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Broadbandits

Broadbandits

Om Malik
2003
T3 334 pages · about 5h 34m to read Open Librarygoodreads

The telecom capex bubble, with Ebbers and WorldCom at its centre.

Summary

Malik, a technology journalist, covers the telecommunications bubble of the late 1990s and its collapse, which destroyed several hundred billion dollars of capital and produced the largest bankruptcies of the period.

The central mechanism was a supply forecast that was wrong by orders of magnitude. The industry operated on a claim, repeated by executives and by government officials, that internet traffic was doubling every three months. That figure originated with WorldCom and was never verified. Actual traffic growth was substantial but far lower. On the strength of the forecast, carriers including Global Crossing, Level 3, Qwest, WorldCom and dozens of others raised enormous debt and laid fibre optic capacity across oceans and continents, most of which was never lit.

Malik covers the accounting that sustained it, particularly the capacity swap transactions in which carriers sold each other equivalent amounts of capacity and each booked the sale as revenue while capitalising the purchase, which inflated reported growth across the industry simultaneously. He covers the individual executives, the banking relationships, the analyst conflicts and the specific frauds that produced criminal convictions.

The book is contemporaneous journalism written shortly after the collapse and it is angry. It is not a technical account of the industry and the reference has not verified all its specific figures. Its value is as a documented case of an entire industry raising and destroying capital on a single unverified statistic, and of the accounting technique that made the resulting revenue growth appear real.

Key takeaways 7

  1. The industry's capital allocation rested on a claim that internet traffic was doubling every three months, which originated with WorldCom and was never verified.
  2. Actual traffic growth was substantial but far below the figure that justified the capacity built, and most fibre laid was never lit.
  3. Capacity swap transactions, in which carriers sold each other equivalent capacity and each booked revenue while capitalising the purchase, inflated reported growth industry-wide.
  4. An entire industry can raise and destroy capital on a single unverified statistic when no participant has an incentive to check it.
  5. Debt-financed infrastructure build-out is catastrophic when demand disappoints, because the fixed obligation remains while the revenue does not.
  6. Analysts and banks that earned fees from the financings supplied the research that justified them.
  7. The capacity built was eventually used, which means the physical investment was not wasted even though the capital that funded it was destroyed.

Who should read it

Investors in infrastructure and capital-intensive technology who want a documented case of industry-wide capital destruction from a single unchecked forecast.

Who recommended it 1 · 1 direct

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Lisa Endlich · 2004

How Lucent went from industry leader to junk credit rating in two years.

George Gilder · 2000

Bandwidth-abundance thesis; useful as a period document of the bubble.

Jon Gertner · 2012

How Bell Labs turned research into the transistor, the laser and information theory.

Tim Wu · 2010

Every US information industry moved from an open era to control by one firm.

Recommended by: Patrick Collison, Andrew Chen

Lynne W. Jeter · 2003

How deceit and betrayal inside WorldCom brought down a one-time telecom giant.

Cynthia Cooper · 2007

How WorldCom's internal audit chief uncovered its accounting fraud.

Where it sits in the reference 2

Companies
Industries

Topics

Company HistoriesTechnology and ComputingTech strategy and platform economics