|Dreams on hold
The technology meltdown recalls images of
the 1980s real estate collapse, but experts disagree on how
long this business blow will last
By Vikas Bajaj and Alan Goldstein / The
Dallas Morning News
Allison V. Smith / DMN
unfinished foundation and an underground parking lot are
all that became of Lone Star Plaza. Remnants of the
50-story tower at Ross Avenue and Crockett Street serve
as one of the more visible reminders of the real estate
crisis in Dallas.
Hair-thin glass fibers were to the recent technology stock
bubble what gleaming towers of glass and steel were to the
real estate boom of the 1980s.
Both were engines driving tremendous growth in the
Dallas-Fort Worth economy – eventually to the point of excess.
Back when J.R. Ewing was an icon of Dallas bravado,
developers spent fortunes to raise skyscrapers and condos.
Funded by rubber-stamp loans from banks and thrifts, their
building activity eventually created a glut that brought the
real estate business crashing down.
Telecommunications firms in the 1990s also got hooked on
Encouraged by deregulation, a seemingly insatiable appetite
for Internet bandwidth and Wall Street's voracious hunger for
investments in infrastructure companies, telecom entrepreneurs
raced to build out vast optical-fiber networks.
But if it seemed there would be no end to the boom,
exuberant telecom boosters had failed to learn from history.
In the spring of 2000, investors became disillusioned with
dot.coms that were continuously losing money. Within months,
the contagion had spread to Internet infrastructure
businesses. The stock prices for Cisco Systems Inc., Nortel
Networks Corp. and other blue chip tech darlings collapsed.
Meanwhile, thousands of employees in the Richardson Telecom
Corridor and elsewhere in North Texas have lost their jobs, as
companies seek to reconcile their labor costs with slowing
revenue growth that's failing to meet the lofty expectations
of only months ago.
Cisco is leaving two buildings at its Richardson
development center unfinished as it pares back expansion and
hiring plans. The company is writing off $2.5 billion worth of
"Just as with real estate in the 1980s, producers added
capacity way ahead of demand," said Bernard Weinstein,
director of the Center for Economic Development and Research
at the University of North Texas. "They made projections of
growth that in retrospect seem to be unrealistic."
To be sure, most experts don't believe the telecom
industry's problems will have as severe an impact on the
region as the real estate crash. At its peak, construction and
real estate made up 22 percent of the North Texas economy,
twice telecommunications' 11 percent share today, said Ray
Perryman, an economist in Waco.
But the two events offer reminders about capitalism and
human nature, and the simple truth that no tree grows to the
"We have enjoyed unparalleled great times, and I'm afraid
the time has come to pay the piper," said Guy Hoffman, a
partner in the Dallas office of TL Ventures, a venture capital
firm. "I don't believe 10-plus years of relative growth will
lead to one quarter of contraction and then continued
estate and energy bust of the 1980s led to calls to
diversify the regional economy – through technology
companies. Now the telecommunications industry is under
stress, and companies with large operations in
Dallas-Fort Worth are sacking thousands of employees.
Though no one expects the current downturn to have the
same impact, there are similarities:|
Origin: Changes in
the tax code encouraged lenders to put billions of
dollars into real estate projects. At its height, the
real estate and construction industry accounted for 22
percent of the area economy.
Result: There was
a finite demand for commercial office space and many
buildings were left empty. Banks folded and were bought
out. The real estate collapse cost the economy an
estimated $80 billion in bad loans.
Origin: Spurred by
the 1984 breakup of AT&T and deregulation,
entrepreneurs rushed to launch phone companies.
Equipment vendors lent them money and offered deep
discounts. More than $381 billion was spent on equipment
and software globally in 2000, up 36 percent from
Result: Newer carriers are failing, and
equipment makers have slashed thousands of jobs in an
effort to reduce costs. After hitting new highs last
spring, the stock market has come crashing down, casting
a pall over the economy.
SOURCE: Dallas Morning News
Real estate craze
In the 1980s, financial institutions were encouraged to
make real estate loans by tax law changes enacted in the
Reagan administration. According to conventional wisdom of the
time, no project was too speculative because no new land was
"There was a time in the early '80s where half the people
in my class were either full time or part time in real
estate," said Don Hicks, a professor of political economy at
University of Texas at Dallas. "It was something that couldn't
let us down."
The real estate bailout cost the economy about $80 billion,
much of it shouldered by the government because loans were
funded by federally backed bank deposits.
Fallout from the real estate downfall brought down many
banks, thrifts and other financial institutions and sent the
economy into a downturn that some say lasted well into the
"It was literally a depression in Texas," said Andrew
Thorby, co-chief executive of Akili, an Internet consulting
firm in Dallas. The tech downturn won't be nearly as severe,
he said, because the financial services infrastructure remains
In telecom, the money for the boom came from a broad array
of institutions that invested on behalf of the general public.
It came from stock and bond markets, from venture capitalists
and banks, many of which believed the Internet was rewriting
fundamental economic rules. Mutual funds, pension funds and
insurance firms hold telecom bonds totaling $126 billion,
according to Capital Access International, a research firm.
At the telecom boom's height, more than 1,700 local-phone
companies were gunning for the industry's so-called dinosaurs.
The newcomers built networks thinking capacity would be eaten
by consumers using video-on-demand and businesses automating
the distribution of their products.
Today, many of the challengers are either out of business
or close to it. The nation's four Baby Bell local-phone
companies are prospering by comparison.
"When people were willing to lend you money or invest money
in your company and you could make these investments and build
this major infrastructure network, everything was great," said
Hasan Pirkul, dean of the University of Texas at Dallas'
school of management. "At some point, you need to turn around
and make a profit."
Still, some argue that allocating blame can be difficult in
an industry that is growing as quickly as it is, even if the
pace isn't quite as blazing as had been expected.
"The industry built networks to handle Internet traffic
growth of 400 percent. But it's only growing at about 100
percent," said Nicholas Economides, a New York University
economics professor. "I don't see this as irrational."
Indeed, predicting communications traffic is hard. At its
peak, Napster, the music swapping service recently ordered to
police copyright violations, accounted for 6 percent of all
Internet traffic in a few short years. Yet few telecom
carriers had factored the phenomenon into their projections.
The telecommunications equipment vendors fueled the boom
with their flush resources, handing out loans and discounted
gear to younger carriers.
Now that largesse is haunting them in the form of bloated
inventories and weak balance sheets. Even well-established
players such as Lucent Technologies are plagued by rumors of
bankruptcies and buyouts.
Part of the blame can be assigned to the way the
telecommunications industry was deregulated under a 1996 law,
some experts say. Although rivals have managed to steal
business customers, the large local-phone companies have a
virtual lock on consumers.
"It's very difficult for an entrant to compete," Dr.
Economides said. He called the demise of the smaller phone
companies "a tragedy of the regulatory process."
But that's not a view shared by all telecom players. Some
challengers, such as Allegiance Telecom Inc. of Dallas, say
the failure of start-up phone companies has to do with the
shoddiness of their business plans and their over-reliance on
debt for funding.
"The telecom act is one of the most significant pieces of
communications legislation of the post-war era," said Royce
Holland, Allegiance's chairman and chief executive. "It has
directly been responsible for the U.S. dominating the
Internet, as well as building the most modern infrastructure
in the world."
Many experts believe the telecom crunch will probably
get worse before it gets better.
Some say more service providers probably will head to
bankruptcy court. And as those businesses are acquired by
stronger rivals, purchasing their assets for pennies on the
dollar, the industry may face even more tension caused by
players that have the opportunity to operate at far lower
"The other companies that aren't as well financed will get
stressed by that, and they'll go under," said Andrew Whinston,
director of the Center for Research in Electronic Commerce at
the University of Texas at Austin.
The scenario is already being played out. In March,
AT&T Corp. scooped up most of the assets of Northpoint
Communications Inc., which offered high-speed Internet access,
for $135 million in a bankruptcy court auction. Only last
August, before Northpoint began its downward spiral, Verizon
Communications Inc. was expecting to pay $800 million for the
provider of digital subscriber line service.
The dot.com crisis, though worse in Austin than in the
Dallas area, isn't over here either.
"I can name five or 10 companies that are either shells of
their former selves or are looking to reduce their head count
in the Internet space in Dallas," said Lee Blaylock, founder
of ServiceLane, an Internet company that helps customers with
Unlike many pure dot.coms, he said, ServiceLane is holding
its own, largely because of a recent affiliation with Lowe's
Home Centers Inc., a traditional bricks-and-mortar retailer.
What will be the final impact of the tech bust?
Big telecom companies have been slashing their staffs even
more swiftly than they built them up during the boom. Many
dismissed workers are struggling to regain their footing
because companies are not hiring.
"Telecom is down the tubes. E-business is down the tubes.
Wireless is on hold. Although people are talking about it,
they're afraid to spend money on it," said John Lenihan, who
left his job at ailing Scient Corp. and is looking for work as
he also starts his own business.
But experts say the downturn will not last nearly as long
as the crash driven by real estate because wireless phone
service and Internet use are growing at phenomenal rates. The
rest of the economy continues to do well, as indicated by
recent figures that peg the nation's growth at an annual 2
percent for the first quarter.
Dallas-Fort Worth led the nation in new jobs for the year
ending March 31, adding 104,500.
In the aftermath of the real estate crash, many economists
said that Texas needed to diversify its economy by expanding
its technology industry. Despite the current tech downturn,
diversification has paid off, Dr. Whinston said.