Hi guys... thought I would chime in on your thread as I feel uniquely qualified to post to this topic.
You see, I'm a 10 year veteran of Worldcom. Actually, most of those 10 years were spent with MCI before Worldcom bought them out. I also grew up with Telecom running in my family. Father has been with what is now known as Qwest for the last 20+ years. Uncles were with Nynex and Ameritec. Grandmother retired from Bell Telephone and Telegraph before the telco breakup. I also majored in Business at college, and am part way through my MBA in Telecommunications Management. All of it relevant to my understanding of the companies involved, and some of the factors that played in their current set of issues.
Your first article about the Pyramid Scheme was interesting Newbie~wan, but I don't agree that its the only cause for the fall of Worldcom (and soon to be others) that the author made it out to be. For sure it may have contributed to the accounting irregularities and deception, but the capacity exchanges weren't (IMHO) the proximate cause of the failures. That, and for a pyramid scheme to exist, there has to be a certain amount of collusion or intent on the part of the upper levels of the pyramid to create one. I don't believe this really ever existed. I do agree though that some of the events which transpired, within the companies do resemble the sort of redistribution of money that some pyramid schemes employ. However, keep in mind that the author has only shown you a few of the major telco companies in his pyramid. What about the others? If you include Sprint, Ameritec, GTE, AT&T, Pac Bel, and whatever other ones you wish, his pyramid theory starts to lose its shape and strength.
That sort of "capacity swapping" as he referred to it goes on all the time, but its only dark fiber until its needed. Large telco companies buy or trade future use capacity, or current use capacity, on competitors lines and cables because it protects them from catastrophic outages. It also allows them to "lease" lines from other companies in the hopes of reselling the bandwidth (hopefully at a profit), without having to endure the cost of building the required network themselves and at their expense.
Think of it as an insurance policy of sorts. Telco is, if nothing else, extremely redundant in its architecture when done right. MCI and ATT for instance, two bitter rivals in the long distance market, each carry their calls over their own lines, as well as the lines of their competitors. The idea is that by spreading your calls (data transmission, or whatever) over a large area and many networks, that one outage won't take down your whole operation or effect all of your customers. Its really quite a smart idea, and is a good way of insuring that your business would continue to operate relatively uneffected in the event of some type of catastrophy. Is the fiber just laying in the ground sometimes not being used? Sure it is. And when its needed, it can quickly be turned up for use by whomever it was that leased it, and for whatever reason. Its a hell of a lot faster to install the fiber patch panels and boot up the switches/routers than it is to dig a trench from Minneapolis to St. Louis for your fiber.....trust me
The greatest amount of cost in running fiber isn't the fiber itself either, its the contruction cost for the initial install. Those companies that laid fiber (and almost all of them did to a certain extent) almost always included a large number of extra stands..... both because its easier to install it once, and the strands themselves are cheap compared to the cost of the installation.
So, lets say that MCI decides to lease or trade some of their fiber capacity to ATT. ATT might only need 1 strand to carry the number of calls in that area at the time, but instead they lease 5. Partly in the hopes that they can increase the amount of customers and traffic they have, thereby necessitating more fiber, and maybe partly as well to increase the redunancy of their own backup network...thereby giving them a "second backup" network. The other four are just laying there, dark and not used....but it doesn't necessarily cost a great deal, or mean that its a bad business decison.
Even the article you pointed us to (using Qwest as an example) mentioned that the amount of money involved in "Round Trip" revenue accounted for only 4% of Qwests earnings in the first nine months of 2001. Granted, thats a TON of cash to you and me, but compared to the numbers we are talking about here, its pocket change.
Everyone is outraged about the accounting fraud, and undoubtably we all should be. I can't even begin to tell you how it effected me financially, or what it will mean in the future should I be let go in the next round of layoffs. No matter how you slice it, its wrong! But as the author of your articles stated, its nothing more than the desperate actions of management and their complicit accountants to (best case) try to save the company, or (worst case) hide the truth and save their own butts.
The real root cause of the problem lies in the way that companies today are run, and with those that run them. There are also problems with Wall Street, and the unrealistic expectations that companies must always continue to show growth in order to stay in favor with Wall Street Analysts. But the bottom line is (IMO) its all a matter of how management runs a company, and the decisions they make.
Bernie Ebbers and the Worldcom Board Of Directors for example, are rife with examples of how a CEO bought up several extremely successful companies (sometimes at too high a price) and then ran them into the ground.
His management (or mis-managment) style, and penchant for aquisition, is also an excellent example of stretching your company way too thin financially simply for the sake of buying more companies. Even non-business people realize that eventually you have to pay off your debt....that you can't buy or borrow indefinitely.
Bernie's problem, and those of other CEO's and Board of Directors, was that (in addition to possibly being corrupt) they started to believe fully in their own optimistic predictions! Thinking that tomorrow would always be as rosy as the day before it. And if not, it didn't really matter as long as they were pulling down huge salaries, had their golden parachutes in order, and their stock options continued to be worth something.
Then when it became apparent that the predictions were not going to happen, they either bailed and left the company (collecting their golden parachute and exercising their options) or, they scrambled to continue to meet Wall Street expectations, and hide their mistakes and inequities.
Pyramid scheme?? I don't really think so... just good old fashion mis-management, greed, and a combination of negative factors that managment ignored as a real possibility when making their decisions.
I never understood studying history when I was a kid (unless you just enjoyed it - as many people do), but now I understand all too clearly.
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