Uh Oh. The "Bubble" Word Reemerges

Those who lived through the telecom bubble and bust know viscerally what it means when trillions worth of telecom assets suddenly evaporate. So many will be chilled to hear suggestions that the U.S. market might be in a position similar to the pre-burst conditions of the middle 1990s.

Between 1997 and 2003, the global telecom industry lost $2.8 trillion of market value, collapsing from $4 trillion to $1.2 trillion, an event virtually without parallel in the industry, and arguably in any industry.

Some might argue that irrational behavior occurred because capital markets relied too heavily on Federal Communications Commission rules and regulations, either favorable or unfavorable.

Massive capital misallocation--and huge losses--in a very short time, was the result.

Ironically, some might argue, we now are about to see the reverse of the irrational over-investment, namely rational underinvestment, but with a similar causation: federal telecommunications regulation.

The argument is that with profit potential in the U.S. high speed access market, leading contestants will find they can earn a better return elsewhere than in the U.S. market.

Common carrier regulation in general, and network neutrality rules in particular, will limit supplier business models and prospects for revenue growth in the U.S. high speed access market--at least for many of the tier one suppliers.

Supporters argue the gap will be filled by new suppliers, operating with lower costs. That essentially is what happened when cable TV operators, for example, successfully attacked the U.S. fixed network voice and high speed access markets.

That seems already to be happening, on a small scale, as independent Internet service providers launch new gigabit service operations on a local basis. Eventually, given enough scale, such new competition will pressure tier one provider business models.

The point is that major shifts in U.S. telecom policy within the last two decades have lead to drastic changes in investment, competition and innovation, with what can only be called huge distortions of capital allocation.

Some might note the irony that the passage of telecom legislation intended to increase competition lead to greater dominance by the incumbents. In one sense, that might be correct. In the wake of the Telecommunications Act of 1996, hundreds of new competitors arose, only to crash and burn by 2003.

In other other vital sense, competition did increase, however, as U.S. cable TV companies became major players in voice and high speed access, arguably now taking the lead in the strategic high speed access category.

What now happens will be worth watching. Investment is going to change. The only issue is how much, and where that investment will shift. AT&T’s moves in Mexico might provide a bit of insight.

More significant will be Verizon’s response, since Verizon has bet its near term future on robust U.S. market growth. If that should change, so will Verizon’s strategy.