telecoms

Never mind the dotcoms. What about the telecoms? No upstart start-ups, these. But investors have lost billions from the steep tumble of companies which only recently were universally regarded as sure things for the Millennium stakes - groups which would be rolling in wealth in 2200, let alone 2001.

Instead, BT and ATT, the Anglo-American heavyweights, are on the ropes: even their Concert joint venture in long-distance traffic looks like being knocked out before it has truly entered the ring. Vodaphone, which triumphantly soared past both, has seen its shares collapse by half this year. Another vainglorious outsider, WorldCom, has been forced to eat humble pie as over-ambitious, over-priced acquisitions have taken their usual painful toll.

The picture is no more pleasing on the supply side. The plumbers who provide the communications infrastructure were supposed to be immune from any difficulties that their customers might encounter. But Lucent, the spin-off from ATT, is now as heavily denigrated as it was once widely praised. A troubled Ericsson may pull out of mobile phone manufacture altogether. Even Cisco, which back in June was the world's most highly valued company, at $454 billion, has fallen short of forecasts and slumped by half in the stock market.

The telecoms boom was the real South Sea Bubble, not the absurd over-valuations in the largely peripheral dotcom economy. Just as in the run-up to the Great Crash of 1929, very large companies were suddenly invested with supposedly magical powers. Genuine economic phenomena (the rise of the automobile and radio then, now the enormous growth in communications, including the internet) were translated into indefensible, unsustainable multiples of unobtainable earnings.

There were no more fervent believers in the new faith than the telecoms moguls themselves. Their behaviour is positively mysterious to anybody unfamiliar with the conduct of the Gadarene swine. Almost as one man, they joined in a bidding war for subscribers to their services. As the cost of buying subscribers soared on one hand, on the other the prices paid by said customers continued to fall - and will go on doing so. It is an unpromising equation.

ATT provides a gruesome illustration. It has invested some $11 billion in cable operations that were supposed to deliver local traffic to replace some of the business forcibly removed by its anti-monopoly break-up. The gigantic expenditure has brought nothing but pain: much of the purchased network was too rundown to support ATT's plans without huge investment. But at least ATT bought businesses that actually existed.

Its partner in the discordant Concert, BT, led the charge into G3 licences, which brought the British Government an all-but-incredible £22 billion for entry into a new market whose potential is at best problematical, at worst certain to yield huge losses without increasing charges to customers who won't pay them. Dirt-cheap IP (Internet Protocol) telephony is the name of the future, and it is not consistent with anything but still lower prices.

In most respects, the reasons for the upheaval in telecoms are no different from past boom-and-bust scenarios. The first necessity is universal belief. When all men agree, that's the time to run for the hills. Very few lemmings pause to question their behaviour as they plunge to their deaths. Very few participants in affected industries, and few sceptics outside, question assumptions which they all share - witness the near-total loss of the "one-stop shopping" investments made after Big Bang liberalised the City of London.

The second force for bad is competitive FUD (fear, uncertainty and doubt). The argument is that, if we don't buy this licence or that company, some vile competitor will. The latter, of course, says exactly the same thing. Prices consequently get forced up in a bidding war, even though, in "strategic acquisitions", nobody has the faintest idea of how to value the passionately beloved object. As the dotcom fiasco showed, money-losing companies can be worth everything or nothing.

If that sounds exaggerated, consider the fate of Orange. Is it worth the enormous valuation that was originally expected from its flotation? Or the far lower figure actually realised by the launch? Or the 11% lesser sum to which it fell after the float? You pays your money, and you takes your choice. In any event, none of the major movers in telecoms was prepared to adopt a contrarian policy, going against the crowd - which is almost always the wisest course in investment and management.

The third factor concerns the nature of the "telcos". The great majority are privatised former State monopolies, like BT: ATT, though never nationalised, is of the same stamp. The great myth was that liberation from the dead hand of the State, and plunging into the icy waters of competition, would turn monopolistic bureaucrats into dynamic businessmen. Spin-offs from the former monopolies were supposed to achieve a similar wondrous effect. Tell that one to the shareholders in the loss-making Lucent.

The reality is that dead hands can be applied from within as much as without. The telcos have imported vigorous outside talent. But too often the new men and women have been been spat out, like the unwelcome grit in the oyster; or sucked into an inimical corporate culture (Michael Armstrong, the author of ATT's cable strategy, if that's the word, came from Hughes Aircraft). However much the external environment has changed, the internal climate resists (and sometimes refuses) adaptation.

Neither privatisation nor spin-off are reliable antidotes to the pervasiveness of outdated behaviours - witness the slow agony of Xerox, another once all-powerful overlord, which became so constipated that, having invented but failed to produce the personal computer, it proceeded to lose hold of another vast business, the inkjet printer. If any telco bosses find that amusing (or sad), what brilliant new businesses have they invented? The sorry story is the same. Once a monopolist, always a monopolist - which, sans monopoly, is no good thing.