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The Enduring Spirit of Enterprise

The Age of Intelligent Machines

The Wall Street Journal, October 6, 1997
The Fiber Baron

Checkmate.
Sorry, Bob Allen of AT&T and Ray Smith of Bell Atlantic, Duane Ackerman of Bell South and Edward Whitacre Jr. of SBC, Shigeo Sawada of NTT and Sir Peter Bonfield of British Telecom. It's all over. Bernard Ebbers of WorldCom has won—whether or not he is successful in his bid for MCI.

I know that most of the pieces are still on the board and you hold them: the $600 billion of global telco revenues, the 43 million tons of copper wire in U.S. local loops, the $76 billion of U.S. long-distance revenues, the $10 billion in leased lines to corporations, your mindless Bell company mergers of mediocrity with bloated obsolescence, your inane trials of video on demand and interactive-TV farceware, your thousands of Armani lawyers and Gucci lobbyists and public affairs consultants, your alliances with long-distance carriers and regional leviathans around the globe.

Wrong Pieces
It is indeed an imperial array. But they are the wrong pieces, on the wrong board. The game is Internet protocol packet data over fiber optics, and Mr. Ebbers already has mounted an impregnable position. With MCI, his 1.2 million miles of fiber in the U.S. would roughly equal AT&T's; and his deployments of a leading-edge all-optical-network technology called wave division multiplexing will multiply his capacity some 100-fold.

The U.S. establishment telcos command an apparent capital edge of over 50-fold, with a global installed base of plant and equipment worth roughly $263 billion, compared with Mr. Ebbers's roughly $5 billion. Altogether the international telcos command more than $1 trillion worth of capital assets, or 200 times WorldCom's stake. But look at the famous "Q factor," the ratio of market value to replacement cost as conceived by Yale economist and Nobel laureate James Tobin. It can serve as an index of the entrepreneurial dynamite in a capital stock. With a market cap of some $264 billion and a similar capital installed base, the "Q" of AT&T and the Baby Bells is approximately 1. With a replacement cost of some $5 billion and a market cap of some $33 billion, Mr. Ebbers's "Q" is 6.5. The telecom establishment constitutes a Maginot monopoly.

Welcome to the reign of King Bernie. Like John D. Rockefeller and Michael Milken before him, Mr. Ebbers has shown the magic of entrepreneurial vision and guts. While the establishment telcos subsidized their weaknesses and created expensive obsolescence, Mr. Ebbers saw that there are three key technologies in present-day telecommunications—fiber, code division multiple access wireless, and Internet—and he got two of them. If he wins MCI, he can parlay its NextWave alliance into international power in wireless as well.

How could this be checkmate? How can Mr. Ebbers's $5 billion of assets trump the trillion-dollar entrenchments of the international telco establishment? One key to the kingdom is fiber optics. Using new technologies from Lucent, Ciena, Hitachi, NEC and others, a single strand of fiber-optic thread as thin as a human hair can already carry as much traffic as the entire world telephone system could five years ago. The other key to the kingdom is Internet packet data. Mr. Ebbers is a fiber baron and an Internet emperor.

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