The 20th century triumph of capitalism has been described as the "end of history" and the New Economy as the end of economic history. But investors in 21st century telecommunications have ignored to their cost the warning of the philosopher George Santayana that "those who cannot remember the past are condemned to repeat it".
They have seen billions of dollars in stock holdings evaporate in recent months in a meltdown which has a historic parallel in a 19th century crisis in capitalism that had the same root cause - extending a communications network too quickly.
A century and a half ago the railway barons built too many tracks, could not produce enough revenue to service their loans, and crashed into the buffers, losing enormous fortunes in investors' money. Today, telecom barons have created too many networks, cannot produce enough revenue to service their loans, and shareholders are again seeing their massive investments evaporate.
The debacle in telecoms is shaping up to be "one of the biggest financial fiascos ever", with losses to investors approaching the levels of the $150 billion (€175 billion) federal bailout of the US Savings and Loan industry 10 years ago, as the Wall Street Journal put it. Companies competing to build fibre-optic networks in the United States have created a nation-wide web of fibre-optic cable totalling 39 million miles, some of it running in plastic pipes alongside the same tracks built during the railroad mania of the 19th century. But only 2.6 per cent of the cables is actually in use.
The ambitions of companies like Denver-based Level 3 Communications to create the biggest fibre-optic network the world has ever seen have been reduced to a desperate struggle for survival as other companies crowd into the market.
One of Level 3's biggest backers, construction billionaire Walter Scott of Omaha, said that he was dazzled by a talk given by Bill Gates at a 1995 meeting of executives in Ireland. The Microsoft chairman's message was that the Internet was about to change the world and that Internet traffic would keep growing to satisfy demand.
He was right, up to a point, that point being reached with the dotcom collapse and the economic slowdown this year.
There were unique reasons that hastened the fibre-optics slump, like a failure to provide enough conduits to run the new cables to offices and homes. But it was the old story: with the glut in supply, prices collapsed. The theory that demand would grow faster than prices would fall - which once also falsely inspired the railroad magnates - did not hold.
Companies like Global Crossing and 360 Networks - which provide Ireland with international connectivity through transatlantic cables - have lost billions in shareholder value. Global Crossing's share value has fallen from a year's high of $37.75 to just under $8 and 360 Networks is said to be facing bankruptcy.
Level 3 on Monday slashed its revenue forecasts and said it would lay off a quarter of its workforce. Its stock has collapsed from a year's high of $95 to under $6. Losses among Level 3 investors in Omaha alone could run to $20 billion.
This is about the same as the staggering amount written off by Nortel, the global Internet and communications leader, which reported on Friday a second quarter loss of $19.2 billion due to a "disastrous" downturn in telecoms spending. $19.2 billion is almost a third of Ireland's GDP, or three times that of Iceland, using 1999 figures. It is the biggest single company loss in history, if one excludes the slightly larger figure recorded by General Motors a decade ago, which was inflated by pension-related charges.
Many telecom companies still have the problem of actually creating the network infrastructure to produce revenue to stay alive. "Central banks around the world are telling their domestic banks to back-off lending to them," a senior international banking official told me this week. Telecom companies financed by bank credit have "borrowed to their eyeballs just to buy licences" in developing countries, he said.
"Now they have to put in the infrastructure, but with technology moving along they are going to have to borrow a whole lot more money to deliver a service while the value of what assets they have is declining."
Things had actually reached the point he said where "The biggest threat to world banking today is in telecoms". Just as it once was in railways.
