“We are a lot smarter than we ever were 10 or 15 years ago,” says James Crowe, chief executive of Level 3 Communications Inc. LVLT -0.66% His company helped define the telecom boom by building its own network from coast to coast, beginning in 1998. It lost more than 90% of its stock-market value a year after hitting its high in March 2000, but it was one of the few to survive the bust. In recent months, for the first time since the 1990s, Mr. Crowe has started extending Level 3′s fiber-optic network into areas where he hasn’t yet signed up any customers, betting that the demand he needs to make money is there. – from the WSJ.COM April 3, 2012.

This excerpt from yesterday’s WSJ.Com got me thinking about how things go in cycles and therefore how old I feel. In the 1990′s when I was a relatively young consultant, the internet boom was driving up equity prices for dotcom startups (like iVillage), for telecom companies (like Global Crossings) and for networking equipment manufacturers (like Juniper). The underlying assumption that value came from profitability had been set aside in favor of a “land rush” mentality.

In his book, Good Strategy Bad Strategy , Richard Rumelt cited clear evidence a the time (1998) that things were getting ahead of themselves and that investments were being made based on wild assumptions for demand. Here’s what he said, “In 1998, a Lehman Brothers report estimated that total capacity of 1998 US terrestrial fiber systems was seventy times the 1998 working capacity, which was in turn, quite a bit larger than current demand.” Quoting the Lehman analyst, “In order to begin to fill the potential capacity, bandwidth needs per user, number of users, and usage per month have to increase. If every phone line in the country were upgraded to a T1 [1.5 megabits per second], then network capacity would have to increase 24 times (at constant usage levels). Therefore, in order to arrive at 70 times increases even higher speeds and greater usage is required. We believe that electronic commerce will grow exponentially helping demand for higher bandwidth for Internet and data services.”

In December 2001, Global Crossing declared bankruptcy. Friends of mine who had received Global Crossing shares as part of the buyout of Frontier Communications lost huge amounts of money, along with many pension funds.

The economics of telecom networks may have changed since the 1990′s, but I doubt it. The idea that “if you build it, they will come” has been around the block a few times. Watch to see whether this turns out to be wise anticipation of demand or the start of the next bubble.

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