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magic process by which words, music, data, films, files, and pictures are turned into

bits and bytes-combinations of Is and Os-that can be manipulated on a computer screen,

stored on a microprocessor, or transmitted over satellites and fiber-optic lines.

It used to be the post office was where I went to send my mail, but once the Internet

came alive, I wanted my mail digitized so I could e-mail it. Photography used to be

a cumbersome process involving film coated with silver dug up from mines halfway

across the world. I used to take some pictures with my camera, then bring the film

to the drugstore to be sent off to a big plant somewhere for processing. But once

the Internet made it possible to send pictures around the world,

attached to or in e-mails, I didn't want to use silver film anymore. I wanted to take

pictures in the digital format, which could be uploaded, not developed. (And by the

way, I didn't want to be confined to using a camera to take them. I wanted to be able

to use my cell phone to do it.) I used to have to go to Barnes & Noble to buy and

browse books, but once the Internet came alive, I wanted to browse for books digitally

on Amazon.com as well. I used to go to the library to do research, but now I wanted

to do it digitally through Google or Yahoo!, not just by roaming the stacks. I used

to buy a CD to listen to Simon and Garfunkel-CDs had already replaced albums as a

form of digitized music-but once the Internet came alive, I wanted those music bits

to be even more malleable and mobile. I wanted to be able to download them into an

iPod. In recent years the digitization technology evolved so I could do just that.

Well, as investors watched this mad rush to digitize everything, they said to

themselves, "Holy cow. If everyone wants all this stuff digitized and turned into

bits and transmitted over the Internet, the demand for Web service companies and the

demand for fiber-optic cables to handle all this digitized stuff around the world

is going to be limitless! You cannot lose if you invest in this!"

And thus was the bubble born.

Overinvestment is not necessarily a bad thing-provided that it is eventually

corrected. I'll always remember a news conference that Microsoft chairman Bill Gates

held at the 1999 World Economic Forum in Davos, at the height of the tech bubble.

Over and over again, Gates was bombarded by reporters with versions of the question,

"Mr. Gates, these Internet stocks, they're a bubble, right? Surely they're a bubble.

They must be a bubble?" Finally an exasperated Gates said to the reporters something

to the effect of, "Look, you bozos, of course they're a bubble, but you're all missing

the point. This bubble is attracting so much new capital to this Internet industry,

it is going to drive innovation faster and faster." Gates compared the Internet to

the gold rush, the idea being that more money was made selling Levi's, picks, shovels,

and hotel rooms to the gold diggers than from digging up gold from the earth. Gates

was right: Booms and bubbles may be economically dangerous; they may end up with many

people losing money and a lot of companies

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going bankrupt. But they also often do drive innovation faster and faster, and the

sheer overcapacity that they spur-whether it is in railroad lines or automobiles-can

create its own unintended positive consequences.

That is what happened with the Internet stock boom. It sparked a huge overinvestment

in fiber-optic cable companies, which then laid massive amounts of fiber-optic cable

on land and under the oceans, which dramatically drove down the cost of making a phone

call or transmitting data anywhere in the world.

The first commercial installation of a fiber-optic system was in 1977, after which

fiber slowly began to replace copper telephone wires, because it could carry data

and digitized voices much farther and faster in larger quantities. According to

Howstuffworks.com, fiber optics are made up of strands of optically pure glass each

"as thin as a human hair," which are arranged in bundles, called "optical cables,"

to carry digitized packets of information over long distances. Because these optical

fibers are so much thinner than copper wires, more fibers can be bundled into a given

diameter of cable than can copper wires, which means that much more data or many more

voices can be sent over the same cable at a lower cost. The most important benefit

of fiber, though, derives from the dramatically higher bandwidth of the signals it

can transport over long distances. Copper wires can carry very high frequencies too,

but only for a few feet before the signal starts to degrade in strength due to certain

parasitic effects. Optical fibers, by contrast, can carry very high-frequency optical

pulses on the same individual fiber without substantial signal degradation for many,

many miles.

The way fiber-optic cables work, explains one of the manufacturers, ARC Electronics,

on its Web site, is by converting data or voices into light pulses and then

transmitting them down fiber lines, instead of using electronic pulses to transmit

information down copper lines. At one end of the fiber-optic system is a transmitter.

The transmitter accepts coded electronic pulse information-words or data-coming from

copper wire out of your home telephone or office computer. The transmitter then

processes and translates those digitized, electronically coded words or data into

equivalently coded light pulses. A light-emitting diode (LED)

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or an injection-laser diode (ILD) can be used to generate the light pulses, which

are then funneled down the fiber-optic cable. The cable functions as a kind of light

guide, guiding the light pulses introduced at one end of the cable through to the

other end, where a light-sensitive receiver converts the pulses back into the

electronic digital Is and Os of the original signal, so they can then show up on your

computer screen as e-mail or in your cell phone as a voice. Fiber-optic cable is also

ideal for secure communications, because it is very difficult to tap.

It was actually the coincidence of the dot-com boom and the Telecommunications Act

of 1996 that launched the fiber-optic bubble. The act allowed local and long-distance

companies to get into each other's businesses, and enabled all sorts of new local

exchange carriers to compete head-to-head with the Baby Bells and AT&T in providing

both phone services and infrastructure. As these new phone companies came online,

offering their own local, long-distance, international, data, and Internet services,

each soughtto have its own infrastructure. And why not?The Internet boom led everyone

to assume that the demand for bandwidth to carry all that Internet traffic would double

every three months-indefinitely. For about two years that was true. But then the law

of large numbers started to kick in, and the pace of doubling slowed. Unfortunately,

the telecom companies weren't paying close attention to the developing mismatch

between demand and reality. The market was in the grip of an Internet fever, and

companies just kept building more and more capacity. And the stock market boom meant

money was free! It was a party! So every one of these incredibly optimistic scenarios

from every one of these new telecom companies got funded. In a period of about five

or six years, these telecom companies invested about $ 1 trillion in wiring the world.

And virtually no one questioned the demand projections.

Few companies got crazier than Global Crossing, one of the companies hired by all

these new telecoms to lay fiber-optic cable for them around the world. Global Crossing

was founded in 1997 by Gary Winnick and went public the next year. Robert Annunziata,

who lasted only a year as CEO, had a contract that the Corporate Library's Nell Minow

once

picked as the worst (from the point of view of shareholders) in the United States.

Among other things, it included Annunziata's mother's first-class airfare to visit

him once a month. It also included a signing bonus of 2 million shares of stock at

$10 a share below market.

Henry Schacht, a veteran industrialist now with E. M. Warburg, Pincus & Co., was

brought in by Lucent, the successor of Western Electric, to help manage it through

this crazy period. He recalled the atmosphere: "The telecom deregulation of 1996 was

hugely important. It allowed competitive local exchange carriers to build their own

capacities and sell in competition with each other and with the Baby Bells. These

new telecoms went to companies like Global Crossing and had them install fiber

networks for them so they could compete at the transport level with AT&T and MCI,

particularly on overseas traffic . . . Everyone thought this was a new world, and

it would never stop. [You had] competitive firms using free capital, and everyone

thought the pie would expand infinitely. So [each company said,] 'I will put my fiber

down before you do, and I will get a bigger share than you.' It was supposed to be

just a vertical growth line, straight up, and we each thought we would get our share,

so everybodybuilt to the max projections and assumed that they would get their share."

It turned out that while business-to-business and e-commerce developed as projected,

and a lot of Web sites that no one anticipated exploded-like eBay, Amazon, and

Google-they still devoured only a fraction of the capacity that was being made

available. So when the dotcom bust came along, there was just way too much fiber-optic

cable out there. Long-distance phone rates went from $2 a minute to 100. And the

transmission of data was virtually free. "The telecom industry has invested itself

right out of a business," Mike McCue, chief operations officer of Tellme Networks,

a voice-activated Internet service, told CNET News.com in June 2001. "They've laid

so much fiber in the ground that they've basically commoditized themselves. They are

going to get into massive price wars with everyone and it's going to be a disaster."

It was a disaster for many of the companies and their investors (Global Crossing filed

for bankruptcy in January 2002, with $12.4 billion in debt), but it turned out to

be a great boon for consumers. Just as the na

tional highway system that was built in the 1950s flattened the United States, broke

down regional differences, and made it so much easier for companies to relocate in

lower-wage regions, like the South, because ithad become so much easier to move people

and goods long distances, so the laying of global fiber highways flattened the

developed world. It helped to break down global regionalism, create a more seamless

global commercial network, and made it simple and almost free to move digitized

labor-service jobs and knowledge work-to lower-cost countries.

(It should be noted, though, that those fiber highways in America tended to stop at

the last mile-before connecting to households. While a huge amount of long-distance

fiber cable was laid to connect India and America, virtually none of these new U.S.

telecom companies laid any substantial new local loop infrastructure, due to a failure

of the 1996 telecom deregulation act to permit real competition in the local loop

between the cable companies and the telephone companies. Where the local broadband

did get installed was in office buildings, which were already pretty well served by

the old companies. So this pushed prices down for businesses-and for Indians who

wanted to get online from Bangalore to do business with those businesses-but it didn't

create the sort of competition that could bring cheap broadband capability to the

American masses in their homes. That has started happening only more recently.)

The broad overinvestment in fiber cable is a gift that keeps on giving, thanks to

the unique nature of fiber optics. Unlike other forms of Internet overinvestment,

it was permanent: Once the fiber cables were laid, no one was going to dig them up

and thereby eliminate the overcapacity. So when the telecom companies went bankrupt,

the banks took them over and then sold their fiber cables for ten cents on the dollar

to new companies, which continued to operate them, which they could do profitably,

having bought them in a fire sale. But the way fiber cable works is that each cable

has multiple strands of fiber init with a potential capacityto transmit many terabits

of data per second on each strand. When these fiber cables were originally laid, the

optical switches-the transmitters and receivers-at each end of them could not take

full advantage of the fiber's full capacity. But every year since then, the optical

switches

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at each end of that fiber cable have gotten better and better, meaning that more and

more voices and data can be transmitted down each fiber. So as the switches keep

improving, the capacity of all the already installed fiber cables just keeps growing,

making it cheaper and easier to transmit voices and data every year to any part of

the world. It is as though we laid down a national highway system where people were

first allowed to drive 50 mph, then 60 mph, then 70 mph, then 80 mph, then eventually

150 mph on the same highways without any fear of accidents. Only this highway wasn't

just national. It was international.

"Every layer of innovation gets built on the next," said Andreessen, who went on from

Netscape to start another high-tech firm, Opsware Inc. "And today the most profound

thing to me is the fact that a fourteen-year-old in Romania or Bangalore or the Soviet

Union or Vietnam has all the information, all the tools, all the software easily

available to apply knowledge however they want. That is why I am sure the next Napster

is going to come out of left field. As bioscience becomes more computational and less

about wet labs, and as all the genomic data becomes easily available on the Internet,

at some point you will be able to design vaccines on your laptop."