Internet Giants Prepare for WorldCom 'Storm'

swight1701 writes: "MSNBC has an article about how E-bay and others are enacting contingency plans in case WorldCom goes under and no one steps in to run UUNet right away. Also talks extensively about how this is happening already in Europe with KPNQwest, who is telling their customers, 'During this week you can already expect outages to happen that we cannot solve any more. At the end of this week we expect that larger parts of the network will be down.' Can telecommunications giants realistically keep up with the public's need for ever-growing bandwidth without going bankrupt?"

Comments

WorldCom Storm

[evestrum]

The question is: Can telecommunications giants realistically keep up with the public's need for ever-growing bandwidth without going bankrupt?

Most certainly, if executives can be satisfied with a couple of hundred tousand dollars a year each instead of tens and hundreds of millions of dollars a year each, and if stock holders can be satisfied with modest but steady returns on their investment. Greed ends up killing all it touches.

Re:WorldCom Storm

[Restil]

You're partially correct. However, it isn't the amount of the exec salary that is the problem. Its the salary cap. Exec salaries over $1 million can't be deducted. Now you can debate until you're blue in the face what a proper exec salary is, but in the end, it comes down to, whatever the company is willing to pay and whatever the exec is willing to work for. The marketplace at work.

However, by implementing a cap on the salary, the corporations are forced to find alternative ways to make up the difference. They're not going to throw money away to the government, so they pay the execs with stock options instead. Now, stock options for the regular employee aren't always a bad thing. It builds company loyalty, and gives the employees an extra reason to go the extra mile. However, with execs, the situation is different. A lowly employee typically would be unable to cause a massive shift in the stock price by anything he/she is able to do. However, execs can. They have full control over the corporation, including what the public finds out about. And since they also have control over how the accounting system works, and their salaries depend on the stock price always going up, they're going to manipulate (to the razor's edge of legality if necessary) the accounting to maximize the value of their options.

There might be another reason why this happened, that didn't have much to do with executive greed. Worldcom screwed up, but its possible that they didn't actually do anything illegal. A lot of expenses CAN legitimately be expensed over 10 years, even labor in some cases. Ultimately, it wouldn't matter, they just pay the expenses over a longer period of time. In the dot com boom, they had a desparate need to expand quickly, so they depreciated the expenses, which is permitted, and wouldn't have had such a dramatic effect, except for one small problem. The bubble burst, and their steadily increasing revenue stream suddenly fell far short of where it should be.

Now, Worldcom isn't in bad shape, they're just deep in debt. Its still a viable corporation with a healthy revenue stream, and given enough time and some responsible financial management, it would recover from this without any problem. However, in the wake of Enron, there was a pressing need to find and disclose all potential problems, and with these new startling revelations, the creditors are suddenly panicing and pulling their lines of credit. Hence their
current situation.

What's potentially scary about this, as of yesterday, you could purchase a controlling share of Worldcom for about $10 million. Of course, the low price is due to the impending bankrupcy. However, as daunting as the billions of dollars of debt might seem, Worldcom is still a viable company for someone who might be able to refinance the debt. Know of any large software companies that have that much working cash available?? Who might want to own a significant percentage of the backbone? Think its too far fetched??

-Restil

It's how we do infrastructure

[Tim Ward]

The big investments in infrastructure (roads, bridges, cross channel tunnels, whatever) never pay back fast enough for the original owners to survive.

So they go bust, the banks sell off the assets minus debts to new operators, who do fine (after all, an operating profit was available, just not enough to service the debt).

The bill is picked up by the banks, private investors and/or government, depending on your local system.

The new new new new new economy

[ZahrGnosis]

"Can telecommunications giants realistically keep up with the public's need for ever- growing bandwidth without going bankrupt?"

I love that question from an economics standpoint. How can over-demand for a product cause a company to go bankrupt? You don't think we're over regulating the telecom industry or anything, huh?

No need to run around with our heads cut off...

[tytso]

... and panic.

FCC regulations (authorized by the Communications Act of 1934) require that company provide 60 days notice before terminating telecommunications services. This has been interpreted more recently to mean notice before cutting off voice or data services, and means that even in the case of a chapter 7 bankruptcy, the bankruptcy trustee isn't allowed to just sell all of the assets and leave customers hanging high and dry.

Furthermore, in WorldCon^Hm's case, they will almost certainly be filing for a chapter 11, which means they are trying to reorganize debts, and not shutdown the business. In a chapter 11, the advantage is that Worldcom will paradoxically be more able to get financing after they file for bankruptcy, since lenders know that they won't be screwed by past debts.

(Bankruptcy essentially creates a two legal companies from the perspective of debt --- before the bankruptcy and after the bankruptcy. It means that equity shareholders will be completely screwed, and that debt holders will be partially screwed, but hopefully the company will emerge from bankruptcy able to pay its bills. That means that creditors that lend a company money after the bankruptcy have more of a chance to get paid --- which means that suppliers will more likely be willing to give WorldCom credit, and banks will be more likely to give WorldCom short-term loans, etc.)

creative accounting doesn't lose money

[Trepidity]

Creative accounting merely hides losses by basically listing a bunch of income that isn't really there. The actual money loss comes from somewhere else, such as selling bandwidth for too cheap.

Are they going bankrupt from providing bandwidth?

[Catbeller]

Is Worldcom going bankrupt from providing bandwidth?

Nope. They make lots o' money from that.

They are going bankrupt because they got greedy. As did Enron, Haliburton, and all the others to come.

Remember, the mantra for the last ten years is to maximize shareholder value. To do so, firing your workers en masse is acceptable. Buying up synergystic businesses at silly prices is okay, too, because no matter what the true value of the company is (read: earnings per share), the perception of the stock market has become the ONLY ruler to measure performance.

So, to keep stock values high, they cooked the books, constantly, and eventually were caught.

The people who ran Worldcom made themselves millionaires. They will never see a real jail. They know this, they knew this.

Alan Greenspan himself, an #1 acolyte of Ayn Rand, has finally grown up and wrote the epitaph for unbridled corporate greed:

"An infectious greed seemed to grip much of our business community" as stock prices ballooned in the late 1990s, Greenspan said. "It's not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously."


If Greenspan can see it, then the end of this madness may be at hand. Sadly, my portfolio agrees as well.

Have these companies created mighty servers and bandwidth for all this trouble? Let's just say I'v spent 10 minutes trying to search for Greenspan's speech online, and I've given up because even on a cable modem, it's too slow, especially on a beautiful sunny day with lots to do outside.

AOL made billions, and should have been a rock-solid stock based on just being rich. But they blew it on acquisitions. Why? To make themselves even richer. To boost stock prices.

Greed, stupid dumbass greed, is causing the collapse of the world economy at the moment. Greed combined with an infectious contempt for the common welfare of all people as well, for greed was GOOD for the businessmen who profited. WE are going to pay for all this mess. We are going to see higher taxes to cover the shortfalls, to pay for the interest on all that lovely new debt incurred by tax cuts for rich people. Our standard of living is going to plumment for the benefit of a couple million rich connected people, one of whom was crowned President by his dad's judges.

Time to get a commune and set up to ride this era out. Peace out, baby :)