their balance sheets wiped clean of most of their debts, allowing them to offer even lower prices than competitors still trying to make their interest payments. To remain competitive, the non-bankrupt companies will have to match the lower prices, putting them on the path to bankruptcy.
Telecom wouldn't be the first to go through such a boom-and-bust cycle. During the railroad boom of the late 1880s, so much money was invested building so many parallel tracks — or tracks to places that would never support profitable service — that the entire industry went bankrupt. Much the same story is told of the airline industry, which because of so many losing years has yet to turn a net profit.