IP: Disconnect: How Bush and Michael Powell are killing the New Economy

[David Farber <dave () farber net>]

> From: Dewayne Hendricks <dewayne () warpspeed com>
>
> Disconnect: How Bush and Michael Powell are killing the New Economy.
> And how to turn it around.
>
> By Karen Kornbluh
> <http://www.washingtonmonthly.com/features/2001/0110.kornbluh.html>
>
> On the last Friday in August, President Bush, fresh from his vacation in 
> Texas, was asked by a reporter about his plans to address the frustration 
> so many Americans currently face trying to get high-speed Internet access. 
> The president didn't appear terribly worried. "The technologies are 
> evolving," he said, with equanimity. His only concern was that "the 
> economic slowdown will perhaps slow down some of the progress made, as far 
> as high-speed access." The possibility that the telecom industry's 
> collapse and the sudden scarcity of high-speed access might have been a 
> major cause of the economic slowdown did not seem to have occurred to him.
>
> Weeks later, America suffered a devastating terrorist attack in the heart 
> of New York City's financial district. It's too early to know what the 
> full economic effect of the attack will be. But it's clear that the 
> economy was already in trouble, and that the telecommunications sector was 
> at the heart of the problem. Consider this: The drop in market value among 
> telecommunications service providers and equipment makers accounts for 
> more than 90 percent of the net loss in stock wealth since the spring of 
> last year, according to an in-depth analysis by The Wall Street Journal.
>
> To understand what's really going wrong with the economy, and how he might 
> help turn it around, Bush ought to talk with the folks at Rhythms 
> NetConnections, an Englewood, Colorado, company that provides high-speed, 
> high-capacity, always-on "broadband" Internet connections. Rhythms is one 
> of dozens of firms that sprang to life and helped drive the boom economy 
> of the late 1990s, after Congress had passed the Telecommunications Act of 
> 1996, which sought to replace monopoly regulation of local phone service 
> with the sort of competition that Rhythms and its many contemporaries 
> represented. The telecom bill mandated that the regional monopolies known 
> as the Baby Bells---currently four behemoths: Qwest, SBC, Verizon, and 
> BellSouth---sell access to what industry types have dubbed the "last 
> mile"---literally, the copper wires connecting each business and home to 
> the public network. Rhythms planned to access these wires and increase 
> their network's speed and capacity through Digital Subscriber Line (DSL) 
> technology, giving customers Internet access far superior to the dial-up 
> access most were accustomed to using. In 1999, a year after it began 
> providing service, Rhythms had one of the most successful IPOs in history. 
> It quickly grew to 2,000 employees, expanding its service to 75 markets. 
> Rhythms had customers, growing revenues, a real business plan, 
> and---unlike most dot-coms---a product for which people were eager to pay.
>
> Unfortunately, the company quickly ran into a problem it couldn't control: 
> the Bells. In order to operate its business, Rhythms needed the Bells' 
> cooperation on matters such as letting Rhythms install equipment in the 
> Bell "office"---the local hub of the Internet's vast hub-and-spoke system. 
> But Rhythms, as a Bell "customer," was also a competitor; the Baby Bells 
> had their own, pricier broadband services they wanted to sell to 
> customers. Cooperating with Rhythms, as the telecom act requires, would 
> mean cutting into their own revenues. So, perhaps not surprisingly, 
> customer service wasn't always spectacular. Rhythms says the Bells 
> repeatedly delayed or cancelled appointments to connect 
> customers---costing Rhythms $150 each time it sent a truck to a customer 
> site. Sometimes, Bell service people would wire up a new customer but 
> somehow forget to pass that information on to Rhythms, causing infuriating 
> delays for customers. The Bells also charged through the nose for Rhythms 
> to set up equipment in its local offices. For their part, the Bells claim 
> competitors like Rhythms also made mistakes and broke appointments. "It's 
> a two-way street," insists one Verizon spokesman. Nevertheless, while the 
> Bells are among the most profitable companies in America, their behavior 
> drove up Rhythms' costs and scared off potential customers. In early 
> August, Rhythms filed for bankruptcy and informed its customers it would 
> discontinue all service.
>
> That wasn't bad news just for Rhythms, but for companies across the 
> country that relied on its service. One of them is Technology Service 
> Corporation in Trumbull, Connecticut, a 15-person employee-owned 
> engineering firm that helps governments and large companies install radar 
> and other sensor equipment. TSC uses broadband every day---sending and 
> receiving, for instance, huge data files containing the images of future 
> airports in Canada or Taiwan. Until it installed a $300-a-month DSL 
> connection from Rhythms, TSC did very little international business 
> because shipping reams of technical data overseas was too cumbersome and 
> expensive. Now, 15 percent of TSC's business is international, and 
> operations manager Allan Corbeil doesn't think the company could "do any 
> business without it." Hearing that its broadband company went bust was 
> "like hearing the mail man isn't coming." Corbeil scrambled to find 
> another broadband supplier. But when we spoke in early September, Corbeil 
> was still worried. The new supplier couldn't guarantee that its service 
> would be up and running by the time Rhythms' went dark---and there were 
> troubling signs that even this new company might go out of business.
>
> It's the Phones, Stupid
>
> If cyber-geeks selling their BMWs were the most visible sign of the 
> dot-com crash, then the failure of companies like Rhythms signals a much 
> more important collapse in high tech. Scores of such companies have closed 
> up shop, and DSL prices have risen substantially After several years of 
> exploding growth, deployment of DSL actually slowed in the second quarter 
> of this year, helping to set off a chain reaction. As broadband services 
> failed to take off, companies stopped buying new computers and software, 
> which hurt suppliers and left massive inventory on the shelf or in the ground.
>
> Over the last few years, companies such as MFS-WorldCom and New Edge 
> Networks have spent $90 billion to dig up the nation's streets and lay 
> millions of miles of fiber-optic cable (the "superhighway" of data 
> networks), while companies like PSINet have installed the equipment along 
> the line that directs Internet traffic. That, incidentally, is the massive 
> project responsible for creating the endless traffic jams and 
> muffler-busting ruts in the road we've all had to endure. All of it would 
> have been worthwhile if it had enabled millions of small and medium-sized 
> businesses to get broadband, and allowed services dependent on broadband, 
> like video conferencing, to take off. Unfortunately, the way to get to the 
> new data superhighway is through the old "last mile" of copper wiring, 
> which the Bells control and resist sharing. As a result, most of the $90 
> billion in new fiber-optic cable lies dormant in the clay; according to a 
> Merrill Lynch study, only 2.6 percent is in use. Meanwhile, PSINet 
> declared bankruptcy in May. And millions of Americans whose mutual funds 
> invested in companies like PSINet are significantly poorer.
>
> The telecom industry's collapse has been a major source of our short-term 
> economic woes. By some estimates, the decision of many companies to forego 
> spending on new telecommunications equipment accounts for nearly 
> one-quarter of the drop in economic growth.
>
> Though the popping of the dot-com bubble has been the favorite media 
> angle, The Wall Street Journal estimates that many more jobs have been 
> lost in telecom. Analysts predict that the telecom industry could default 
> on as much as 20 percent of the $700 billion in debt it has accrued in the 
> last few years. Banks and other lenders holding that debt are tightening 
> their lending practices. That hurts the ability of other companies to get 
> financing and for the economy as a whole to rebound.
>
> The telecom collapse threatens equally serious long-term effects. The 
> economy boomed in the late '90s largely because productivity---output per 
> worker---nearly doubled to 2.6 percent annually, from an average of 1.4 
> percent in the '70s, '80s, and early '90s. Booming productivity, after 
> all, led to the lower unemployment and inflation and higher economic 
> growth that distinguished the "new economy." And according to Federal 
> Reserve Chairman Alan Greenspan, productivity shot up because companies 
> began using new data networks to get efficiencies out of the computers 
> they'd bought. But now that the rollout of these data networks is slowing, 
> productivity growth rates are threatened. Speeding up the spread of 
> broadband could give the economy the lift it needs.
>
> <snip>


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