iscussion Questions: 1. Why did the strategic plans adopted by companies like Level 3, Global Crossing, and 360 Networks fail? 2. The managers who ran these companies were smart, successful individuals, as were many of the investors who put money into these businesses. How could so many smart people have been so wrong? 3. What specific decision-making biases do you think were at work in this industry during the late 1990s and early 2000s? 4. What could the managers running these companies have done differently that might have led to a different outcome?
iscussion Questions: 1. Why did the strategic plans adopted by companies like Level 3, Global Crossing, and 360 Networks fail? 2. The managers who ran these companies were smart, successful individuals, as were many of the investors who put money into these businesses. How could so many smart people have been so wrong? 3. What specific decision-making biases do you think were at work in this industry during the late 1990s and early 2000s? 4. What could the managers running these companies have done differently that might have led to a different outcome?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Discussion Questions:
1. Why did the strategic plans adopted by companies like Level 3, Global Crossing, and 360 Networks fail?
2. The managers who ran these companies were smart, successful individuals, as were many of the investors who put money into these businesses. How could so many smart people have been so wrong?
3. What specific decision-making biases do you think were at work in this industry during the late 1990s and early 2000s?
4. What could the managers running these companies have done differently that might have led to a different outcome?
Transcribed Image Text:In 1997 Michael O'Dell, the chief scientist at WorldCom, which owned the largest network
of "Internet backbone" fiber optic cable in the world, stated that data traffic over the
Internet was doubling every hundred days. This implied a growth rate of over 1,000
percent a year. O'Dell went on to say that there was not enough fiber optic capacity to
go around, and that “demand will far outstrip supply for the foreseeable future."
Electrified by this potential opportunity, a number of companies rushed into the business.
These firms included Level 3 Communications, 360 Networks, Global Crossing, Qwest
Communications, WorldCom, Williams Communications Group, Genuity Inc., and XO
Communications. In all cases the strategic plans were remarkably similar: Raise lots of
capital, build massive fiber optic networks that straddled the nation (or even the globe),
cut prices, and get ready for the rush of business. Managers at these companies believed
that surging demand would soon catch up with capacity, resulting in a profit bonanza
for those that had the foresight to build out their networks. It was a gold rush, and the first
into the field would stake the best claims.
However, there were dissenting voices. As early as October 1998 an Internet researcher
at AT&T Labs named Andrew Odlyzko published a paper that debunked the assumption
that demand for Internet traffic was growing at 1,000 percent a year. Odlyzko's careful
analysis concluded that growth was much slower-only 100 percent a year! Although still
large, that growth rate was not nearly large enough to fill the massive flood of fiber optic
capacity that was entering the market. Moreover, Odlyzko noted that new technologies
were increasing the amount of data that could be sent down existing fibers, reducing
the need for new fiber. But with investment money flooding into the market, few paid any
attention to him. World- Com was still using the 1,000 percent figure as late as September
2000.
As it turned out, Odlyzko was right. Capacity rapidly outstripped demand, and by late
2002 less than 3 percent of the fiber that had been laid in the ground was actually being
used! While prices slumped, the surge in volume that managers had bet on did not
materialize. Unable to service the debt they had taken on to build out their networks,
company after company tumbled into bankruptcy–including WorldCom, 360 Networks,
XO Communications, and Global Crossing. Level 3 and Qwest survived, but their stock
prices had fallen by 90 percent, and both companies were saddled with massive debts.
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