25 April 2010

John “Bernie” Ebbers founded the telecommunications company WorldCom and is a former chief executive officer of that company.

In 2005, he was convicted of fraud and conspiracy as a result of WorldCom’s false financial reporting, and subsequent investor’s loss of US$100-billion. The WorldCom scandal was, until the Madoff scam came to light in 2008, the largest accounting scandal in United States history. He is currently serving a 25-year prison term at Oakdale Federal Correctional Complex in Louisiana. Portfolio.com and CNBC named Ebbers as the fifth-worst CEO in American history; Time Magazine named him the tenth most corrupt CEO of all time.[1]

Sounds like a bit of a loser, but I must admit we owe him one.

Were it not for Bernie Ebbers, Barack Obama would not have been elected president.

Why? Because Barack Obama was elected thanks to the Internet. The biggest difference between the 1999 elections and those of 2007 was the flood of broadband experienced by most Americans. And Bernie Ebbers played a big part in that story.

In 2007, the Internet allowed voters to question and rebuff rumours such as “Barack is not an American citizen”. Ten years ago, if one of the major news networks (for example: CNN) had started or supported such a rumour (like Lou Dobbs did), the candidate would have been knocked out in round one.

Tens years ago most Americans had to rely on TV, newspapers and radio for their news. Content monopolies that filter all the information in the world via hundreds of editors and journalists, all of whom have conscious and unconscious biases. Result: Leaders such as George W Bush.

My point is made. But what does this have to do with Bernie and Barack?

Bernie installed all the pipes in the ground that makes the Internet ubiquitous and cheap in the USA today. Let me explain.

The global telecommunications industry, especially in the USA, went through a massive boom-bust cycle from 1997 to 2002. According to Bankruptcy.com, telecoms operators comprised 8 out of the 15 largest public company bankruptcies in the United States in 2002, with Worldcom (assets of $104 billion) leading the charge.

It was the biggest bankruptcy in USA history, until Lehman Brothers in 2008 that is…

In July 2002 WorldCom went under, taking with it the debt incurred for building the world’s biggest Internet backbone, UUNet, which single-handedly carried a third of the world’s Internet traffic, as well as 6000km of fiber-optic cable into businesses across the USA.

In April 2003 WorldCom wrote down its physical assets (no goodwill included) by $70billion. These were physical assets, paid for in hard cash, and ultimately written down by 75%! WorldCom emerged from bankruptcy in 2004, freed of $35billion in debt, renamed as MCI Inc and was eventually acquired by Verizon Communications in 2005 for $8.4billion.

A great line from the NY Times in 2003: “Thanks to WorldCom, we are closer to knowing how much demonstrably dumb money went into the telecom industry at the century’s end.”

Another lesser-known consequence of the overinvestment in infrastructure in the USA was the disappearance of AT&T as an independent company. Founded in 1885 Alexander Graham Bell, it was acquired by SBC in 2005 after being caught up in the hype of infinite demand for bandwidth. At one stage AT&T was laying “2,200 miles of cable per hour” on the back of the Global Crossing and WorldCom forecasts, the end result being massive write-downs and the eventual absorption of the 120 year-old industry legend into SBC.

And guess who were the biggest suppliers to WorldCom and Global Crossings? Lucent Technologies and Nortel Networks. Both bankrupt.

Does this sound familiar to you? A bit like the financial crisis? In fact it is very similar. Both the telecom and credit bubbles were grounded on false assumptions, namely “Data consumption will double every 100 days” and “House prices will always rise”. The result in the telecoms industry was a massive overinvestment in infrastructure followed by massive write-offs, lay-offs and bankruptcies. The silver lining was a surplus of high-tech capacity, which resulted in fast broadband connections and cheap prices for consumers.

The other silver lining was in Barack Obama becoming president of the USA.