| The economic boom of the late 1990s included huge investments in the telecommunications
industry and related sectors. It was followed by a downturn of
unusual severity, which reduced total paper wealth by trillions of dollars, cost
many thousands of jobs, and saw some of the biggest bankruptcies in history.
While there certainly was a general business cycle at work, the downturn in telecom
was not just a cyclical correction, itself a healthy event that routinely shakes
out the weakest players. The downturn was unusually severe, impacting many
well-established as well as young companies; the price pressures that resulted
from so many distressed vendors then put an impossible squeeze on the profit
margins of many of their stronger competitors. These conditions led investors to
avoid anything remotely resembling telecom; the resulting capital squeeze further
hurt the remaining survivors. This was not just a low point in the business
cycle; it was economic metastasis, an epic failure, a full-bore meltdown.
Analysts, reporters, and other pundits have frequently sought to identify
the cause of the telecom industry crash. So have industry participants themselves,
both market participants and their regulators, eager to pin the blame on
someone else. At the top of many commentators’ lists is the Telecommunications
Act of 1996, which opened up local telephone service to competition
across the United States. The Act led to the creation of a huge number of new
companies, many of which went public quickly and visibly, and which failed,
equally visibly, not long afterwards. The Act became law just as the boom was
beginning, and in many ways set the direction of the industry, making it an
obvious culprit. |
