| In Through the Out Door The US courts this week waved through a proposal that would let WorldCom, now styling itself MCI, out of bankruptcy early next year. Last month I received a similar notification for MFN, who used to co-locate our computers and provide our Internet connectivity. Apart from the moral dubiousness of allowing big businesses to escape virtually unscathed while shafting their shareholders - many of whom held those shares as part of the money they had put away for their pensions - there is a more fundamental problem. The truth is that these multiple 'Chapter 11' bankruptcies are set to turn the Internet/telecom industries into the same sort of crisis-ridden wasteland that is so typical of the airline industries, and for the same reason. The use of Chapter 11 (which gives companies protection against people they owe money to while they, supposedly, trade their way out of trouble) means that the companies involved effectively come back into the market place with their assets intact and their debts considerably reduced. That might be acceptable for a company that is fundamentally sound, but was badly managed. However, the truth is that the accounting scandal that triggered the bankruptcy was only the effect, not the cause of the problem. The underlying cause was over-capacity in the market. In the same way as the airline business has too many aircraft and is flying planes around half empty, the telecom/Internet business has a massive over-capacity. Empty co-location facilities, vast quantities of unused fibre-optic cable laid, and exchanges with floors of unused switching equipment. Take just one example from my personal experience. For many years now I've always had two lines - one for voice and one for data. Earlier this year I got an ADSL line. Once I knew that was working properly, I was able to cancel one of the lines because I could use a single line for both voice and data. And that's not the only reason for people cutting down. Parents have stopped putting extra lines for their teenagers - why bother when you can give them a mobile phone? Even better, you can give them a mobile phone with a pay as you go facility and give them an allowance for the phone each month. Anything over that they buy out of their regular allowance. Try doing that with a fixed line! So the truth of the matter is that the use of Chapter 11 is preventing normal market processes from sorting out the market by their usual mechanisms - destruction of excess market capacity by bankruptcy. I predict two outcomes to this affair. One, the smaller outfits who managed their affairs prudently will come under increasing pressure as the larger outfits who dumped their debts via Chapter 11 use that freedom to drive prices down (again) to levels that are ruinous to those who are paying their creditors and shareholders. Two, another case of the revolving door with the main players in the business going in and out of Chapter 11 bankruptcy every few years, just like the major airlines. Most people I know who work in the Internet/telecoms industry are looking for jobs outside the industry. They can see the writing on the wall, even if the politicians are illiterate. http://www.theregister.co.uk/content/7/33749.html
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