title: Quite an achievement!

by: Scott Bradner

How can one public company loose more money in 3 months than the gross national product of a reasonably sized country? It seems that a reliable way to do so these days is to be in the telecommunications business. The leaders, if that is the right word, of the old-line phone business are in a contest with the stars of the Internet firmament over who can loose the most stockholder value. Last week Nortel took a big step to solidify its position in this bizarre contest.

Nortel announced that it had lost $19.2 billion in the 2nd quarter of 2001. No matter how you cut it $19.2 billion is a lot of money. The New York Times pointed out that this is more than the gross national product of El Salvador and nearly as much as that of Bolivia. Impressive indeed. That might not be quite the word you would use if, like me, you had some Nortel stock. The value of Nortel stock has gone from $89 per share a year ago to under $10. This represents a loss of $244 billion in shareholder value - ouch!

Nortel is not alone in this. Lucent stock has gone from the high 60s to a bit over $6 in the same time period and Cisco from $70 to $17. Trillions of dollars in paper wealth has vanished. In too many cases its real wealth because people bought the stock at the high prices.

I saw some research a few years ago that looked at the return on investment for a number of different types of infrastructures in the U.S. It looked at the canals, the railroads and the telephone system. The analysis showed that of these only the telephone system paid back its investors, i.e. paid for itself. In the other cases one could say they were financed by stock market crashes. The companies did not have to pay back the money that investors had paid the companies for the stock. The telephone system did eventually pay for itself in the mid 1960's but mostly because it was operating as a regulated monopoly with a rate structure designed to provide a guaranteed return on investment.

Historically, the euphoria ("irrational exuberance") that accompanies a technological shift is rarely well matched to the reality of actual potential return. The past few years of the tech stocks have been a rather good example of this mismatch, unfortunately.

The real question now is whether the financing-by-loss-of-stock-value of the Internet is now mostly over or do we have more to go. A corollary question is which of these players will have an upside, at least relative to their current valuations. It is well past time to forget about the highs of yesteryear.

disclaimer: Harvard's endowment profited greatly from the recent euphoria but I do not know how its going this year and the University has not told me its opinion on infrastructure funding.