Boom and Bust Telacommunication

Boom and Bust in

Telecommunications

Elise A. Couper, John P. Hejkal, and Alexander L. Wolman

he telecommunications sector has experienced a spectacular decline from mid-2000 until the present, after experiencing a spectacular rise from early 1997. Equity valuations and capital spending soared and

T

then plummeted, and a flood of initial public offerings turned into a flood of bankruptcy filings. The boom and bust in telecommunications coincided with the boom and bust in the U.S. equity market as a whole and with the “dot- com bubble” of Internet stocks. The dot-coms received most of the publicity initially, but the telecommunications industry accounts for a much larger share of market capitalization gained and lost than do the dot-coms.1 This article documents the telecom boom and bust, and contends that it was caused by a combination of major changes in the regulatory landscape and rapid techno- logical progress. Both factors made it difficult for telecommunications firms and outside investors to accurately forecast supply and demand conditions in the industry.2

The single most important telecommunications regulatory change in recent years was the Telecommunications Act of 1996. This Act was meant to bring competition to the local exchange carrier level, that is local telephone service. By 1996, long-distance telephone service had a significant amount of com- petition, whereas local service was largely monopolized by the regional Bell

Hejkal and Wolman are with the Federal Reserve Bank of Richmond. Couper is a Ph.D. student in economics at the University of California, Berkeley. We are grateful to Huberto Ennis, Andrew Foerster, Tom Humphrey, John Weinberg, and Roy Webb for comments on an earlier draft. The views here are the authors’ and should not be attributed to the Federal Reserve Bank of Richmond, the Federal Reserve System, or the Board of Governors of the Federal Reserve System.

1 As will...