TEAM LinG TELEBOMB The Truth Behind the $500-Billion Telecom Bust and What the Industry Must Do to Recover JOHN HANDLEY AMERICAN MANAGEMENT ASSOCIATION New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C. TEAM LinG ................. 11283$ $$FM 04-12-05 13:06:22 PS PAGE i Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Various names used by companies to distinguish their software and other products can be claimed as trademarks. AMACOM uses such names throughout this book for editorial purposes only, with no intention of trademark violation. All such software or product names are in initial capital letters or ALL CAPITAL letters. Individual companies should be contacted for complete information regarding trademarks and registration. Library of Congress Cataloging-in-Publication Data Handley, John, 1961– Telebomb : the truth behind the $500-billion telecom bust and what the industry must do to recover / John Handley. p. cm. Includes index. ISBN 0-8144-0833-8 (hardcover) 1. Telecommunication—United States. 2. Telecommunication—Deregulation— United States. 3. Telecommunication policy—United States. 4. United States. Telecommunications Act of 1996. I. Title. HE7775.H33 2005 384Ј.0973—dc22 2005005682 ᭧ 2005 John Handley All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Printing number 10987654321 TEAM LinG ................. 11283$ $$FM 04-12-05 13:06:23 PS PAGE ii To Elena, my life and my love. TEAM LinG ................. 11283$ $$FM 04-12-05 13:06:23 PS PAGE iii This page intentionally left blank TEAM LinG CONTENTS Acknowledgments vii Introduction 1 CHAPTER 1 Before and After the Breakup of AT&T 9 CHAPTER 2 Stability as the World Changed 25 CHAPTER 3 The Telecommunications Act of 1996 43 CHAPTER 4 The Second Race to Cover the United States in Optical Fiber 61 CHAPTER 5 The Big Get Bigger: The Entry of the RBOCs into the Long-Distance Market 77 CHAPTER 6 The Last Stand of the Long-Distance Companies 95 CHAPTER 7 The Rise and Fall of the Competitive Local Exchange Carriers 117 CHAPTER 8 Lost Opportunities by the Cable Companies 137 CHAPTER 9 The Crash 159 CHAPTER 10 Who Won? 185 CHAPTER 11 Likely Future Winners and Losers 204 CHAPTER 12 A Look Back and a Look Forward 222 APPENDIX A Glossary and Acronym List 240 APPENDIX B Bankrupt Telecommunications Carriers, 1988 to 2003 251 Index 255 TEAM LinG ................. 11283$ CNTS 04-12-05 13:06:25 PS PAGE v This page intentionally left blank TEAM LinG ACKNOWLEDGMENTS The first ideas of what would become Telebomb began during a series of conversations I had with my friend and mentor Don Rippert during the summer of 2002. Even the title came from one of those conversations, although the idea came many gin-and-tonics into the evening, so my mem- ory of which one of us coined the term is a bit fuzzy. Don not only encouraged the ideas behind the book but he was the greatest of my mentors at Accenture, the technology and management con- sultancy. During the ten years I worked for him, he had the faith to send me, on my own, into new areas to make things happen. He let me have the freedom to find my own way, to make and fix my own mistakes, and to let me decide what route my career should take. He let me find a genuine definition of success that I believed in and used to the maximum benefit of Accenture and myself. Later generations of Accenture management may not have shared the same vision, but I feel that the ability to define my own path within the company built the most value for all. When I thought it was time for me to leave Accenture, Don also had the courage to tell me in a straightforward manner that it was the right decision. For that and so many other little things: Thanks, Don. Special thanks are deserved by the crew at AMACOM Books for leading me through the publication process. Thanks especially to Jacquie Flynn and Barry Richardson for their big roles in making this project happen. During the writing of this book, my wife, Elena Handley, was my firmest supporter. Even as the project wore on, she was at my side the whole time. She faithfully read every draft of every chapter, including each of the many rewrites. In addition to her support of the project in general, she lent me her perspective as a telecommunications novice, although she knows more about the subject than she thinks. After years of pretending to care about what I was looking at on the tops of the telephone poles around our neigh- borhood, I think she finally got a little perspective on what I did during my TEAM LinG ................. 11283$ $ACK 04-12-05 13:06:28 PS PAGE vii viii • ACKNOWLEDGMENTS fifteen years at Accenture. My children still think I used to fly on airplanes for a living. My sister, language person and news editor Beth Handley, also read early drafts of each chapter as they reached completion. Her perspective as an experienced copy editor and newspaper person gave me valuable insight into the reader’s perspective. I am quite grateful to her and the experience she has gained during her career at the Roanoke Times. Eddy Yager, my friend and former business partner, also rates special kudos for reading the entire manuscript under deadline. He trudged through the snow to meet me on more than one occasion. I thank him for giving me his time and for lending me his accumulated telecommunica- tions industry experience. The research and writing of this book were made much simpler and easier because of my Digital Filing Cabinet (DFC). I gathered thousands of pages of research material for Telebomb, all of which are safely indexed and stored away. The search and organization capability of the DFC covers all the research material, no matter what format or source. Where else could I find a tool that doesn’t care where I am or whether it is searching though Word files, Excel spreadsheets, PowerPoint presentations, PDFs, images, faxed pages, or personal notes? Thanks to the crew at New Mexico Software and, in particular, NMXS’s chief executive officer, Dick Govatski. I have leaned on many of my former partners at Accenture for content reviews throughout the process. Rob Martin, Jack Sepple, Jim Arrison, and Annette Peterson have come through with their comments and support for the project. Several people helped with the early research and visualization of this book. For their time and input, I would like to thank Vijay Venkateswaran and Wilson Randolph. Thanks also to my research assistant, Robert Ratcliffe. To my many clients and colleagues from my time at Accenture, thanks for the interesting work, conversations, and support. To my children, Laura, Alex, James, and Joe: I love you. Now go to bed. Last and certainly not least, I would like to recognize Alex Dean for the fundamental role he had in making my career at Accenture a success. He opened many doors that I would later pass through on my way to the partnership. He embodied the concepts of client service and stewardship within the Accenture partnership that made it a great place to be for so many years. While many have contributed to this work, and the completed work would be of lower quality without them, any mistakes or errors in the book remain mine. TEAM LinG ................. 11283$ $ACK 04-12-05 13:06:29 PS PAGE viii INTRODUCTION The notorious dot-com crash was heavily covered by the press, but a larger revolution was going on at the same time in the telecommunications indus- try and it received comparatively little attention. The telecommunications revolution followed a similar trajectory to the dot-com boom and bust, but it wasted more investor dollars and created much more havoc in the econ- omy than the dot-coms. In fact, the ‘‘telebomb’’ likely wasted more real investor dollars than any—and possibly all—of the previous stock manias in the U.S. equity markets. The dot-com wave broke and washed away the pretenders, leaving an industry populated by only a few strong companies. However, the telecom- munications revolution has, through its ups and downs, touched most citi- zens in the United States. All are customers and many are investors in and/ or employees of the industry. Even those who have not yet felt the changes brought on by the Internet revolution will do so in the next few years. The overall cost of the crash in the telecommunications industry was staggering. More than $500 billion was lost because of overinvestment and ill-advised mergers. The network construction boom in the industry led to a spending bubble that consumed $220 billion above a steady-state invest- ment rate within the industry that already approached $50 billion per year.