The technology meltdown recalls images of the 1980s real estate collapse, but experts disagree on how long this business blow will last

05/06/2001

By Vikas Bajaj and Alan Goldstein / The Dallas Morning News

Allison V. Smith / DMN An 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 easy money.

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 excess inventory.

"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 sky.

"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 expansion."

Real estate craze

"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 1990s.

"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 essentially intact.

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."

Future shock

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 costs.

"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 home improvements.

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.