There’s no obvious reason that companies can’t invest too much in high-tech boxes just as they’ve historically overinvested in office buildings or commercial jets. The dot-com debacle may simply be a harbinger of a bigger problem. Overinvestment depresses profits. Retrenchment follows as spending is cut until surplus supply is absorbed and profitability restored.
Let’s examine some numbers. Between 1995 and 1999, business-equipment investment increased about 65 percent. Three quarters of the increase occurred in high-technology. Everyone knows about computers. The sleeping giant is communications. In 1999, the investment in new networks–everything from fiber optics to mobile-phone towers–was $99 billion, reports the Commerce Department. That slightly exceeded investment in computers, $94 billion. “We’re rebuilding something that took over 100 years to build–the old telephone network,” says Tracey Vanik, an analyst for RHK, a market-research firm in San Francisco.
True enough. In 1980, the U.S. communications system was essentially AT& was a voice telephone system, with copper wires running into homes and coaxial cables and microwave towers connecting cities. The modest computer-data traffic was confined mainly to huge corporations and government agencies. Television (both cable and over the air) existed apart. This world is long gone.
For starters, AT&T’s breakup in 1984 ended its virtual monopoly. Next, the number of cable subscribers (including customers of satellite services) quintupled to 85 million. Then a wireless system arose alongside the landline phone network. In early 1985, mobile-phone users numbered fewer than 100,000, using 346 cell sites (transmitter and receiver); by mid-2000, there were 97 million subscribers, using 95,733 cell sites. Finally, there’s the Internet and the surge of computer traffic. The old voice-only system is giving way to a network that can transmit anything convertible into digital signals–data, voice (including songs) and video.
Electronic signals are transformed into light waves and moved along fiber cables. The technology has advanced spectacularly. In 1984, a single fiber-optic strand (slightly wider than a piece of hair) carried about 50 megabits of data a second, says Anil Khatod, a top executive of Nortel Networks, the leading maker of optical networking equipment. In 2000, the capacity of the same fiber-optic strand has multiplied about 32,000 times. Started differently: in 1984, it could carry the equivalent of about 700 phone conversations; now that exceeds 20 million. Communications firms have laid thousands of miles of fiber cable; and Nortel’s next generation of equipment–due in a year–promises to quadruple fiber capacity again.
Gulp. It is precisely this astounding arithmetic that infuses people like Khatod with optimism about the Internet, which (they say) is only in its infancy. Against that is the stock market’s somber message: prices of communications companies–providers of service and equipment–have plunged. From their peaks, here are some examples: AT&T is down about 68 percent; Nortel, 58 percent; Cisco (a maker of Internet routers), 41 percent; Motorola (a mobile-phone maker), 70 percent. If the future is so bright, why is the present so dark? The answer is not simply that some stock prices rose to unrealistic levels.
When technology changes, no one knows what will succeed. Some big investments fail. Iridium–a satellite system for mobile phones–has gone bankrupt. Globalstar, a similar system, cost $3.5 billion and has 52 satellites; it needs 550,000 customers to break even and had 21,000 in September. Technologies compete. Some mobile-phone users abandon traditional phone services; some homes use cable for phone and Internet services.
Too many sellers may also be chasing too few buyers. Dozens of new companies offer network services to businesses and homes. Data transmission now exceeds voice traffic (the ratio is about 60-40, says Khatod, and growing wider every year). But prices are so low that revenues from voice services still exceed data’s. The Internet “does not pay the bills,” writes analyst Paul Sagawa of Sanford C. Bernstein & an investment house. “Only four of the 40 large U.S. network operators we surveyed showed positive free cash flow.”
What helped build communications networks was a flood of money from venture capitalists, IPOs (“initial public offerings” of stock) and junk bonds. Discouraged investors are now retreating, and as they do, investment spending will slacken and, possibly, drop. Consider PSINet, a network company. Between 1995 and 1999, its debt went from $40 million to $3.3 billion. By 2002, it planned 60 “hosting centers” for Internet computers, each center costing about $100 million. By the year-end of 2000, it will have 14. But with huge losses, many others will be delayed indefinitely. Construction as well as high-tech purchases will suffer. Business investment and consumer spending are the economy’s twin engines; both are weakening. How much will determine whether there’s a “soft landing”–or recession.
The information economy has long had a “Field of Dreams” quality: build it (meaning networks) and they (meaning customers) will come. Someday the visionaries will be vindicated. The Internet is not just computers but a new communications system that may absorb all voice, computer and video traffic. Profits will arrive. The harder question–for which there is no answer–is how many years, busted business plans and bankruptcies lie between here and there.
