Where's Your $50 Million?

Broadbandit (noun): One who padded his coffers by $50 million or more riding the bandwidth bubble.

by Alex Goldman ISP-Planet Associate Editor [July 25, 2003]

The publishing industry has decided that it's time to explain the telecom boom and bust. Numerous books are now being published, purporting to explain the phenomenon, which is now being compared to other financial fiascos from the railroad buildout of the nineteenth century to tulipmania in Holland in the seventeenth century.

In his book Broadbandits: Inside the $750 Billion Telecom Heist, journalist Om Malik details the many partners who helped fuel a massive telecoms binge that enriched a few and impoverished many. Many chapters focus on one man who either got rich or lost all he had (or both) in the boom. Chapters cover (in order) WorldCom's CEO Bernie Ebbers, Qwest's chairman Phil Anschutz, Global Crossing CEO Gary Winnick, Teligent CEO Alex Mandl, AtHome CEO John Doerr, financier Theodore "Teddy" Forstmann, Solomon Smith Barney research analyst Jack Grubman, Nortel CEO John Roth, Sycamore Networks founder and chairman Gururaj Deshpande, multibillionare VC Vinod Khosla, and pundit George Gilder.

Other important people are mentioned in the book, but Malik uses the roles of these twelve people, many of whom knew each other, to show how small the telecom world was when it built and destroyed nearly a trillion dollars in stock market wealth.

He suggests that those who honestly believed they were building something permanent were least likely to cash out—and most likely to lose money. They include Gilder, Forstmann, and Deshpande. Others, such as Grubman, Ebbers, and Winnick, cashed out of their stocks while telling others to buy.

The meaning and purpose of Appendix A is unclear. Appendix B is a list of company executives who sold company stock and got rich during the period 1997 to 2001. At the top of the list is Bobby R. Johnson Jr. of Foundry Networks who sold $411,176,466 of stock. Since then, he has continued to sell several million dollars of stock each month. The last transaction reported to the SEC, on April 28, 2003, gained him about $8,693,820, which is a nice addition to a CEO's monthly salary of only $13,083.

This book is more about people and business plans than about technology and products. It resembles Barbarians at the Gate: The Fall of RJR Nabisco, the very readable account of the most famous leveraged buyout of the 1980s, a single transaction that earned several individuals tens of millions of dollars and destroyed RJR Nabisco with debt, leaving perennial rival Philip Morris the winner in the tobacco industry.

In anticipation of the book's popularity, there's already a website. In a populist turn, Malik has also invented epithets for many of the famous companies. Readers may be amused by "nobody@home," "Global Double Crossing," or one of his nicest names for WorldCom: "Bernie's Bad Idea."

Many ISP-Planet readers followed the telecoms boom as it made headlines, but seeing it all in one place allows the reader to make connections that might not have been obvious in day-to-day coverage. The links between equipment makers and vendor finance, research analysts, telecommunications companies, and banks are clearly drawn.

The only area in which the book falls short is on the subject of regulation and politics. Malik acknowledges that Bell intransigence played a role in many bankruptcies but does not examine the idea. He fails to look into the myriad ways in which the Bells made millions by breaking the law and paid only penny-ante fines. He does not talk about flagrant disregard for agreements the companies signed with the FCC. He also does not examine the fact that the bust occurred just months after the new administration entered office, promising to change the regulatory landscape completely by appointing a completely different kind of FCC. The replacement of William Kennard by Michael Powell coincided almost exactly with the beginning of the end of the boom.

Malik says the CLECs failed for eight reasons, but he seems to essentially believe that one was the most important. He says, "The CLECs had underestimated the Baby Bells' survival instincts."

That aside, the book is accurate and careful. Your reviewer saw only one factual error (Lucent paid $24 billion for Ascend, a number recorded accurately throughout the book but misstated as $20 billion on one page). The book represents a massive collection of facts, statistics, and character insights. It promises to talk about those who made money and how they did so, and it does deliver that.

Of those still around, Carly Fiorina, now CEO of HP, is pilloried for her role in driving vendor financing at Lucent, including a $2 billion deal with Winstar. Level 3's CEO Jim Crowe is pilloried for earning money from stock flipping but praised for retaining the faith of his employees and his Omaha, Neb. neighbors. Khosla, who sold two companies for several billion dollars each, is admired.

Many readers of this website, however, are aware of a second level of innovation that did not get as much press because it occurred outside the mainstream. It consisted of small businesses serving rural communities or niche markets in cities. These small ISPs did not overbuild, did not get the attention of Wall Street because they did not borrow, did not make friends with Bill Clinton or George Bush, and their founders did not sell out for millions of dollars.

These small businesses, many of them family-owned and operated, are still around. Precisely because they did not hire expert management or pay for expert Wall Street research, they did not overbuild, make inflated claims about their subscribership, and did not achieve national attention. They are still working hard, earning an honest living. Many were somewhat harmed by the boom and the bust, and are worried about the future. But they committed no crimes. They are still here. They are serving broadband where the big Bells cannot.

Maybe ten years from now, if Malik writes another book about the industry, he will write about these companies that kept the fiber and copper lines lit while the CEOs turned out the lights and sailed off into the Pacific Ocean on their yachts—or attended "Camp Fed" in Florida, Eglin Federal Prison Camp which, in a sign of the times, has been chosen by Forbes.com, where Malik began his journalism career, (free registration required) as the "best place to be incarcerated."

— End