When lots of companies are in trouble, watch out for the future monopolists picking up cheap assets
The year is 2130. There has been a dreadful network accident. Kajillions of gigabytes of data have collided and been destroyed at the delapidated Midlands node.
It is the most graphic evidence of the consequence of decades of underinvestment in the UK's broadband internet network. The integrity of data transmission is at risk. Headlines in the media talk about Britain's "Third World infrastructure" and columnists call for the network to be taken into public ownership. The reputation and career of S.Byers/omega3 - the latest in a long series of clones of new Labour heroes - is on the line.
Well, we are not there yet. In early 2002, the problem is an excess of spanking new cable capacity - though I know that many will be sceptical of this, given how difficult it is to obtain a fast internet connection in some parts of the country (one cause is an intractable shortage of skilled engineers; another is BT's reluctance to co-operate with rivals on the wiring of homes).
Anyway, if the analogy for the development of the internet and related telecommunications services is with the railways of the 19th century - an overused analogy, but a good one - we have had the boom and now we are into the bust.
In the past week, Global Crossing, the US owner of a vast undersea fibre-optic cable system, filed for bankruptcy protection - the biggest telecoms collapse so far, with debts around £8bn. And here in the UK, we have seen hundreds of millions of pounds wiped off the value of a company called Energis, when it disclosed that it might be in breach of the terms of its borrowing agreements with the banks. This was very bad news for investors, because Energis - which has debts of around £1bn - was supposed to be one of the better run and more financially robust of the new generation of telecommunications businesses.
But Energis's troubles are a little local difficulty compared with the damage to banks and investment institutions that would be wreaked if everything went wrong at NTL, which is redolent of an over-borrowed country with a narrow industrial base. Although its cable network is principally in the UK, it was financed to a large extent out of the US. And it currently owes banks and bondholders £12bn. Short of a miracle, it will not be able to make the payments on its debts.
You cannot simply put such problems down to the global economic slowdown. The point is that, when businesses such as Global Crossing, NTL and Energis were created in the 1990s, they assumed that even if the economic cycle had not been abolished completely, it would not operate for them. They expected seamless growth in revenues for many, many years.
Cables were laid at inordinate expense and inconvenience all over the country. But at the very moment that a single strand too much of fibre-optic cable was put in the ground, something terrible happened to the economics of the industry. In a world of network oversupply, the marginal cost of sending a few electrons down the line is the tiniest nano-increment above nil, which leads to savage discounting. Energis, NTL and many others tried to protect themselves by developing specialist services for specialist segments of the market. But too many not-so-great minds thought alike. Wherever you looked in this industry, prices and profit margins were tumbling.
NTL's best hope is that its bondholders are not in a destructive mood, now that they know the painful truth. It is planning to ask them to convert their loans into "equity", because shares have one wonderful quality: the payment of dividends, as opposed to the payment of interest on debt, is optional.
If all went well, NTL would be transformed from bust to going concern, with no change in its basic business. What it is endeavouring to do is a bit like you asking a building society to take over the ownership of your house, but allow you and your children and their children to live there, in perpetuity, rent free.
Why on earth would bondholders agree to this? NTL would have to persuade them that all the alternatives were worse, that they would lose a lot more if the business was declared officially insolvent. The sheer scale of NTL's debts works to its advantage. The risks to the financial system of an uncontrolled collapse will lead both creditors and regulators to do all they can to keep it afloat.
Funnily enough, however, it is just when everything looks absolutely appalling for companies, when competition looks to have done its healthily Schumpeterian destructive bit, that ministers and regulators should be most on their guard. This is the time when well-heeled vultures pick up assets at knock-down prices and create monopolies. There are already just the faintest signs that the elimination of capacity (or companies going bust) may soon allow a rise in prices for internet and data transmission services.
Although it may seem implausible at the moment, I would not be at all surprised if - within a couple of years - the widely perceived problem were a shortage of competition. Place your bets on which company or individual will be demonised as a rapacious broadband baron ripping us all off.
Meanwhile, my Schadenfreude at the pain suffered by greedy, naive financial institutions is not unmitigated. It grieves me that the one company revelling in the plight of the young upstarts is BT, which knows a thing or two about monopolistic behaviour.
Robert Peston is editorial director of Quest ; www.csquest.com; e-mail firstname.lastname@example.org
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