The Tangled Web Of Fiber Optics Lines & Gates

sdirector writes "Monday, super investor Warren Buffett jolted the nearly prostrate telecom industry by leading an investment of $500 million in Level 3 Communications ... Buffett's investment could set in motion a complex web of relationships and -- if you play it all out in just the right way -- put Bill Gates in charge of every fiber-optic line in the USA." The actual article itself is pretty interesting reading. Update: 07/12 08AM GMT by C :The link was broken, it has now been fixed. Sorry about that.

Comments

Fixed link

[Gogo Dodo]

Here's the fixed link. The submitter didn't code the HTML correctly.

Re:Fixed link

[Gogo Dodo]

Ken Maney's article is available at several different URLs:

• Money section, current URL
• Money section, past Technology columns archive
• Tech section, Columnists, past columns archive

In the long run your URL will be stable as the original article and my corrected link use a URL that changes whenever Kevin writes a new article.

However, it looks like Kevin writes an article a week and with /.'s short attention span, the current article link should be fine.

uh, whatever...

[bigNuns]

i love the part about just dismissing at&t at all... yeah ok... whatever... this is fantasy...

I don't think so.

[msaavedra]

The author is really reaching here. Such a deal would never make it past the regulators without selling off large portions of the network. Of course, GWB could always decide that such regulations are un-American, and tell his people to look the other way, but that is not likely considering the lack of trust that most US citizens have for corporations these days.

Additionally, Warren Buffett never buys into a company with plans to turn around and sell it; he's almost always in for the long haul. Still, Buffett has always stayed away from tech stocks in the past, so maybe he's turning over a new leaf.

Re:I don't think so.

[vidarh]

I'm fully with you about the regulators. As for Buffet, I think the reason he's going for telecom now is that they pose an exceptional opportunity:

The market has fallen extremely far to start with, then the KPNQwest bankrupcy in Europe, the Worldcom scandal and the Qwest investigations, makes telecom take a nosedive. There are bound to be lots of opportunities now.

If Level3 is healthy (I wouldn't know, haven't looked at their numbers), and there's no scandals lurking, they should be in a very good position to steal worried customers from the others, and even if they don't their shareprice should still have a reasonable growth potential when the market rebounds.

I guess he might have seen it as a larger than usual opportunity. But before you run of to buy level 3 stock, remember that Buffet knows people - he may have deals in place that gets him way more potential from Level 3 than the average investor will (and btw. I'm referring to legal possibilities here - it gets so much easier to make money when you're already rich and people want to cut deals with you)

Damn, it sounds plausible, too.

[Mac Degger]

Which is kind of scary. Especially as mr Gates has the money to make that bid mentioned in the last paragraph, and apparently the goodwill-between-friends to make the offer stick. And of course he's shown that he's the kind of man who likes non-competetive markets (read: monopolies). And even more bothersome is that KPNQwest also has lotsa cable running through Europe...and I thought I was safe here :( What's funny though is the bit about mr Gates telling the three friends all about this internet thing...yup, the same mr Gates who ignored the browser market because he saw no future in that internet thingy... Now if only he'd had the same attitude about OS', back in the day...

Why?

[thales]

If Billy Borg wanted to buy into the Telecoms, WHY would he need Buffett to come in and buy them first? Why didn't he just buy the stock earlier this week?

This sounds more likely. Buffett decided the stock was undervalued after the beating it's taken lately and a good longterm investment. A Hack writter noticed Buffett's investment and wanted to grab page hits for the online version of the story, so he invented some half ass conspircy to attract the paranoid.

Re:Why?

[truthsearch]

WHY would he need Buffett to come in and buy them first? Why didn't he just buy the stock earlier this week?

It's not that simple. (I work for an investment firm but I AM NOT SPEAKING ON THEIR BEHALF, SO DON'T LET THEM SUE ME, BOSS.) It seems I could walk into the market and buy all the stock that's for sale by a few companies. But it's not that simple. Large trades are automatically tracked by the market (e.g. NYSE has a department with lots of computers checking what's up). Huge purchases can be instantly blocked pending an investigation. Plus remember that only stocks which are being offered can be bought. If 51% of a company's investors aren't selling their stock, Bill could only buy 49%.

Plus on top of all of that, if the board is against a majority purchase of stock (51% or more) it's called a hostile takeover. It's legal, but angers investors and employees, plus the board might be able to sue to buy stock back. But if Bill's in with a huge investor, he'll face no arguments from inside the company. He can also then slowly move in, rather than buy everything at once, preventing regulation flags from being raised by the SEC.

So basically it's a lot more complicated than you might think. Although I agree that this probably isn't a conspiracy. Buffett saw a good deal and took it. Anything now that happens with Bill probably was not planned.

Telecommunications Consolidation

[panaceaa]

The telecommunications industry is definitely ripe for consolidation. There is just too much bandwidth and too much telecom competition for any company to be very profitable. The article predicts that L3, with Warren Buffett's investment, will buy up the assets of WorldCom and Qwest to consolidate their customer bases, reduce costs, and lower competition. Since Gates has a relationship with Buffett, and current investments in L3 and WorldCom assets, he will be in a powerful position in the telecom industry after the mergers go through. But he'll still only own about 5-10% of L3. Then the article goes completely off a limb and states:

Gates could approach Buffett to buy it all. Gates would own the Internet.

This is stupid. If Gates (or probably Microsoft) wanted to own telecom, he could just buy it now at lower prices. He has enough money to buy L3, Qwest and WorldCom now. Why would he wait for consolidation to occur, the market to improve, and the price of these companies to probably triple?

Sure, Gates could own the infrastructure. But if he was still interested in infrastructure, why did he stop investing in MSN? Over the past few years Microsoft has abandoned most of its infrastructure projects and focused once again on software. And the Qwest/L3 investments are years old, back when MS cared about MSN.

Saying that Gates is trying to buy the telecom industry is just flamebait. There's nothing recent to suggest that he's trying to do that.

Re:Telecommunications Consolidation

[The Cat]

too much ... competition

Yeah. Too much competition. Shame.

Like too much democracy, or too much freedom.

sigh...

Re:Telecommunications Consolidation

[panaceaa]

It's definitely good for consumers to have too much competition. But hey, when have Warren Buffett and Gates cared about consumers. They just want to make money. And you make more money in a heavily competed industry by bringing companies together, taking away redundant assets and services, and (unfortunately) removing customer choice.

There's a post about 10 above mine about Gates liking monopolies, so he'd probably like to make a telecom monopoly too. It's funny, but it's so true. But the root of it is that you can make more money with less competition. That's business. You just have to be careful not to piss off too many consumers or make a scene while doing it. (Something Microsoft hasn't been good at recently.)

Re:Telecommunications Consolidation

[stu72]

uh... no.

Too much competition results in prices to low to sustain healthy businesses, which results in rashes of bankruptcy. Less competition results in prices high enough to sustain healthy companies for the long term. No competition results in the highest prices and will sustain a company long after it has ceased to be useful to the world.

As in all things, balance is key.

Your metaphor is also flawed because freedom and democracy are not zero sum games. If you have more freedom, you don't need to get it at someone else's expense. But if you pay less money for a product or service, that person that provides that product or service earns less. If you earn more money for a product or service, the customers who buy it must pay more.

As in all things, balance is key.

Oh, I forgot, this is /. and whatever the issue, it's always the corporation's fault.

Re:Telecommunications Consolidation

[Junta]

Umm, not quite right either....

'Too much' competition does indeed cut profits to the bare minimum which the companies care to get away with, but so long as no company has a drastic advantage over the other and they all realize it, companies will sell below production costs most of the time. True, promotions come about that do this occasionally, but they are typically short lived. A company in a market full of competition *knows* they can't survive if they sell below production cost. They will of course cut production costs and maintenance, etc, but only as far as they can before the quality falls below the point the consumer will take. This results in a market-driven quality/price 'sweet point' after time is given to reach equilibrium.

The companies that will sell stuff at a loss are companies that are nearly monopolies in order to drive a perceived competitor out of business (or in the case of MS, to try to force its way into another market, the home entertainment market). Only when a company knows it has enough staying power to pull it off do they go beneath production (or if a bigger company is bullying them out of the market, forcing their hand...)

Difference between the US and Asia is cultural

[joneshenry]

That Net-Nexus Seoul article explicitly mentioned cultural differences between the US and Korea. To recast the analysis in a different light, the quest in the US for the past few decades has been for individual space. This is reflected in the American obsession for the automobile and the suburbs. The United States has basically spread out development to sustain the "American dream" of home ownership. In Korea on the other hand the article points out that many people are crowded into small apartments without room to entertain friends. As the Koreans wish to be social they will gladly go out to be with others, and for younger people, they will flock to the equivalent of Internet cafes.

From the American perspective it does not take an evil conspiracy to explain why providers would prefer the Internet to be used to deliver content not interactivity. If there is a market it is likely considering the American culture that this is the best way to make money by satisfying consumer demand. Americans with money will have relatively big houses and the willingness to spend thousands of dollars on home entertainment systems. In the past decade American consumers have shown they are willing to purchase billions in content in the form of DVDs. In the US at least it is not considered shameful to spend whatever free hours one has on self-emersed isolated personal entertainment, and there is a strong psychological demand for such entertainment.

The fly in the ointment is simply the classic analysis by Tanenbaum that one should not underestimate the bandwidth of a station wagon transporting tapes down the highway. That is, if one can ignore latency of 12 hours, there is no bandwith advantage to the Internet when it comes to delivering content. In the US at least it is very easy for the lone commuter in an automobile to stop by the store on the way home to pick up a DVD. Unless the Federal Government were to launch a program on the scale of the building of the Interstate highway system to close the last mile gap with fiber, something that will not happen, the average US consumer will suffer less latency from just dropping by the local store versus waiting for content to be downloaded. The current cable/DSL piddly bandwidth relative to what DVD quality content demands simply can't cut it.

Call me Paranoid...

[DarkHelmet]

But there was a story on Slashdot about an Editorial on The Pulpit in regards to the death of TCP/IP. Robert Cringley's article puts forth the idea that Microsoft wishes to banish the protocol in favor of its own non-anonymous, proprietary system.

If Bill Gates owned every single piece of fiber in the US, it's definately a step in that direction. Perhaps even the only thing preventing a standards change now.

You can find the article here:
http://www.pbs.org/cringely/pulpit/pulpit20010802. html

Another point

[Spunk]

While this would be unlikely behavior for Gates, it's even less likely for Buffett.

His strategy is based on taking a very long-term view. Generally, when he buys stock (or the company, outright) he intends to hold on to it "forever." Why would he go ahead and sell this company he just invested in - to make a quick buck? Not his style at all.