According to the news media, the history of the Internet is straightforward. In the 1950s, the idea was opposed by the telephone companies, notably AT&T. In the 1960s, sponsored by the US military, the Internet started as an experiment to link scientists. This idea gained a wider audience. The breakup of AT&T in 1984 helped the process and the Internet was becoming a great success. All was well until 2000-2001 when there two great setbacks: 1) the dot.com bust and 2) a crisis in the telecommunications and specifically the telephone industry. Some link these events largely or even exclusively to the events of September 11, 2001. Since then, our safety has been jeopardized by terrorism and Internet developments have been correspondingly shaky.
This essay challenges the received wisdom concerning the Internet. There is strong evidence that there was support from telephone companies from the outset; that the breakup of AT&T did not immediately change the situation. Since 2000, there was no fundamental decline in the telecom markets. Indeed, the so called bubble might have been a diversionary tactic to take attention away from the real struggle: control of infrastructure. There have also been other important changes. Energy companies now play a central role in the media domain. In the US, the military is extending its activities in the civil sphere. Private investment firms are systematically buying up sections of the entire telecommunications infrastructure from cables to satellites. There is a case to be made that the myriad bankruptcies in the field are being planned. This plan extends far beyond new media and includes education, finance, health, law and other sectors. And while the surface transactions are legitimate, these developments are leading to a crisis of trust, which endangers all the noble values of liberty and freedom for which the United States has rightly become famous.
Acknowledgements
I am grateful to a number of individuals who have kindly read this paper and suggested improvements and references among whom: Nik Baerten, John Beckers, Hans Koolmees, Dominic Pinto, Chris Zielinski, the alias David Evans and especially . I am particularly to Jonathan Robin who provided several references and improvements. I also thank also others whose discretion leaves them unnamed. Finally I am grateful to Dean Tummers for giving me the freedom to write this little essay which goes slightly beyond the usual borders of cultural studies.
Since its beginnings in the 1960s there have been many stories about the Internet. One is that the Internet was a US invention. The story that officials in AT&T were once adamantly opposed to the Internet[1] led to a received wisdom that telephone or telecommunications companies (telcos or telecoms) and the Internet were unrelated. The telephone companies (telcos), we are told, were big monopolies, blind to innovation and the Internet was started on the sly by a few scientists and academics. The Federal Communications Commission (FCC) version was more subtle:[2] The telcos did infrastructure, while those who developed the Internet did applications.[3]
When one looks more closely at the evidence, a very different story emerges (§ 2). The Internet began in Europe. In the United States, which is the focus of this essay, the development of the Internet was dominated by the major telcos. While received wisdom tells us that AT&T was disbanded in 1984, AT&T remained one of the leading players in the field (§ 3). Also important until recently were competitors such as MCI/Worldcom (§4); AT&T’s Baby Bells, especially Bell Atlantic in its new guise as Verizon (§ 5) and AT&T’s BellCore in its new guise as Telcordia (§ 6). In theory, these were four sets of players. With the bankruptcy of MCI/Worldcom, there was effectively only one major player on the home front: AT&T in the various guises as itself, the Baby Bells, and its research labs (Lucent, Telcordia and SAIC). There was significantly more cohesion between the parts of AT&T than would at first sight appear. AT&T was a telecommunications company with Internet interests. Through its divisions AT&T became involved in business solutions, cable and broadband content as well as mobile communications and satellites. Through its various subsidiaries AT&T became intimately involved in education; Next Generation Internet (NGI); Electronic Numbering: to achieve Internet Telephony[4] and Domain Name Systems.
2. Background of the Internet
The origins of the Internet[6] are frequently linked with As we may think (1945), the famous essay of Vannevar Bush in which he described his Memex device that used microfiche and “in which an individual stores all his books, records and communications and which is mechanized so that it may be consulted with exceeding speed and flexibility.”More than a decade earlier, Paul Otlet (1934),[7] who had worked with Lafontaine in establishing a universal bibliographical organization of intellectual work (figure 2),[8] had envisaged a machine for reading:
Soon television will be a problem that has essentially been resolved just as it is already from a scientific viewpoint: the image reproduces itself at a distance, wireless. One can imagine an electric telescope which allows one to read at home pre-ordered pages of the books exhibited in the “teleg” room of large libraries. This will be the telephoned book.[9]
This led to “a machine to think/imagine the world” (la machine à penser le monde, 1943)[10]as part of his larger vision of a Mundaneum for access to all human knowledge. This was a large, television-like sphere that allowed viewers to study information literally from all sides. Neither of these machines were developed directly as Otlet or Bush envisaged. Nonetheless, Vannevar Bush’s student, Claude Shannon, applied the principles of Boolean logic to define bits and bytes as they are now used in computers. Bush’s essay also inspired Douglas Engelbart, Ted Nelson and most of the pioneers of what has since been called hypertext and hypermedia. By 1968 the Internet became a reality.
We are almost always told that the Internet began solely in America. This is not really true. The earliest pioneers included a Frenchman, Louis Pouzin,[11] who introduced the idea of data grams and an Englishman, Donald W. Davies,[12] who was one of the inventors of packet-switching. Indeed, Davies is credited with renaming what had been called data grams as packets in 1976.[13] Another of the great pioneers in Britain was Peter T. Kirstein,[14] who went to America at the beginning of the Arpanet in 1969 when it was decided that Davies could not go for reasons of national security.[15] According to Bruce Sterling: “The National Physical Laboratory in Great Britain set up the first test network on these principles [of packet switching] in 1968. Shortly afterward, the Pentagon's Advanced Research Projects Agency decided to fund a larger, more ambitious project in the USA.”[16]
Hence an English project[17] of 1968 inspired the ARPAnet in 1969, which marked the beginnings of the US Internet. It was false to claim that America invented the Internet and it was simply misleading to argue that because America invented the Internet, it was their right to control its governance through organizations such as the Internet Assigned Names Authority (IANA) and more recently the Internet Corporation for Assigned Names and Numbers (ICANN).
3. AT&T
Long before the Internet began, AT&T founded Bell Labs in 1925. In the 1930s, Vannevar Bush was a professor at the Massachussets Institute of technology (MIT) working on a Differential Analyser machine that led to the Electronic Numerical Integrator and Computer (ENIAC).[18] In 1945, Bush went on to write As we may Think, which was one of the first published visions of what the Internet might become. Vannevar Bush’s[19] student at MIT in the 1930s was Claude Shannon who recognized a close similarity between the Boolean algebra that he had learned as an undergraduate and an electric current. “The next obvious step would be to lay out circuitry according to Boolean principles, allowing the circuits to binary-test propositions as well as calculate problems.”[20] Claude Shannon, Vannevar Bush and Norbert Wiener, the father of cybernetics, all knew each other well.[21]
Shannon graduated from MIT in 1940, and in 1941 joined the Bell Telephone Laboratories, where he was “charged with the tasks of developing more efficient information transmitting methods and improving the reliability of long-distance telephone and telegraph lines.”[22]Information was taken in its widest possible sense to include messages occurring in any communications medium - television, radio, telephone, data-processing devices such as computers and servomechanisms, even neural networks. This quest for multi-media avant la lettre, led Shannon and his colleague Weaver, to develop information theory (1948)[23], which is the cornerstone for the digital, electronic communication of information. Wiener’s book on Cybernetics was published in the same year. Hence, the context for the internet was prepared at AT&T’s Bell Labs.
The same Bell Labs did some of the first digital transmission and switching in 1962, seven years before the US Internet began. When the Department of Defense (DoD) commissioned the Advanced Research Project Agency’s Network (ARPANET) to do research into networking, it was AT&T that provided 50kbps lines. In 1969, the year that the Internet began, AT&T’s Bell Labs developed Unix, which was “the operating system behind the early Internet, and was one of the key operating systems in the middle and late ARPANET.”
John Quarterman has noted that Ken Thompson and Dennis M. Ritchie “originally managed to develop [the] UNIX [software], starting on a machine in an attic, largely by convincing AT&T Bell Labs that they were really working on a text-processing system for handling patents.”[24] This led later to RFC 681, “Network Unix,” (May 1975),[25] the operating system behind Usenet. Quarterman noted that “AT&T itself often didn't seem to know half of what its own people were doing. For several significant years, a sizeable proportion of USENET was supported for free by AT&T.”[26] In Quarterman’s version, AT&T had a few bright visionaries working away while the management was blind.
There are reasons to believe that management must have been aware of something. Between 1969 and 1972, Bell Labs developed the C programming language basic to much of Internet software. In 1970, AT&T installed the first cross-country link between the University of California at Los Angeles (UCLA) and Bolt, Beranek and Newman (BBN) in Boston. In 1976, AT&T’s Bell Labs developed (Unix-to-Unix CoPy (UUCP), which was distributed with UNIX one year later. A more recent survey of AT&Ts achievements reminded us that it: “It launched commercial radio-telephony services across the Atlantic (with what is now British Telecom) in 1927. AT&T commissioned the first commercial communications satellite, Telstar I, in 1962 and was active in development of the internet.”[27]
In the 1960's, Michael Lesk “worked for the SMART project, wrote much of their retrieval code and did many of the retrieval experiments, as well as obtaining a PhD in Chemical Physics.” He joined Bell Core and in the 1970s he “worked in the group that built Unix.” He wrote Unix tools for word processing (tbl, refer), compiling (lex), and networking (uucp). In the 1980s, he “worked on specific information systems applications, mostly with geography (a system for driving directions) and dictionaries (a system for disambiguating words in context).[28] He went on to become Chief Scientist of Bellcore[29] and later became the Division Director, Information and Intelligent Systems at the National Science Foundation (NSF).[30]
At the time of the divestiture of in 1984, AT&T changed its Central Services Organisation (CSO) into Bell Communications Research (BCR) “to serve the Bell operating companies providing a center for technological expertise and innovation.” That same year, AT&T introduced the North American Numbering Plan.
Another scientist, Dr. Bruce R. Schatz, also “spent ten years in industrial R&D at Bellcore and Bell Labs, where he built prototypes of networked digital libraries which served as a foundation of current Internet services through the Telesophy project.[31] It has been claimed that this project on multimedia information retrieval across networks “showed the feasibility of what became the World-Wide Web 10 years later.”[32] In an e-mail of 1 February 1985 18:52, Dr. Schatz described his vision of the Telesophy project as a “worldwide information community, a greatly generalized USENET.”[33] At the time, the Telesophy project was not seen as a priority at Bell Labs. Accordingly, William Y. Arms, then the Vice President, Academic, of Carnegie Mellon University, wrote a letter of support.[34]Professor Arms went on to become the Director of Library Systems (1995-1997) and later the Vice-President of the Corporation for National Research Initiatives (CNRI, Reston, VA). Meanwhile, Dr. Schatz went on to develop the WCS [the Worm Community System]. [35]
Dr Schatz went on to become scientific advisor for digital libraries and information systems
at NCSA when they developed the Mosaic browser. He also became Principal Investigator of the NSF/DARPA/ NASA Digital Libraries Initiative project and subsequently developed the Interspace project, which plays a role in visions for a Next Generation Internet. (Cf. below § 4). More recently, NASA has also been exploring an interplanetary Internet, which may potentially replace the idea of packet switching.
In 1986, when New England was cut off from the net, it turned out that all seven of the ARPA trunk lines were in one large AT&T cable. According to their own website, from 1984 until 1996, “AT&T was an integrated provider of communications services and products, network equipment and computer systems.”[36] Could all of this have been allowed to evolve without any knowledge and endorsement by the management?
In 1991, AT&T merged with National Cash Register (NCR) “in a $7.3 billion deal that gave AT&T the ability to better meet customers' needs for networked computing, globally.”[37] It is striking, that when InterNic was established by the National Science Foundation (NSF) in 1993, the directory and database services were given to AT&T. In 1994, AT&T became one of the first companies to experiment with Internet banner ads. AT&T’s Worldnet – also the name of Schatz’s vision outlined above-- was one of the early Internet Service Providers (ISPs). In 1996, the corporation voluntarily split into three companies:
1. AT&T communication services
2. Lucent communications products
3. National Cash Register (NCR) Corp. computer business.
In theory, there was now a clear distinction between 1) telephony interests (AT&T); 2) related software products (Lucent) and 3) computer/Internet interests (NCR). In practice, the situation remained more complex for at least three reasons. First, AT&T itself today had three Internet related research laboratories: a) Research Internet and Network Systems Research[38]; b) Voice Enabled Services Research[39] and c) Information and Software Systems Research.[40]
Second, Lucent, a spinoff from the old Bell Labs, in addition to its work on data networking and integrated circuits, had no less than eight sets of products related to the Internet.[41] Third, and perhaps most significantly, AT&T’s Central Services Organisation (CSO), which became Bell Communications Research (BCR or Bellcore) was officially sold to Science Applications International Corporation (SAIC, cf. §6), but continued to have goals very close to those of AT&T, particularly in fields such as ENUM. After 1997, AT&T was officially only a “communications services” company. Nonetheless, it continued to expand its interests beyond the narrow confines of telephony. For instance, in 1998, AT&T bought the cable company, MediaOne. According, to Clay Shirky, the motivation for this move came from AT&T’s plans to become “the sole provider for high-speed internet access for a sizable chunk of the country.[42] In January 1999, Lucent Technologies acquired “Ascend for a sum of $20 billion, thus obtaining products and skills in the IP, ATM and xDSL sectors. Also in January 1999, Lucent became “the world's leading equipment manufacturer ahead of Ericsson, with revenues of $26.845 billion, representing a 17% increase over a year.”[43] In March 1999, Lucent acquired “Kenan Systems ($1.48 billion), a leader in billing and customer management systems.”[44]
In the past five years, there has been enormous activity to extend networks beyond computers to include all information appliances. Here, the Home Audio Visual Information (HAVI)[45] consortium, which includes Philips, was a pioneer. Others such as the Universal Plug and Play Forum[46]wanted to extend this concept to smart objects and intelligent devices – especially attractive under an IPv6 architecture where the slogan “IP Everywhere” is no exaggeration with the possibility of several billion IP numbers per mm² of the Earth’s surface.Low-level artificial intelligence systems “currently monitor military systems, optimize the water level in dishwashers, control the actions of simulated pets, and help predict natural disasters.”[47] This is an area in which the research labs of AT&T have been working for decades under the title of telemetry.[48] For instance, in 1999, Lucent's Kenan Systems and Whisper Communications entered into a global marketing agreement for utilities and energy service providers to:
answer the specific billing, customer care, order management, decision-support and usage mediation requirements of leading service providers in the communications and utility industries world-wide, including gas, electric, water, mobile and wireline voice and data services, broadband, Internet, and value-added services.[49]
If these developments are considered from a global level there are six sets of players in the global ICT game: 1) the telcos which now include cable interests (AT&T, Sprint, NTT, British Telecom, Deutsche Telecom, France Telecom, Cable and Wireless etc.); 2) the computer companies (IBM, Compaq/HP, Sun, Microsoft, Apple); 3) the carrier equipment companies (Cisco, Lucent, Nortel, Alcatel, Ericsson); 4) the content holders (Reed/Elsevier, Thomson, Murdoch, Bertelsmann, and AOL/Time Warner and Vivendi/Universal); 5) the home entertainment companies (Sony, Philips, Samsung etc.) and 6) the satellite companies (e.g. SES Global). Together these players represent different aspects of the digital knowledge production chain or knowledge life-cycle.
Theoretically these sets of players are all in competition with one another. In practice AT&T has links with all parts of this knowledge life-cycle. For instance, with respect to computer companies, AT&T has links with Microsoft[50] and long-standing links with IBM. Already in 1991, IBM and AT&T Paradyne announced that they would develop mainframe network technology together.[51] On December 8, 1998 AT&T and IBM announced a series of strategic agreements under which AT&T would acquire IBM's Global Network business for $5 billion in cash, and the two companies would enter into outsourcing contracts with each other. The contract for AT&T to acquire IBM's network was completed in the US on April 30, 1999.[52]
In 1999, AT&T and IBM also made an E-Commerce alliance.[53] In 2000, AT&T and IBM announced that they would work together in providing wireless solutions.[54] In September of 2000 IBM and AT&T signed a $450 million web hosting deal.[55] In 2001, IBM, AT&T and Lotus (owned by IBM) announced an Application Service Provider (ASP) Enablement Suite.[56] In 2002, IBM and AT&T released free privacy tools together.[57] In addition, there were a series of further links through IBM. In 2002, IBM acquired PriceWaterhouse- Coopers in order that, among other things, their educational solutions will be aligned.
With respect to carrier equipment, both AT&T, and IBM have close links with Cisco. With respect to content holders AT&T and AOL were poised to launch an IPO together.[58] AOL has made links with Legend Computers in China. With respect to home entertainment IBM has links with Toshiba and Sony for making Playstation 3.[59] In this constellation, pipelines and content are integrated. IBM was theoretically in competition with EDS and SAP but was also partnered with them.[60] Through a nexus of AT&T, IBM, Cisco, AOL, and Sony five sets of players were linked. Hence, even the sale of MGM to Sony did not threaten this inner circle.
From all this[61] it is clear that a) AT&T’s interests in networked computing existed well before the Internet; b) AT&T’s interests played a significant role in the development of the Internet and c) neither the forced split up in 1984, nor the voluntary partitioning into communications services (AT&T), communications products (Lucent) and computers (NCR) in 1996 changed this fundamentally. In short, AT&T[62] was and remains centrally active in the development of the Internet.[63]
Restructuring
In 1999, Deutsche Telekom announced that it was restructuring into four divisions. In October 2000, AT&T announced that it was (also) restructuring into four businesses, namely, AT&T Consumer, AT&T Business, AT&T Wireless, and AT&T Broadband. It is striking that preparations for this separation appear to have evolved carefully over the past decade.
AT&T Consumer
In 22 July 2004, AT&T announced that it was no longer seeking residential customers.[64] This was slightly misleading. In December 2004, AT&T’s Consumer section called: At Home and on the Go claimed it was “for Voice over IP, calling plans, Internet and more.”[65] Meanwhile four of the largest media mergers in the past decade related directly to this focus on consumers, and to the quest for Broadband (cf. below) namely, a) TCI/Liberty; b) Time-Warner-AOL; c) Twentieth Century Fox and Newscorp and d) Metro-Goldwyn-Mayer (MGM).
TCI/Liberty
Telecommunications Inc. (TCI) began in the 1950s. Liberty Media was founded in 1990 as TCI’s programming arm. In 1988, like Comcast, TCI/Liberty also bought a part of Storer from KKR. In 1999, AT&T bought John Malone’s Telecommunications Inc. (TCI) for $48 billion (some say $54 billion, while others claim the deal was worth $68 billion[66]). This provided AT&T with Liberty Media and “with a substantial stake in Murdoch-controlled News Corporation, a 25% share of Time Warner Cable and 39% of cable ISP @Home.”[67] It also set the stage for a new division called AT&T Consumer Services.
In 2001, AT&T spun off Liberty Media. In 2001, Liberty also took a $1.4 billion stake in UnitedGlobalCom/United PanEurope Communications cable group and in 2004 it gained control of same. Meanwhile in 2001, it bought “nine German regional cable networks from Deutsche Telekom for $5 billion and Deutsche Bank's Tele Columbus and SMARTcom AG cable subsidiaries for $1 billion. In 2003, it bought the remaining 57% of QVC from Qualcomm. By 2004, it had increased its stakes in New Corp to 17% and there were rumors that Liberty was trying to take over News Corp.[68]
AT&T research into communications technology was reflected in partnership between Western Electric and Warner Bros subsidiary Vitaphone about sound recording and speakers for motion films. That was used for the landmark 1926 Don Juan and 1927 Jazz Singer, with AT&T's Electrical Research Products Inc (ERPI) being established in 1927 to service and distribute Western Electric sound equipment.
By the end of the following year over 1,000 cinemas used that gear and most Hollywood studios were leaning to Western Electric as a supplier in the transition to sound production. That drove RCA's acquisition of a stake in FBO during 1927 and creation with Joseph Kennedy of the Radio Keith Orpheum (RKO) film production, distribution and exhibition group. AT&T in turn financed studios and cinema chain purchases of its equipment through loans from ERPI or taking a stake in the film companies.[69]
America OnLine (AOL)
airline reservations, restaurant reviews, banking information” into per sons homes.[70] In 1982, the Control Video [71]
Time-Warner-AOL
February 1999, AT&T announced an agreement with Time Warner to set up a joint venture for providing cable operator subscribers (12.6 million in 20 States) with telephone services. AT&T had a 75.5% stake in the new company.[72]the conglomerate had a market value of US$300 billion in January 2000 but had slumped to US$105 billion two years later.” [73]
Under the agreement, for its 27.64 percent stake in TWE, AT&T Broadband will receive $2.1 billion in cash, $1.5 billion in common stock of AOL Time Warner Inc., valued as of the time of closing, and a 21 percent equity interest (with less than five percent voting power in the election of directors) in a new cable company serving about 10.8 million subscribers.[74]
In September 2003, dissatisfaction with AOL’s role was manifested through the Board's decision to remove 'AOL' from the AOL Time Warner corporate title.[75]regulatory and legal action over accounting practices at its America Online division”[76]
Twentieth Century Fox and Newscorp
[77]substantial stake in Murdoch-controlled News Corporation. the three largest international media groups, operating in most sectors and most continents.”[78] In July 2003 News Corp. “signed a seven-year, $150 million deal with the telecom carrier [AT&T] for voice and international data services.”[79]
Meanwhile, in 2001, Newscorp sold its 49.5% stake in Fox Family Worldwide to Disney for $5.3 billion. In 2003, it bought a 34% controlling stake in Hughes Electronics (satellite broadcaster DirectTV) for $6.6 billion.[80] Hence, the attempts of Comcast to acquire Disney and of Liberty to acquire Newscorp may have been part of a bigger picture, which aimed to get back DirectTV that initially belonged to Hughes, a subsidiary of General Motors, another of the very big players behind the scenes.
MGM (Metro-Goldwyn-Mayer)
In 1997, MGM purchased Metromedia International's studio properties (Orion Pictures, Goldwyn Entertainment, and the Motion Picture Corporation of America).”[81] In 2004, MGM was sold to Sony. As we shall see below under AT&T Broadcast, Comcast, played a significant role in this venture.
Meanwhile, in 1997, C. Michael Armstrong, CEO of General Motors (GM) Hughes Electronics, “led a great new product launch--DirecTV, a satellite-to-home television service that beams crystal-clear programming to rooftop dishes.”[82] We shall show later that the privatization of satellites represented another important dimension to the struggle for communications channels (§10). While the above developments were momentous in themselves they represented only a quarter of the complete AT&T vision.
AT&T Business
Some aspects of AT&T’s business section have been mentioned above in the discussion of links with IBM. There were a number of other elements. In 1996 J.P. Morgan, CSC, Andersen Consulting, AT&T Solutions and Bell Atlantic Network Integration formed the Pinnacle Alliance to manage parts of J.P. Morgan’s global technology infrastructure.[83] In 1998, AT&T bought IBM’s global network for $5 billion. It went on to make a $10 billion dollar joint venture with British Telecom for one stop shopping for big businesses.
On 23 January 2002, AT&T’s Enterprise Business announced a) Managed Services Portfolio, and a Strategic Approach To Serving Business Customers Worldwide; b) New High Availability And Security Services To Its Business Continuity Portfolio; c) Enhanced Capabilities to its Hosting Services Portfolio; and d) the debut of its First Two Global Virtual Private Network Services.[84] Their Enterprise business section addressed government, wholesale, resellers, VARS and agents. It also had a separate site for Small and Medium Business.[85]
AT&T Wireless
A third division focused on wireless communications. AT&T claimed to have invented cellular service at its Bell Labs in 1947 and to have built the first cellular systems in Chicago and Washington in 1984. In 1994, it acquired McCaw Cellular Communications for $11.5 billion.[86] On 3 May 1999, AT&T acquired Vanguard Wireless for $1.7 billion including about $600 million in assumed debt.[87] On November 30, 2000, AT&T and NTT DoCoMo announced the formation of a strategic alliance to develop the next generation of mobile multimedia services. NTTDoCoMo invested nearly $10 billion for a 16 percent stake in AT&T Wireless.[88] In 2002, AT&T Wireless acquired TeleCorp PCS. In 2002, AT&T Wireless made a strategic alliance with Microsoft. In 2003, AT&T Wireless made a strategic alliance with IBM. In 2004, AT&T Wireless (AWE) launched the first UMTS service in the United States.
SBC helped to develop and had a 60% ownership of the Cingular Wireless Network. Cingular was acquired by LCC International, which then proposed to buy AT&T Wireless. By 1 November 2004, federal regulators allowed LCC’s[89] Cingular to buy AT&T’s wireless services for $41 billion.[90] Conveniently, Colin Powell’s son, Michael Powell, was the head of the FCC. Meanwhile, on 19 May 2004, AT&T announced that it had “taken its first step in re-entering the wireless market by reaching an agreement with Sprint that would allow AT&T to sell AT&T-branded wireless service to its over 30 million business and consumer customers.”[91]
AT&T Broadband
AT&T’s fourth division focused on broadband in the form of cable. Here AT&T’s role in media conglomerates such as Time-Warner were important, but its activities centred on three major deals with Teleport, Media One and with Comcast respectively.
Teleport
On 12 January 1998, AT&T bought Teleport Communications Group, Inc. (TCG), for $11 billion.[92]Under the deal, TCG’s three cable owners, Telecommunications Inc. (TCI), Comcast and Cox Communications held a 10% stake in AT&T. Within two years AT&T had also bought TCI and Comcast. Robert Annunziata, TCG's chairman and CEO, became executive vice president of AT&T and led the company's local services unit. The TSG deal gave AT&T “networks that cover 66 markets and pass more than 13,000 buildings.[93]
Media One
Charles Lillis was serving as president and CEO of US West Media Group. In 1998, MediaOne split from US West to become the nation’s fourth cable company. Lillis became the CEO of Media One, which employed 16,000 people, operated in ten countries and generated more than $7 billion in annual revenues through domestic and international cable as well as telephone communications, international wireless and interactive multimedia services.[94] In late 1999-early 2000, AT&T was said to have paid $44 billion to buy the Media-One Group.[95] Others claimed that “AT&T acquired the Media-One Group for $62.5 billion.” [96] The deal gave AT&T:
ownership of all or part of the cables reaching into 60 percent of American homes. Through its ownership of Liberty Media, AT&T is an owner of MacNeil-Lehrer Productions, the co-producer of this program. As a result of that deal, Microsoft announced it was investing $5 billion in AT&T, a move that gave the software manufacturer a strong position in the market for operating systems used in set-top boxes for cable television. [97]
AT&T was now a very significant player in the cable world. Within two years it seemed to have thrown away what it had acquired.
Comcast
In November 2002, Comcast officially acquired AT&T Broadband (i.e. its cable assets) for $70 billion.[98] A lawsuit “accused the company and its top officers of keeping the share price up” while these two deals were made. AT&T and Comcast removed this hurdle with a $100 million settlement.[99]
The American Cable Systems began in 1963 and was renamed Comcast in 1969. In 1986, it doubled in size by a 26% stake of Westinghouse's Group W Cable operations. In 1988, it bought 50% of Storer Communications from KKR, making it the fifth largest cable operator in the US. In 1997, Comcast took a 40% stake in E! Entertainment along with Disney. As noted above, that same year Microsoft invested $1 billion in Comcast. In 1999, Comcast sold Comcast cellular to SBC Communications. It also announced a $60 billion merger with MediaOne, did not go ahead and received instead a $1.5 billion settlement and 2 million AT&T customers.
In 2000, Comcast did cable system swaps with Adelphia and AT&T. In 2001, Comcast bought AT&T’s broadband arm (i.e. its cable TV) for $44.5 billion. By co-incidence the man who had been CEO of AT&T (1997-2002), became the chairman of AT&T Comcast[100]and became CEO of Comcast in 2002. To some the deal between AT&T and Comcast was not a surprise: “The two companies are no strangers. Most recently, on July 2 they closed a deal under which Comcast purchased an AT&T-owned cable TV system in Baltimore for $518 million in cash. The system had 115,000 subscribers. At the beginning of this year, Comcast sold its stake in cable Internet provider Excite@Home to AT&T in exchange for AT&T stock.”[101]On the surface, AT&T had sold its jewels to Comcast. Even so, the deal gave AT&T shareholders a majority of the economic and voting interests in the combined company.
On 17 February 2004, Comcast offered to buy Disney for $54 billion to create the world’s largest media company.[102] Disney rejected the offer. On 21 August, Comcast “announced a deal to acquire TV and Internet content as part of a licensing agreement that will create a new suite of programming for Comcast's broadband subscribers. The new package will be dubbed Disney Connection.”[103] On 13 September 2004, while attention was focused on Sony’s takeover of MGM, Comcast made agreements with Sony to distribute their videos in the US.[104] Comcast played a significant role in this $5 billion buyout of the Metro-Goldwyn-Mayer studios announced in the fall of 2004. Comcast invested $300 million in the bid led by Sony Corp. “The deal gives the cable operator the right to buy a 20 percent stake in MGM. Plus, it allows Comcast to distribute MGM's content through its new video-on-demand, or VOD, service.”[105]
On 18 October 2004, Comcast and Walt Disney Co. launched a “broadband portal Comcast Kids Channel on Monday, part of the cabler's broader effort to cater to tots, which will include a 24/7 children's cable network”[106] In November 2004, “Comcast Cable (formerly AT&T Broadband, Media One and Time Warner Cable)” described itself as providing public access by contract” and insisted that “Public Access is an extension of the First Amendment to the U.S. Constitution.”[107]
Comcast still owned a 21% stake in Time-Warner which it could reduce to 17% in order to make a deal with Time Warner re: Adelphia. In November 2004, Comcast and Time Warner were planning to buy Adelphia Communications, which was also the fifth largest Cable TV company in the country, but faced with creditors claiming $3 trillion.[108] The head of Adelphia's management team, William T. Schleyer, who formerly ran AT&T's cable business,[109] was rumoured to favour a buyout by private equity firms such as Thomas H. Lee Partners; Providence Equity Partners; and Kohlberg Kravis Roberts (KKR). On 8 November 2004, Comcast, as the largest cable TV provider, announced a deal with Microsoft to work together.[110]
From the above it is clear that AT&T remained a very major player. In an article on the top 25 digital economy companies in 1999, Business Week, basing its claims on Morgan Stanley Capital International ranked AT&T in third place (after Microsoft and IBM), with a
market value of $186.14 billion.[111] In 1999, the International Telecommunications Union (ITU) ranked AT&T as number 2 (after NTT) of the top 20 public telecom operators: as number 1 of the top 20 international telecom operators; and number 9 of the top 20 mobile telecom operators with net incomes of $147.8 billion; $3.489 billion and $7.627 billion respectively.
By contrast, according to the Forbes list of the top 2000 global companies in 2004, AT&T ranked number 439 (although in terms of sales it was number 85 in the world) while Verizon, SBC Communications and Bell South were now said to be the top telecoms in the world arena and appeared in positions 11, 12 and 74 respectively.[112] Perhaps as a consolation, in the period 2001-2003 AT&T received $4.6 billion in tax rebates, while Verizon received 4.3 billion.[113] Meanwhile in 2004, Lucent was due to receive a $816 million tax refund.[114]
If we stand back to assess these developments several interpretations are possible. A negative view would be that the former monopoly holder in telephony saw its markets fragmented into a thousand fiefdoms and was desperately hanging on by making alliances with the big players in the field. A more positive interpretation would note that AT&T had serious stakes in all the big media conglomerates in the US. Perhaps it did not own them 100%, but then no global player today does. Indeed, the former telephony company had now expanded into cable, television and Internet, or as one observer put it, Ma Bell was becoming Ma Bel, Ma Cable and Ma Internet.[115] At a superficial level AT&T was a monopoly telecom operator until 1984 and then faced increasing competition from MCI, Worldcom, Sprint and others.
There is clearly some truth to this as becomes evident if one looks at basic statistics concerning telephone, cable and mobile telephone operators (figures 1a-c). Of course, some looked at these same statistics to suggest that Comcast was now the central company and that AT&T was effectively a thing of the past (figure 1d).
We are told that in an effort to regain some of its lost ground, AT&T made bold moves into both the cable and the wireless sectors in the period 1999-2001. Having made this immense leap, they then sold off their assets in these two vitally important sectors between 2002 and 2004. If this were true, then the image of AT&T as a monolithic mastodon incapable of adapting to new developments was well deserved. From any point of view there were a bewildering number of deals going on between many competing partners.
But as we stand back to take a long term view another picture emerges. There are only a handful of giants, AT&T, General Electric, Westinghouse, General Motors, IBM and more recently Microsoft. Two things are notable. First, the number of close links among this inner circle of the very big players continued undiminished. Second, and even more fascinating, is how these companies “lose” assets and then regain them. For instance, as we shall see presently (§ 7), General Electric helped to found NBC, lost it in 1932 and gained it back in 1985. By 2004, it owned not only NBC but also Vivendi-Universal. It was also a central player in SES Global, a key satellite consortium. In the past decades, the time frame may have accelerated but the basic approach remained the same: divide and conquer using ever new company names responsible to the same old headquarters.
Telephone Companies Millions of customers
1. Verizon 28.2
2. SBC 24.3
3. Bellsouth 12.7
4. Qwest 8.8
5. Sprint 7.8
6. Century Tel 3
7. Comcast 1.3
8. Cox 0.9
9. Adelphia 0.9
Cable Companies Millions of customers
1. Comcast 21.5
2. Time Warner 10.5
3. Cox 6.6
4. Charter 6.5
5. Adelphia 5.2
6. Cablevision 3.0
Wireless Company Millions of customers
1. Cingular-AT&T 46
2. Verizon 40
3. Sprint 22
4. T-Mobile USA 15.4
5. Nextel 15.3
6. Alltell 12
Figure 1a) Largest telephone companies;[116] b) cable companies[117] and c) wireless companies[118] in the US in 2004;[119] d) Another view of Televison, Internet and Telephone in the US in 2004.[120]
As noted earlier, according to Morgan Stanley’s ranking of the top 25 digital economy companies, the top three were Microsoft, IBM and AT&T respectively. We noted that AT&T made various partnerships with Microsoft and IBM. Is it likely that it would simply hand over its crown jewels to Comcast and Verizon if they were outright competitors? Or is it more than a co-incidence that the head of AT&T went on to become the head of Comcast at the critical moment when this handover occurred? Was there an entente between Ma Bell (AT&T) and her not so baby Bells? Whichever interpretation one favours AT&T remained one of the largest telecoms of the world with stakes in telephony, cable, wireless, Internet, internet telephony in the form of Voice over Internet Protocol (VOIP) and even satellites, something which they began with Telstar in 1962.
4. Competitors
The breakup of AT&T in 1984 opened the doors for hundreds of competitors. Most of these were small and short lived. On the US scene, there were three more serious competitors: MCI, Worldcom and Sprint. On the world scene, there were a half dozen serious players: NTT, British Telecom, Deutsche Telecom, France Telecom and Cable&Wireless. In the past decade, most of these have been outplayed or played out, some would claim very deliberately, and have diminished in power with respect to AT&T.
MCI
Microwave Communications of America, Inc. (MCI) was founded in 1968 to help truckers communicate via two-way radios. In 1969, the FCC approved MCI's application to provide private microwave service between Chicago and St. Louis. MCI went public in 1972 and in 1973 became “the first telecommunications company to market specialized services to the public.” In 1974, MCI began a series of lawsuits against AT&T that led to its divestiture in 1984.
In 1975, MCI activated its first computer switch. This became the cornerstone of MCI’s network. In 1983, MCI made the largest order of fiber optic cable ever placed thus far of more than 150,000 miles. By 1987, MCI’s new coast-to-coast fiber optic network began operations. On 3 November 1996, British Telecom agreed to a merger whereby it would acquire MCI for $20 billion.[121] This would have created a major competition for AT&T. The combined BT-MCI would have been “one of the largest companies in the world, with annual revenues of $40.6 billion, 181,000 employees, and 43 million customers in 72 countries.”[122] Some spoke of a new world order.
In May 1997, the EU gave its consent. In July 1997, the US Justice Department agreed to the merger[123]and in July the FCC also agreed to the merger. Then, on 10 July, 1997 MCI warned “shareholders that it was running up unexpectedly large losses as it tried to break into the local phone business. The company said those losses could reach $800 million in 1997 alone.” On 21 August 1997, the deal was in disarray; there was discussion that if British Telecom bought MCI, it would pay “from 10 percent to 25 percent less for the company than the original terms of the deal. That consensus knocked “$3.4 billion off the company's market value in one frantic trading session.”[124] The next day BT renegotiated saying it would “pay about $17 billion [rather than $20 billion] to buy MCI and create a joint entity, to be known as Concert Plc.” BT already owned about 20 percent of MCI.[125]
In October 1997, presumably of their own accord, Worldcom announced plans for a hostile takeover of MCI for $40 billion that threw into question the planned BT-MCI merger. By July 1998 the MCI-Worldcom deal was done; Cable and Wireless had bought MCI’s Internet assets and BT was looking for a new partner. On 10 November, 1998, AT&T and BT applied to the FCC for a joint venture, called Concert which lasted until 16 October 2001.[126] Two years and one week after MCI planned serious competition to AT&T through a merger with BT, AT&T had created its own joint venture with BT against MCI.
Worldcom
Although founded in 1983 by Bernie Ebbers, Worldcom’s website used to claim that during the 1960s and 1970s, Worldcom itself had pioneered packet services and the use of international X.25 standards for public packet services for point of sale and credit card transactions. In 1977, Worldcom introduced the first internal e-mail service (INFOPLEX); in 1979, the first online consumer service; in 1983, the first e-commerce application with an e-mall of 100 stores, where orders could be placed and in 1988, the first Internet access service and first commercial connection to the Internet. The company went public in August 1989.
In the decade that followed, WorldCom became involved in a number of pioneering experiments leading to higher bandwidth such as the National Science Foundation Network (NSFNET linked with Compuserve, 1989); a long-haul Synchronous Optical Network (SONET, 1990); a public Frame Relay service (1991); a commercial version of frame relay on a cell-based network platform (1992); a dedicated, multipoint, Internet Protocol Virtual Private Network (IP VPN, 1994); integrated service for voice, data and video transmission over an ATM network (1994); combined Synchronous Optical Network (SONET) and Asynchronous Transfer Mode (ATM) technologies and the first 10 Gbps data transmission on an enterprise network (1995) and high-speed Frame Relay service (1996).
UUNet, founded in 1987, became the first business Internet Service Provider (ISP) with a backbone network.[127] They too claimed to have introduced a number of firsts: a first commercial connection to the Internet (1988); commercial application-layer firewall services for Internet Protocol (IP) Networks (1992); significantly higher Internet backbone access speed level, from a T-1 (1.544 Mbps) in 1993 up to the current 10 Gbps OC-192c level (1993); designed and installed the first dedicated multi-point Internet Protocol Virtual Private Network (IP VPN) Service (1994); the first profitable ISP (1995) and the first ISP to offer Extranet VPNs and Web Hosting services (1996). That same year WorldCom bought Uunet.
MCI/Worldcom introduced commercial Internet traffic on a backbone network at OC-192 speed of 10 Gbps (2000) and initiated an all optical network (Terabit Challenge) to optimize use of available bandwidth (2001).[128] In the next years, Worldcomalso focussed increasingly on infrastructure. In 1997, they had the first undersea (Gemini) cable system network to carry production traffic, connecting city centres in New York and London. In 1999, they began building the Southern Cross Cable Network, the first undersea cable network system primarily for Internet and data use between the United States, New Zealand and Australia.
In 1998, MCI acquired the ailing Cable and Wireless company “for $1.8 billion dollars” and subsequently “acquired Exodus Communications and Digital Island for a total outlay of $1.19 billion dollars.”[129] In 1998 also, in order to help the MCI/Wordcom merger MCI sold its backbone to Cable and Wireless for $625 million.[130] By 22 July 2002, MCI/Worldcom was bankrupt:[131] Some spoke of an $11 billion accounting fraud.[132] Others noted that it had over $1 trillion dollars of intercompany debts, of which $380 billion involved unidentified entities within the company.[133] To be “worldconned” became a new expression for persons who were conned “big time.”
World Scene: NTT
On the world scene, Nippon Telephone and Telegraph (NT&T) is the only company operating at the scale and size of AT&T. As one might expect these giants have been co-operating happily. In 1996, they worked together in creating a new kind of fibre optic wire (cf. below § 10). On 28 April 1999, the two companies announced that they would “develop agreements and business ventures that provide value-added networking solutions for large and mid-sized multinational businesses and industries in the Asia Pacific….The first priority of the two companies will be to collaborate on the operation and development of the IBM Global Network (IGN) in Japan which AT&T is in the process of acquiring.”[146] On 30 November, 2000 NTT DoCOMO and AT&T announced:
a long-term partnership to develop wireless multimedia applications. The alliance will enable users to access HTML applications and content on mobile wireless terminals and allow the two companies to promote common global standards. As part of the deal, NTT DoCoMo will invest nearly $10 billion for AT&T referred stock, equivalent to 406 million shares of AT&T Wireless tracking stock.[147]
As a result NTT’s DoCoMo had a 16% stake in AT&T Wireless.[148] On 26 December 2002 AT&T Wireless and NTT DoCoMo outlined “plans for targeted rollout of W-CDMA services in four US cities by 2004.[149]
British Telecom
A number of private telegraph companies emerged from 1846 onwards. The Telegraph Act of 1865 passed control of these to the General Post Office (GPO). This was renamed the Post Office in 1969 with a separate division called Post Office Telecommunications (PTO). This division was renamed British Telecom in 1980-1981. It was privatized in 1984 and renamed BT in 1991.[150]
Although much smaller than AT&T, BT operates around the world. In 2004, its global services department had 20,000 employees on four of the five continents (not in Africa).[151] On 29 March 1996, British Telecom and Cable & Wireless “restarted discussions about a merger which would see C&W acquire BT in a reverse takeover.”[152] In 1993, BT announced an alliance with MCI. In 5 November 1996, they announced a definitive merger:
They announced Concert, a new high-growth global communications powerhouse borne from the union of British Telecom and MCI. This is different from the "Concert" they created three years ago. That organization will now be called Concert Communications Services. This new global company will provide local, long distance, and international services including voice, data, wireless, Internet, information technologies, and outsourcing.[153]
This merger would have posed serious competition for AT&T. Indeed, BT planned to become “the leading global telecommunications operator” with “network related products and services.”[154] By 1998, this plan was definitively derailed by the Worldcom/MCI merger. In July 1998, BT announced a joint venture with AT&T. In September 1998, BT bought the Concert Business Services back from MCI. On 16 November, AT&T announced that it would: “beef up its international business services by integrating the Concert global telecom products of its joint venture partner, BT.”[155] But there was much more to this alliance than a simple joint venture by two companies. Three other companies were involved: 1) VLT Co. L. L. C., (a Delaware limited liability corporation, which was a subsidiary of a holding company based in the Netherlands) 2) Violet License Co. LLC, (a wholly owned subsidiary of VLT) and 3) TLTD, (a Bahamas- based corporation, was also a subsidiary of a holding company based in the Netherlands). In February 1999, the five companies made an application “to assign to VLT ownership interests of AT&T:
a) of authorization in international cable facilities within United States territorial limits”:
AT&T Corporation (multiple authorizations)
AT&T Alascom (multiple authorizations)
AT&T Puerto Rico, Inc. (multiple authorizations)
AT&T of the Virgin Islands, Inc. (multiple authorizations)
b) of licence applications of cable landing licences:
AT&T Corporation (multiple licenses)
Transoceanic Communications, Inc. (multiple licenses)
AT&T Puerto Rico, Inc. (multiple licenses) and in addition
c) to License Co. earth station radio licenses held by AT&T or its subsidiaries:
AT&T Corporation (multiple licenses)
AT&T Alascom, Inc. (multiple licenses)[156]
By 2000, TLTD, Telespace Limited, (not to be confused with the Canadian company of the same name) had moved to Redmond (of Microsoft fame). It had also merged with and changed its name to Qinnet.com which became: “the parent corporation of Beijing based QinNet Electronic Technologies Co. Ltd., which provides complete Internet services, including Internet service providers, Internet content providers, E-business, and E-commerce solutions, to government entities, private enterprises, and individuals in China.”[158]
At the start of 2000, when Concert finally “began”, nothing was said of these other companies. On 11 May, 2000, BT, AT&T and Concert announced that they were investing $2 billion over three years: “to deliver global e-commerce services via a network of 44 Internet data centres in 16 countries. The centres will be directly connected to an Internet protocol (IP) backbone and will provide the wide range of co-location, web hosting, application and networking professional services.”[159] By 16 October 2001, BT and AT&T had ended Concert with $7 billion in losses.[160]
Some would point to this failure as vivid proof of how profoundly the telecommunications bubble burst brought suffering even to the mightiest telecoms. Other interpretations are possible. In the course of five years, AT&T had removed BT as a potential competitor on the global scene. Its pseudo-pact with BT allowed it to shift a great number of its licenses to unknown companies, whereby it could work more effectively and invisibly on the global scene.
Cable and Wireless
The company had its beginnings in the 1860s with the laying of the 1866 Atlantic cable. Founded in 1872, the Eastern Telegraph Company was an amalgamation of a number of important smaller telegraph companies. “In the early years of the 20th century, the Eastern became part of the Eastern and Associated Telegraph Companies which incorporated many other telegraph companies from all around the world.”[161] In 1929, it became Imperial and International Communications (IIC) and in 1934 it was renamed Cable & Wireless.[162]
By 1887, the company owned 22,000 miles of submarine cable. By 1929, this had increased to 164,400 nautical miles of submarine cable. By 1992, “C&W owned 25% of the world's digital and analogue submarine cable systems including 28,000 km of digital cable - due to increase to 42,000 km by the end of the decade.”[163] By 1990 it had 37,681staff worldwide.[164]
In 1998, MCI acquired the ailing Cable and Wireless company “for $1.8 billion dollars.”[165] In July 1998 also, in order to help the MCI/Wordcom merger MCI sold its backbone to Cable and Wireless for $625 million.[166] By 2003, Cable and Wireless were also bankrupt and sold “their USA based operations to private investment firm, Gores Technology Group,[167]for $125 million dollars.”[168] This deal was due to be concluded in March 2004.[169] Gores Technology was owned by Alec Gores. As we shall see presently, Alec Gores’ brother, Tom Gores owned Platinum Technology, which was also making aggressive acquisitions of infrastructure in Europe. The Gores Group, like the Carlyle Group, had profited from the Iraq war (cf. § 9 below).
More interesting for our purposes, by November 2004, Cable and Wireless claimed to have developed a new webMethods software with Deloitte[170] and Touche and described itself as having:
yearly revenues in excess of £8 billion (US$11 billion) and customers in 70 countries. Its focus for future growth is on providing business customers with seamless IP (Internet Protocol) and data services and solutions on a global scale. … To position itself as a one-stop provider of global telecommunications services, Cable & Wireless has aggressively acquired operations in the U.S., U.K., and Asia and built out its existing network to offer high performance products and applications. The company has committed $3.5 billion towards building the most advanced single-hop Internet infrastructure in the world and has spent more than $650 million acquiring Internet service providers and network integrators in Europe….. Cable & Wireless acquired 11 ISPs in Europe alone, each bringing its own internal systems and applications to the table.[171]
It was amazing to trace how an ailing, near bankrupt company could be bought for a low price; make acquisitions many times this said price; go bankrupt at a much lower price and then be able to make investments of over $4 billion within a few years.[172] Even so what was once the largest cable company in the world no longer posed serious competition to the international vision of AT&T.
Deutsche Telekom
Deutsche Telekom is “Europe´s largest telecommunications company” and also a “global player with a presence in about 65 countries on six continents.”[173] Deutsche Telekom was privatized in 1996.
In 1988, Deutsche Telekom and France Telecom worked together to create a value added network, Eucoom. This led to other joint ventures: Eurnetcom (outsourcing services) in 1992; and Atlas (virtual private networks). On 15 December 1995, the FCC cleared the way for a joint venture that began in 1996, whereby Deutsche Telekom and France Télécom each acquired a 10% stake in Sprint and the three partners together created “Global One, to provide multinationals with global services.”[174] By 1999, Global One had “1,400 points of presence in over 65 countries” and claimed to have: “one of the world's largest and most advanced ATM- based networks, which delivers a high speed service -- 1.5 Mbps to 155 Mbps -- that simultaneously supports voice, data, Internet, and multimedia in a self-healing network.”[175]
In 1999, Deutsche Telekom focused its core activities in four strategic divisions: mobile communications, Internet services, data communication/IP/system solutions and fixed-line network access. In 1999, Deutsche Telekom bought Britain’s One2One. There were rumours it might buy Sprint, Cable and Wireless or other major players. In 2001, Deutsche Telekom quietly bought Voice Stream Communications and Powertel.[176] In 2004 it remained one of the significant players on the world scene. Not surprisingly, AT&T and TMobile signed an alliance on 2 February 2004.[177] As a result AT&T gained access to the latest third generation mobile phones.
France Telecom
France Telecom was formally launched in 1991. It too is a major European telecom with a global reach. In 2003, it divested a number of subsidiaries, namely, Telecom Argentina, Wind, Casema, CTE Salvador and Eutelsat. Even so it has been developing a world wide strategy in conjunction with Deutsche Telekom.
In 1949, the Société Internationale de Télécommunications Aéronautiques (SITA) was founded. This became the global data network for major airlines, and companies such as Boeing. SITA became Equant, operating “an advanced IP-based network that offers global wide area network (WAN)- to-local area network (LAN)-to-Desktop connectivity over the world's largest commercial data network.”[178] On 20 November, 2000, Equant and France Telecom announced that they would merge Equant and Global One. On 2 July, 2001, Equant began full operations “as a combined company, providing advanced global IP and data services for multinational businesses over the world's largest commercial data network, spanning 220 countries and territories.”[179]
France Telecom was one of the only global players which remained on a course independent of AT&T. As we shall see later, however, by 2004, companies such as Level 3 Communications and Equity companies such as Platinum were posing a threat to the French company’s infrastructure (§10).
Telefonica
With 115 million customers, Telefonica is the leading Telecom for Spanish and Portuguese peoples, active in 13 countries. On 14 April 1997, AT&T “signed a memorandum of understanding with Telecom Italia, Telefonica de Espana, S.A. and Companhia Portuguesa Radio Marconi, S.A. to plan to build Columbus III, an undersea fiber optic cable network that will link the United States with southern Europe by July 1999.”[180] In 2002, there were threats by AT&T Peru to sue Telefonica for being “anti-competitive.”[181] Nonetheless, Telefonica continued to grow as a serious player. On 8 March 2004, Telefonica acquired Bell South’s South American cellular markets and became the world’s fourth largest cellular company with 62.5 million customers.[182]
From all this emerges a very complex picture. AT&T, which supposedly broke up in 1984; broke up into 3 companies in 1996 and divided its main interests into 4 new companies in 2000. Those who have painted it as an archaic structure, unable to shake off its old habits, incapable of responding to the challenges of a multimedia, digital world, overlooked a number of things. AT&T had a serious stake in almost every major project both at home and around the world. Almost every company that became involved with AT&T ended up bankrupt or being swallowed. We shall return to these themes (§ 10) but first we must examine the role of the Baby Bells, SAIC and some other players.
5. Baby Bells
Meanwhile, in the course of the past two decades the seven Baby Bells became four (figure 2). Southwestern Bell acquired Ameritech and Pacific Telesis.[185]US West[186]sold its wireless operations to Air Touch Communications. In January 1999, Vodaphone took control of Air Touch for $62 billion.[187] In May 1999, Vodaphone shareholders agreed to acquire Air Touch for $74.7 billion. The new company claimed to have 29 million subscribers spread throughout 23 countries.[188]
- Ameritech[189]] =6
2. Bell Atlantic[190] Bell Atlantic Verizon Verizon
- Bell South[191] Bell South Bell South Bell South
- Nynex[192] =2
- Pacific Telesis =6
- Southwestern Bell[193] SBC[194] SBC SBC
- US West Qwest[195] QWest[196] =2 ?
Figure 2. A history of the Regional Bell Operating Companies or Baby Bells (RBOCs).
In September 1999, Bell Atlantic and Vodaphone announced plans to “merge their US mobile phone businesses to create a company worth between $70bn and $80bn (£44bn - £50bn), owned 55% by Bell and 45% by Vodafone, which would be floated on the stock market.”[197] Airtouch, subsequently joined with parts of Primeco, General Telephone and Electronics Corporation (GTE), and Bell Atlantic to form a Code Division Multiple Access (CDMA) network, in conjunction with Vodafone, called Verizon Wireless Company “the largest nationwide wireless voice and data network and approximately 30 million customers.”[198]Another of the Baby Bells, Bell Atlantic Corp. acquired Nynex (1997) and merged with GTE Corp. to form Verizon (2000), which now represents a major force with approximately 248,000 employees.[199]Verizon's general counsel, William Barr, was attorney general under President George H.W. Bush.[200] In May 2004, Verizon announced plans for selling video over fibre optic lines.[201] In November 2004, SBC announced plans to develop IP based TV.[202]
As indicated earlier (§4), MCI/Worldcom was also a serious competitor to AT&T. On 4 April, 2002, it was awarded a $450 million Defense Research and Engineering Network (DREN) contract.[216] Worldcom also bid for a 3.5 billion Federal Aviation Authority (FAA) contract to upgrade the country’s air traffic control communication. However, on 16 July, 2002, the FAA awarded the contract instead to Harris Corporation (of Melbourne, Fla., which had links with Jeb Bush),[217] which led a team of brand name telecom firms, including the “Baby Bells” Verizon, SBC and BellSouth Corp (which also had links with Governor Jeb Bush),[218] as well as Defense contractor, Raytheon Technical Services Company.[219]On 21 July, Worldcom filed for bankruptcy.[220] On 26 July, 2002, Verizon Wireless Inc.[221], the largest U.S. mobile-phone company, announced it would“take over the accounts of customers now billed by bankrupt WorldCom Inc.”[222]
In 1984, the year that AT&T was divested, Arun Sarin began his telecommunications career at Pacific Telesis Group, working in particular on cellular business acquisitions. This led to AirTouch Communications, where he became CEO before Airtouch merged with Vodafone in 1999.[223] In April 2000, Mr Sarin became CEO of Infospace “a leading global provider of infrastructure services for wireless devices, merchants and Web sites,”[224]with links to Verizon and VeriSign.[225] In 2000, Arun Sarin also outlined his vision of how the Internet and telcos could link together in the future. Not surprisingly his firm, Infospace had a serious role in that vision. Significantly the carriers in that vision were former Baby Bells (Verizon) and AT&T.
In January of 2001, Sarin[226] left Infospace. In February 2001, the Venture Capital firm Accel Partners, based in Menlo Park, California, and leveraged-buyout (LBO) giant Kohlberg Kravis Roberts (KRR), based in New York, “announced a new joint venture called Accel-KKR Internet. Its goal was to create companies with integrated online and offline assets, especially in the burgeoning business-to-business arena.” Arun Sarin became the CEO of the new venture.[227]
Accel-KKR was one of the few firms, which was reportedly happy with the enormous bankruptcy woes among the telecoms. On the surface, this wais because these impoverished telcos represented a bargain for enterprising investors, bankers and leveraged buyout persons.[228] In the spring of 2004, for instance, KKR quietly acquired PanAmSat for $4.1 billion.[229] We shall see later (§11) that this was part of a much bigger picture, whereby formerly state owned satellite systems were being taken over by the private sector.
Was it not curious, however, that one of the protagonists in this game should be someone who began with one of the Baby Bells? It almost looked as if the disbanded group were reconfiguring. One forced the competition into bankruptcy, or preferably leveraged buyouts, then took them over at a bargain price.[230]Just after one had raised considerable money on the argument that they were the cash cows of the future, one spread the word that the telcos were in desperate straits and complained that they could not survive without subsidy. Such complaining was effective. In 1996, it led to the Telecommunications Act, which helped AT&T return to former markets. Some believed that the Internet Freedom and Broadband Deployment Act (2001)[231] would solve these problems. Others feared that this was another subtle step of the major telco(s) to regain the position they once had. Indeed, some expected that it would accelerate that process. Between 1984 (when AT&T was divested) and 2000, the seven Baby Bells reconfigured into four. With the possible bankruptcy of Qwest, the number of Baby Bells would have dwindled to 3. At the same time Qwest was conveniently looked after by Verizon (= 3 former Baby Bells in one: Bell Atlantic + Nynex +Qwest). Meanwhile, in 2004, Qwest Wireless and the Cellco Partnership applied to the FCC to transfer 62 licences to Verizon.[232]
A futurist would have predicted that the number of Baby Bells would decrease. One could almost see coming the argument that because the telco situation was so desperate and utterly hopeless, the only hope was to allow the Baby Bells and AT&T to save the day using the entirely modern and novel idea of a monopoly.[233]In any case, in November 2004 the Bell Operating Companies (BOCS) were actively filing to gain permanent control of their broadband lines.[234] In November 2004 it was also announced that “within the next several months, Verizon Communications Inc. will be asking consumers to start thinking of Verizon as a television brand, alongside Comcast, NBC, DirecTV, and Fox.”[235]
6. SAIC (Science Applications International Corporation)
A fourth essential player in these developments linking telephony and the Internet is perhaps less known but not less important. The same year that the Internet began in the United States (1969), a former member of Los Alamos Laboratories founded the Science Applications International Corporation (SAIC). Within a year, they were using computers to identify two branches of computer-related growth: large-scale systems analysis and modeling; 2) development of integrated software, including provision of data-processing services and training based on the latest in computer technology.[236] During the next decade their concerns were increasingly linked to diverse military applications with one common thread: the use of computers and the development of advanced specialized software.[237]
By 1987, SAIC was a national leader in Computer-Aided Logistic Support (CALS).[238] By 1997, SAIC was “one of the world’s top systems integrators, one of the leading research and development firms in the U.S., and a major builder of the country’s defense information infrastructure. SAIC also was one of the largest providers of solutions in information technology, data security, electronic commerce, Internet and Intranet services, and one of the largest and most successful government contractors.” National security services remained SAIC’s largest business area.[239]
To understand how these developments became crucial for our story a short excursus is necessary. Formal naming of the Internet came under the auspices of Network Solutions when it was founded in 1991. In 1993:
Network Solutions was awarded, through a competitive bidding process, a 5-year Cooperative Agreement with the National Science Foundation to continue this work…Network Solutions managed both the front-end registration services (now known as registrar services) and the back-end addressing, resolution, and distribution services (registry services) for .com, .net, and .org, domain names, through an agreement with the Defense Data Network-Network Information Center (DDN_NIC).[240]
In 1994, the official body for Internet naming became the Internet Assigned Names Authority (IANA).[241] In 1996, the Science Applications International Corporation (SAIC) bought Network Solutions. This soon led to complex developments linking Network Solutions, SAIC, and Verity. In 1997, the same Science Applications International Corporation (SAIC) bought AT&T’s BellCore and soon after renamed it Telcordia Technologies.[242] SAIC now employed some 30,000 professionals and had official sales of $4 billion.
With respect to operations and business support systems (OSS/BSS), SAIC teamed up with webMethods to create a RapidApps™ integration platform for companies with critical time-to-market needs and/or limited budgets.[243]In April 2001, SAIC and webMethods, were among the partners along with VeriSign, Microsoft, Baltimore Technologies, HP, IBM, IONA, PureEdge and Reuters, to announce a second-generation Public Key Infrastructure (PKI) Standard known as XML key management specification (XKMS).[244] Hence, SAIC, working with the RSA and Verisign, was deeply into security.
During the fiscal year 2000, SAIC launched new initiatives and expanded its business in information technology (IT), e-commerce, and next generation networks. Mergers expanded SAIC’s scope considerably,[245] although these initiatives remained small compared to its military contracts. In 2002, SAIC won – or pre-negotiated - major contracts in three commercial growth areas including: application hosting, wireless technologies, and health. Already in February 1999, Bellcore (now SAIC’s Telcordia) announced with the Toshiba Corporation a project to create: “technologies necessary for the integration of wireless and Internet communications,”[246]
Also in 1999, the same Bellcore, now as, SAIC's Telcordia Technologies, signed “an agreement with Sprint to develop the core software for a visionary new direction in networking that enables the integration of telephone calls and data service over Sprint's Integrated On-Demand Network.”[247] By 2002, Telcordia Technologies was “providing mobility solutions and won contracts to provide OSS software components and intelligent network platforms.”[248]
Telcordia Technologies, owned by SAIC, became a serious player. It held key patents for broadband data communications technologies like Asynchronous Digital Subscriber Line (ADSL), Asynchronous Integrated Network (AIN), Asynchronous Transfer Mode (ATM), Integrated Subscriber Digital Network (ISDN), Frame Relay, Switched Multimegabit Data Service (SMDS), Synchronous Optical NETwork (SONET), and Video-On-Demand (VOD). It invented, developed, implemented or maintains software on which 80% of the U.S. telecommunications network depends[249]and its vision was to be “THE major enabler - worldwide -of tomorrow's Next Generation, packet-based, data centric network model and information-based, e-commerce economic model.”[250]
AT&T in its various guises, and its partners were extending well beyond telephony and the Internet into four further areas, namely, a) telephone number mapping, b) domain name systems, c) education and d) Next Generation Internet. In 2004, SAIC was very active in Homeland Security[251] and had developed an Automated Exercise and Assessment System (AEAS).[252] SAIC was working with Juniper Networks for new military networks.[253]
In November 2004, there were plans by SAIC to sell Telcordia for 1.3 billion (i.e. a profit of 600 million) to the buyout firms Warburg Pincus and Providence Equity.[254] This development is again open to a number of interpretations. Some would say that the increasing presence of for profit firms in areas that were traditionally linked with the public telecoms sector, inevitably meant a greater turnaround of ownership purely in terms of which companies were most lucrative at the moment. Others would be inclined to ask whether it was co-incidental that these deals were being made by a surprisingly small number of private equity firms such as Carlyle, Providence, Gores, Cinven, and Apax (cf. § 9). Still others would wonder if the turnarounds themselves might not be a façade to hide a set of closer links among a select group of partners. Four interconnected examples will serve to explore this suggestion: ENUM, DNS, Education and Next Generation Internet.
Telephone Number Mapping or Electronic NUMbering (ENUM)
In 2000, Telcordia and Verisign committed themselves to Telephone Number Mapping or Electronic NUMbering (ENUM).[255] By coincidence, Lucent, which continued to see itself as an AT&T lab, also saw ENUM as their solution for internet telephony problems. Sometimes it seemed as if AT&T and SAIC/Telcordia were two faces of a same strategy. The Telephone Number Mapping (enum) initiative entailed other players such as the Internet Engineering Task Force (IETF) and the International Telecommunications Union (ITU):[256]
ENUM is the name adopted by the telephone numbering working group of the Internet Engineering Task Force (IETF) to describe a mechanism using the Internet Domain Name System (DNS) to map E.164 numbers to Uniform Resource Locators (URLs). E.164 is an International Telecommunication Union (ITU) standard that describes the format of telephone numbers used around the world.
The proliferation of communications devices at our disposal has created a problem: A multitude of devices that access different networks (PSTN and IP) through different address conventions (phone number, SIP address, email address, etc.) and input capabilities (telephone, computer, PDA). This problem has created the need for a method which allows easy accessing of the growing list of emerging devices, regardless of the platform to which they are connected or which device is being used to access the information. ENUM is a solution to this growing problem: a convergence enabler that bridges the PSTN and IP worlds.
There are many service applications that will be facilitated by the ENUM standard. One of the more prominent ideas is the establishment of a single contact number for individuals. This would, for example, allow the business card of the future to contain a single number rather than a long list of addresses for home phone, office phone, fax, cell phone, and email. Various services will use the Internet to translate that one number into service specific addresses. Some experts believe that ENUM has even broader potential. A recent article in Communications Week International described ENUM in these terms.
ENUM seems destined ultimately to emerge as the most important new Internet platform since the World Wide Web - perhaps even eclipsing it in long-range importance. A measure of its broad significance was the Internet standards speed record recently set by the initial adoption of the ENUM specification on the road to an Internet standard.[257]
On the surface this promised to be a magnificent development. The ENUM standard could establish the framework for a global numbering system that could ultimately enable persons to use only one number to access all of their communication devices including cell phone, fax, phone, and e-mail. But who precisely was in charge? We were told that:
The Internet Architecture Board (IAB) and ITU-T Study Group 2 are discussing collaboration on the operational, administration and delegation issues related to deployment of ENUM protocol-based services. This requires extensive consultation with administrators of resources derived from the international E.164 numbering plan including national and integrated numbering plan administrators.[258]
At a practical level, it was the IETF, which was in control. But the situation was more complex. In North America, the ENUM initiative arose from an agreement between Telcordia[259] and Verisign. If the plan of Telcordia and Verisign succeeded, it looked as if the traditional naming activities of organizations such as the International Telecommunications Union (ITU) and the International Standards Organisation (ISO) could come exclusively under US jurisdiction. Some have seen the conclusions of the ITU meeting in Marrakech, September 2002 as a new basis for a continuing European role.[260] Meanwhile, the ENUM Forum was dominated by Telcordia, AT&T, Illuminet (now owned by Verisign)[261] and Neustar (which has an alliance with Telcordia)[262] and included Worldcom and the International Internet Telephone Organization (IITO).[263]
Domain Name Systems (DNS)
Officially and formally the question of Domain Names has been under the jurisdiction of the Internet Assigned Names Authority (IANA) since 1994. When IANA was being reformed in 1998, among the players in this field were the Policy Oversight Committee and the Council of Registrars (POC/CORE),[264] who suggested the development of a global “whois” search by name. There were many debates. President Clinton appointed Ira Magaziner to advanceU.S. interests but his approach did not work in Europe and especially in Geneva.[265] Objections were made on the basis of privacy issues,[266] but interestingly enough the idea of a universal Whois or Uwho is now part of Verisign’s official plan. There were also other players. When Dr. Robert Kahn, one of the founders of the Internet, was asked in 1998 about the possibility of unified network directories he noted that:
One possible way to accommodate this is to use the existing Handle System technology that was supported by DARPA and has been operating on the Internet for the past several years. This could be incorporated with essentially no change in the way the existing DNS system operates. A major feature of this System is that it provides the necessary coordination mechanisms for a unified directory system and can easily support multiple registrars for a given TLD [Top Level Domain].[267]
Dr. Kahn, who was the President and CEO of the Corporation for National Research Initiatives (CNRI, see below), was also a protagonist in the development of Digital Object Identifiers (DOIs):
CNRI has been providing both registry and directory manager services for an alternative identifier system (known as Digital Object Identifiers or DOIs) on the Internet in conjunction with publishers in the U.S. and Europe. The technology was developed with support from DARPA and is being used by other groups such as the Department of Defense and the Library of Congress, and in various digital library research efforts. The registry is a single logical entity that is distributed in multiple locations and supports open interfaces. Multiple directory managers will likely be added by the publishers in the coming year, but the basic identifier system can be used by others as well.[268]
In short, the naming game was not only about telephony and computers. In July 2001, the Korean company Enpia applied the Digital Object Identifier (DOI) to commercial e-business solutions. By co-incidence, the CEO of Enpia, was also the vice-chairman of the Digital Content Forum, vice chairman of the Korean E-Book Industry Association and vice chairman of the Digital Music Standard Group.[269] The DOI via Content Directions also made deals with Microsoft’s Corbis.[270] Meanwhile the CEO of Content Direction.com[271] claimed that
As the DOI spreads from publishing to other industries and becomes (over time) the primary mechanism by which people find and access structured information on the Internet, I believe that every company in every industry will want to assign DOIs to their objects. This represents a tremendous opportunity for CMS [Content Management Systems] and DAM [Digital Asset Management] vendors.[272]
This will be especially true in a MPEG 21 environment with its multi-media meta-data DRM abilities.[273] In 2004, it lookrd as if Radio Frequency Identification )RFID) were becoming part of that vision. Some saw the DOI as replacing earlier visions of an Universal Resource Name (URN).[274]Not surprisingly, DOI extended to the library world also. As will be shown presently, this explains why the Dublin Core Metadata Initiative of the Ohio Library Computer Center (OCLC) was part of a much bigger picture. Full consideration of the names and naming debate is beyond the scope of this paper and will be considered elsewhere.[275]Even so, in the present context, it is important to consider briefly the realm of education.
Education
One dimension of the naming discussions has been that the .gov domain should go to the government, the .org to ISOC and that the .edu domain should come under the auspices of Educom, which is connected with Educause. A former head of Educom, Mike Roberts, has also been a head of ICANN. It could hardly be a co-incidence that in this same period, Educom, in conjunction with the IEEE, was working on a National Learning Infrastructure Initiative[276](NLII) to create an Instructional Management System (IMS) "to enable an open architecture for online learning."[277] This entailed the use of a Learning Object Model (LOM), used by the Global Learning Consortium.[278] By co-incidence the US Army also used a Learning Object Model (LOM).[279]
In January, 2001 the American Society for Training and Development (ASTD) in its Learning Circuits had a simple newsbyte about Standards Movement Gains Support: “The agreement between a committee under the IEEE [Learning Object Metadata Working Group ] and the Dublin Core Metadata Initiative (DCMI), pledges coordination of their efforts to create a set of metadata specifications.”
The standards drive has also picked up some significant endorsements from learning management technology providers. Three makers of LMS [learning management systems] technologies, including category-leading Saba[280], said they are at various phases of incorporating the Sharable Courseware Object Reference Model (SCORM) into their systems. SCORM is a methodology developed by the federal government's Advanced Distributed Learning (ADL) initiative under which learning content can be designed and described to allow it to interoperate with different LMS systems.[281][
The same Learning Circuits of January 2001 contained a seemingly unrelated newsbyte that: “PricewaterhouseCoopers…and its team beat out rival groups for the $453 million contract, including the team of Click2learn.com and SAIC, as well as Arthur Andersen, EDS, and IBM.”[282]
One of the rival groups mentioned, SAIC, was the developer of the Sharable Courseware Object Reference Model (SCORM) mentioned in the preceding newsbyte. SAIC was the corporation that bought Network Solutions, owned its spinoff Verisign, Bell Labs and via Telcordia was leading the Electronic NUMbering (ENUM) initiative in North America. SAIC lost the contract in January 2001. But since then the US Army became more involved with SAIC’s SCORM[283] as did the training company, THINQ,[284] which worked closely with the Department of Defense in their Advanced Distributed Learning (ADL) programme.
The scope of the game becomes clearer when it is realized that the same SAIC was also involved with business objects where they were working with IBM, with SAP –which was started by former IBM employees—and entailed bodies such as the Object Management Group (OMG), Open Applications Group (OAG), Workflow Management Coalition (WfMC), E-business eXtensibe Markup Language (ebXML) and Universal Description, Discovery and Integration of Business for the Web (UDDI).[285]
Five years ago, Blackboard was a relatively unknown method for the delivery of electronic learning materials. On 29 November, 2000 Blackboard Inc. announced that it was acquiring the former AT&T CampusWide Access Solutions and CEI SpecialTeams, a division of iCollege.[286] In 2001, “the company more than tripled its installations, from 1,800 to 5,500.” In 2002, the company “booked over $80 million in sales.” In 2001, Blackboard also partnered with Bantu Inc, a “leading provider of secure, business-grade Instant Messaging and Presence solutions,”[287] which had amongst its partners SAIC, Sprint, SRA/Assentor, Verisign and the US Army. Blackboard also became a portfolio company of the Carlyle Group[288] with close links to the White House. It is fully natural that senior members of the government are concerned with the future of education in their country. Is it also fully to be expected that they invest in specific technologies with which they themselves are implicated through private firms? We shall see presently (§ 9) that these links involved not only electronic blackboards but also e-voting machines. Here the circle included SAIC, Carlyle and Northrop Grumman.
Next Generation Internet and the Grid
In 1998, SAIC made an alliance with Cisco Systems in support of Next Generation Networks. In 1999, Telcordia and General Electric (GE) Information Services activated “the telecom industry's first Internet-based interconnection clearinghouse to facilitate critical business transactions between telecom carriers and to facilitate national telecommunication interconnection,” and launched the Next Generation Network Initiative.
There were also network dimensions to this vision. As noted earlier, MCI introduced the first commercial connection to Internet. In 1989, the National Science Foundation Network (NSFNET) launched a high-speed digital network capable of transmitting large volumes of data among academic computing centers throughout the country, forming the foundation of today’s Internet. MCI played a leading role in this cooperative effort. CompuServe e-mail service was the first to be connected to NSFNET.
In 1996, Worldcom bought Uunet the largest ISP at the time. In 1997, Worldcom boughtMCI and helped to create an undersea cable system network linking the US and Europe. In 1999, Worldcom began an undersea cable network system linking the United States, New Zealand and Australia. In 2001, Worldcom created the Terabit Challenge to optimize available bandwidth on a complete optical network.[289] Not surprisingly Worldcom was also one of the initiators of the Internet2 project also known as the Next Generation Internet (NGI) initiative which, beginning in April 1998, linked 115 universities and research institutes – a number which had grown to 202 in June 2003. The Next Generation Internet entailed organizations such as Internet2 and the University Corporation for Advanced Internet Development (UCAID) whose advisory groups reads like a Who’s Who of the Internet.[290]
The NGI network was based on Very High Performance Backbone Network Service (vBNS)-Net which was originally established to link the five civilian supercomputers, namely, the Cornell Theory Center (CTC), the National Center for Atmospheric Research (NCAR), National Center for Supercomputing Applications (NCSA), Pittsburgh Supercomputing Center (PSC), and the San Diego Supercomputer Center (SDSC).[291] It will be recalled that the other key proponent of Next Generation Internet was Telcordia, or rather its mother company, SAIC.[292] In 2000, Worldcom planned a merger with Sprint, which was blocked by the EU.[293] Even without a formal merger, there is every reason to believe that MCI/Worldcom and Sprint continued to co-operate.
To understand the global dimensions of the scheme it is useful to recognize that those involved in the NGI were also the proponents of new forms of parallel computing called grids.[294] As with the Internet, this was an idea which began in Europe. The Large Hadron Collidor at the European Organization for Nuclear Research (CERN), which begins operations in 2005, will generate petabyte/sec amounts of information which no single computer in the world today could hope to handle properly. Physicists at CERN thus mapped out a vision for a new level of parallel, distributed computing to address the challenge. The NGI[295] and the Grid Project weree linked with the European GEANT[296] project and the Eurogrid project.[297]
Ian Foster, an immensely charming physicist at the Argonne National Laboratories (ANL) and his colleague Dr. Kesselmann at the University of Southern California, Information Sciences Institute (USC/ISI), made this idea accessible in a very useful book.[298] The idea of the grid soon became popular on the hype charts. Major corporations such as IBM and HP were now fully committed to making both the Next Generation Internet (NGI) and the grid vision a reality, especially in the context of e-science.
At INET 2002 (Arlington, June 2002) a very senior scientist from Caltech, Harvey Newman, modestly pointed out that it would really require investments of $1 billion per year to make this work. The big vision was “big bucks,” though doubtless this will be seen to be modest compared to the total costs related to full IPv6mandated Internet Protocol Security (IPSec) and Domain Name System Security (DNSsec).
All this was closer to telephony, computers and naming than it may seem. The Next Generation Internet (NGI) was leading to a Next Generation Information Networks (NGIN) which entailed, as Gregory Pankauski, explained in The Next Next Generation in Learning,“ a virtual field trip that takes 200,000 students to the Louvre…. The network's Web-based tools will include videoconferencing, which will allow students in the district’s more than 11,000 classrooms to share information.”[299] The latest version of this vision entailed the National Lambda Rail where a number of private bodies were systematically buying fibre optic lines to produce their own educational solution. The rhetoric surrounding this project was magnificent. But the project was ultimately aimed at a privileged few who could afford to pay for the resources. Very little was said about the great majority of persons whose finances would not allow them access to this next generation internet. Ultimately this new vision extended the American notion of gated communities into the corridors of education.
To be sure, all this was happening in the context of wonderfully politically correct sounding bodies such as the Internet Educational Equal Access Foundation (IEEAF).[300] Meanwhile, the same conquest of names, which brought a few hundred millions to Network Solutions in its new guise as Verisign; more hundreds of millions to SAIC’s Business Objects; more hundreds of millions for a Learning Object Model applied to military training especially in the army, could now, via global networks bring many more billions through a Learning Object Model (LOM) applied to education around the world. In this context, European alternatives such as Educational Modelling Languages (EML), appeared like minor distractions.[301]
As was suggested earlier, the Next Generation Internet (NGI) plan was connected with the Dublin Core Metadata Initiative owned by OCLC, which had similar goals of universal application in the library world. By 2004, the OCLC Dewey Decimal Classification system was used in more than 26,000 libraries around the world. If this plan succeeded, the applications to science, business, and military training would be applied to all of education.
Over the past few years, the United Nations Educational Scientific and Cultural Association (UNESCO) was working on a global portal for Culture and E-learning. Meanwhile, the World Bank was creating a (Global) Development Gateway “where worlds of knowledge meet,”[302] which also had an e-learning portal that focused largely on distance learning solutions from the United States. UNESCO and the World Bank offered two alternative visions of the world: one multilingual and multi-cultural: the other uni-lingual and uni-cultural.
One might be tempted to believe that the plans for a Next Generation Internet were yet another example of the hype that so often accompanies the high tech field. On closer study there is serious evidence to the contrary. In the early 1990s, the Japanese Nippon Telegraph and Telephone (NTT) developed a prototype multimedia Multi-User Dungeon (MUD)-like service, Interspace, which allowed people:
to navigate through a graphically rendered space and communicate with other people by text, telephone or video. The system is designed to enable distance education, as participants "attend" lectures and discussions, or catalog shopping, as participants wander through a virtual shop and talk to sales people. The system is implemented as a client running on a PC that downloads scene renderings from a central server over an ISDN link. Narrow bank ISDN is also used to support voice and visual communication….NTT is prototyping a network service in collaboration with several Japanese universities and with retailers.[303]
This was reported by US observers in 1994.[304] By 2002, futurists such as Oliver Sparrow were predicting the advent of an interspace in the context of telecommunications.[305] Nor was this just a vague prediction. It was being worked on by the Defense Advanced Research Projects Agency (DARPA), which was concerned with creating the net of the 21st century. This effectively entailed redesigning the whole of the Internet as we know it today. This project also explained increased top-level military and political U.S. understanding and their new approach that made IPv6 implementation and migration a priority.DARPA described the Arpanet as a first wave, the Internet as a second wave and foresaw the Interspace as a third wave for which a first prototype was developed in 1998. The Interspace:
will bring the level of analysis, of correlation of knowledge. It will move past search of individual repositories, beyond federation across repositories, to analysis of diverse groups of information across sources and subjects. To develop the new technology needed for this new wave 10 years hence, one needs to begin now so that widespread research prototypes can be available for the new millennium supporting global semantics. In this third wave, the Interspace, there will be distributed services to manipulate concepts across domains just as the ARPANET had distributed services to transfer files across machines and the Internet is having distributed services to transfer objects across repositories.The Interspace environment supports fundamental manipulation of concept spaces: indexing and retrieval, grouping and sharing.[306]
Describing the Interspace[307] project in 1995 at the ASIS (American Society for Information Science and Technology) annual meeting, Dr. Bruce R. Schatz, who also developed the Telesophy project (see above §3), spoke of “building the WorldNet, every community big and small living in the interspace of all the world’s knowledge.”[308] By co-incidence, AT&T developed a WorldNet service.[309] More recently the Interspace vision led to Medical Interspace Projects (Medspace) which foresaw systematic changes in medicine including virtual town doctors.[310] Medspace “is developing research technology for semantic federation of community repositories and deploying that technology in a large-scale testbed for clinical medicine.” For starters, Medspace would make a semantic index of all of MEDLINE and BIOSIS. Semantic, in this case, had little to do with personal meaning. It entailed mainly formal, subsumptive relationships such as whole/part.
If one looked more closely at the Interspace conceptual diagrams one found interesting parallels with the Spatial Paradigm for Information Retrieval and Exploration (SPIRE) project[311] at the Pacific Northwestern Labs, particularly their ThemeView method and the methods being developed at Sandia Labs.[312] It was almost as if the advanced military labs of the Department of Energy were working on another stage of prototypes for the Interspace. As so often there were competing visions of the future. The National Aeronautics and Space Administration (NASA) was working on the idea of an Interplanetary Internet which would combine terrestrial and space systems in a new system which would no longer be IP based.
More recently, problems of terrorism came to play an important role in plans for the future of the Internet. On September 19, 2001, a week after September 11, there was an article asking: “Can Cyber-Intelligence Prevent Real-World Terrorism?”[313]The author of the article acknowledged the Federal Bureau of Investigation's (FBI) Carnivore system (now called DCS1000), but noted that perhaps the most promising development was DARPA’s Genoa Project, which “employs a combination of a cutting-edge search engine, sophisticated information harvesting programs, and P2P computing methods.”
The article did not point out that the Genoa project, was developed jointly between DARPA and Syntek Technologies.[314] In 2001, Syntek was one of the companies to receive a Naval Sea Systems Command (NAVSEA) Multiple Award Contract (MAC) for 15-years, with a total ceiling of $14.5 billion.[315]At the time, the Vice President of Syntek[316]was John M. Poindexter, of Iran-Contra fame.[317]On February 13, 2002, Americans were warned that the nation was facing the threat of danger to homeland security. That same day, John M. Poindexter.[318] was appointed Director of the Pentagon's Information Awareness Office (IAO).[319]The IAO worked jointly with the Information Exploitation Office (IEO). These two organizations would receive “a big chunk of the $48bn of the taxpayers' money George Bush is pumping into his war on the evildoers.”[320]The IAO was already very active. Until recently it included eleven programs and one project. A cursory look at their goals suggested an emphasis on military dimensions rather than information for the public good.
On 21 March 2002 the IAO made a Broad Agency Announcement (BAA) about a new Total Information Awareness (TIA) programme.[321] The deadline for the first round of submissions was 22 April although the call was supposedly open for one year.[322] On 7 August 2002, the Defense Advanced Research Projects Agency announced publicly that it would begin awarding contracts for the design and implementation of a Total Information Awareness (TIA) system.[323] TIA had as its motto the phrase Scientia est Potentia (Knowledge is Power) and its symbol was the Masonic pyramid and eye which is familiar from the American dollar bill.[324] The only difference was that the rays of the eye stretched out specifically over EurAsia and Africa and effectively to the whole world. TIA was the latest program[me] within the IAO. The Program Manager of the TIA system was John M. Poindexter:[325] “Grant applicants are warned that no money will be invested in "research that primarily results in evolutionary improvements to existing technology"; officials are committed to a fundamental redesign of technology.”[326]
In simple terms, the plan was to replace the Internet as it now exists with what some saw as a thinly disguised spy machine. All this was happening with effectively no consultation at all outside America. A small group within the United States was treating the rest of the world as insignificant. The plan met with opposition from within the US. On 23 January 2003, the Senate:
voted in favor of the Wyden-Feinstein amendment to the current omnibus appropriations bill (Senate Amendment No. 59) which would block the deployment of any TIA program until it has specifically authorized and appropriated funds. Exceptions in the amendment allow a TIA program to be used to support a lawful military operation or a lawful foreign intelligence activity conducted wholly overseas or wholly against non-U.S. persons, it should effectively preclude the use of TIA inside the United States against citizens.[327]
On 24 January 2003, it was reported that the Senate officially voted to stop funding the TIA project.[328] On 27 January Share Me technologies The Mobile future Weblog reported: “As you may know the Senate killed the Total Awareness Inititative. However, the big Brother aspect of control and invasion of your privacy is still alive and now taking new roots at OASIS in the form of a new XML format initiative called LegalXML Lawful Intercept XML (LI-XML).”[329]
Similarly a report on 29 January 2003, stated that TIA was not yet dead.[330] On 7 February 2003, the Electronic Frontier Foundation (EFF) urged support of the Wyden-Feinstein Amendment[331] and the same day Amercian Forces Press Service announced that TIA would go ahead under the supervision of two boards.[332] On 12 Febraury, 2003, the House and Senate of the US decided that TIA could not be used to spy on American citizens.[333] Nonetheless, on 3 May, 2003, DARPA “awarded a $3.5 million contract to Xerox Corp.'s Palo Alto Research Center (PARC) to create a privacy-protection system as part of DARPA's controversial Total Information Awareness program.“[334] On 17 July 2003, it was announced that the Senate was blocking funds for TIA,[335] which launched a new series of reports that TIA was killed. That same day Paul Rozenzweig, Michael Scardaville and Ha Nyugen published WebMemo 315 entitled: “Senate Should Restore TIA Funding” as part of their research on homeland security for the Heritage Foundation.
But on 22 July there was a new note urging that that the TIA should be stopped and that it still required the decision of a joint House-Senate Conference committee.[336] A note on 23 July pointed to the ongoing threat to privacy posed by TIA[337] and on 24 July a note from the Department of Defense pointed out that TIA was too broad but intimated that it was necessary nonetheless. On 24 September 2003 a conference on the subject agreed with the Senate position to eliminate funding for TIA. They concluded, however, that research on earlier projects should continue, namely: Bio-Event Advanced Leading Indicator Program; Rapid Analytic Wargaming; Wargaming the Asymmetric Environment and Automated Speech and Text Exploitation in Multiple Languages (including Babylon and Symphony. Significantly they added: “The conference agreement does not restrict the National Foreign Intelligence Program from using processing, analysis and collaboration tools for counterterrorism foreign intelligence purposes.” The objections made against TIA in the US were not against the system. The concern was simply that it should be applied only to foreigners and not to American citizens. We shall explore the psychological motivations for such distinctions later (§ 13).
In 2004, the idea re-emerged with a consortium founded on 28 September 2004 to create a war net or Internet in the sky to provide the military with a “God’s eye view of the battle.” The consortium included “Boeing; Cisco Systems; Factiva, a joint venture of Dow Jones and Reuters; General Dynamics; Hewlett-Packard; Honeywell; I.B.M.; Lockheed Martin; Microsoft; Northrop Grumman; Oracle; Raytheon; and Sun Microsystems.”[338]The proposed pricetag of the new system was in the range of $200 billion. Observers noted that the Pentagon had made two previous attempts: “Its Worldwide Military Command and Control System, built in the 1960's, often failed in crises. A $25 billion successor, Milstar, was completed in 2003 after two decades of work.”[339] The new vision was being championed by Donald Rumsfeld’s advisor, Bill Owen, who now also headed SAIC and Nortel Networks. This was the same Admiral Bill Owen who was Chairman of Vote Here. a company which was producing new electronic voting software (§ 9).
Only English or Multilingualism?
Ten years ago the Internet was overwhelmingly English. Today the Internet is approx-imately 35% English, has Chinese as its second most important language; Spanish in third place, Japanese in fourth, German in fifth, French in sixth and Korean in seventh place.[340] The Internet as envisaged by the United States remains effectively a uni-lingual, uni-cultural phenomenon.
To be sure there were multilingual projects in the United States. But their purpose was very different. In the military, there was a quest to develop new tools, which allowed communication with knowledge only of English. A “Translingual Information Detection, Extraction and Summarization (TIDES) program was developing advanced language processing technology to enable English speakers to find and interpret critical information in multiple languages without requiring knowledge of those languages.”[341] In the American vision, the worlds of e-business and e-science required global, standardized solutions in which variations of culture and language at the national, regional and local level played no significant role. In their high industry, there was a quest for tools, independent of language and culture:
A major task will be to create tools independent of language and culture that can be instantly used by anyone, regardless of location or national origin. Tools will have to be developed that allow for effective remote interaction. Collaboration technologies will require models of the dynamics of human interactions that can simulate behaviors, characteristics, and appearances to simulate physical presence.[342]
The US is perfectly free to develop a comprehensive vision of the Internet that affects the whole of telephony, libraries, publishing and education within their own country. The problem was that this US vision foresaw controlling not only their own education but the edu. domain for the entire world, assumed that the future of education and e-learning would be in the image of their own uni-lingual, uni-cultural “melting pot” model of reality. Indeed to assume that a vision of 4.5% of the world, or rather the vision of a few thousand individuals in that great nation, should determine the future of world learning was at odds with the US’s own quest for democracy. Much more than money and profits were at stake. Here lack of vision could destroy trust and cultural diversity, which are a basis of culture and civilization everywhere in this global village.
In these developments there were serious contradictions between 1) a rhetoric of a universal Internet for everyone; 2) a plan whereby the US version of the Internet was exported globally and 3) the realities of the today’s Internet, which included well over 70 of the world’s 6,500 languages. When the Internet Society told us that the Internet was for everyone, did it perhaps believe that a US version of the Internet should serve as a model for everyone?[343] If so there was a question which of the three alternatives would win: NASA’s Interplanetary Internet, ARPA’s Interspace or the new Total Information Awareness or Terrorist Information Awareness (TIA) system?
All this posed important challenges for Europe, Asia and the rest of the world. When the United States painted a vision of an Information Highway, Europe insisted on the need for an Information Society[344] and some even spoke of a Knowledge Society. While the United States continued to assume that the Internet was to all intents and purposes in and forEnglish, Europe had been very conscientious in making the key documents of the European Union available in at least 11 and now 25 languages. Faced with this new vision it again had a choice. It could blindly follow the American solution, or it could remember its roots and insist on a multi-lingual, multi-cultural, open source model for the future of the Internet, which was becoming intimately linked with the future of knowledge and culture.
7. Energy
Thus far we have established that AT&T and the Baby Bells played an important role in the development of the Internet and the evolution of new media. We have shown also that MCI/Worldcom and Sprint also played a significant role in the development of the Internet especially in America. We have shown how their efforts together were linked with most of the major U.S. multimedia mergers of the past decade. To understand the big picture it is also important to explore links between energy companies and new media, both in terms of electricity and oil.
Electricity
The obvious connections between electricity and new media take us back to the 1920s when AT&T owned Western Electric and the two were so obviously dominant that they were forced to divest some of their holdings in 1932. Less well known are other connections. In the United States, the two largest electricity firms have been General Electric (GE) and Westinghouse Electric. These very large corporations were active in a whole range of fields from aircraft production to wired and wireless communication, and were again linked with AT&T. General Electric was the nation’s sixth largest defence contractor. We have already noted links between General Electric and SAIC. General Electric Capital remains by far the largest equity investment firm in the United States. In fact, GE and Westinghouse have played and are playing a central role in the American media industries. For our purposes a few highlights of these connections will suffice.
Radio Networks
The Radio Corporation of America (RCA) was founded “in 1919 to control the US patents of GE, AT&T, Westinghouse and United Fruit.”[346] In 1929, RCA purchased the Victor Talking Machine Company for $154 million and began manufacturing radios and phonographs as RCA/Victor. In 1932, concerns of a growing monopoly forced GE and Westinghouse sell off their stake in RCA which became linked with RKO, which in turn was sold to Howard Hughes in 1948. In 1985, General Electric (GE) re-acquired RCA.
Television Networks
RCA formed the National Broadcasting Company in 1926. As noted above, GE and Westinghouse were forced to divest RCA and NBC in 1932 for regulatory reasons. In 1985, when GE re-acquired RCA it also re-acquired NBC. In 2003, GE formed NBC-Universal that included:
the US film studio, theme park and cable tv interests of Vivendi Universal. At that time GE had revenue of around US$135 billion and assets of US$575bn, with around 315,000 employees in over 100 nations. It ranked as the 5th largest US company by sales and the 8th largest in the world.[347]
CBS, MTV, Nickelodeon, VH1, BET, Paramount Pictures, Infinity, Viacom Outdoor, UPN, Spike, Country Music Television, Comedy Central, Showtime, Blockbuster and Simon & Schuster.”
Hence all three of the major television networks in the United States were intimately connected with energy in the form of electricity. These energy companies, under the guise of different names have begun to make serious inroads into the European media markets. In 2002 and 2003, General Electric quietly bought Vivendi Universal. acquired a 75.83% stake in Viva Media AG in Germany.[349] We shall see presently (§ 9) that these were not isolated examples. At a higher level, General Electric was playing a key role in GE Americom, which since its merger with SES to form SES Global transformed the satellite industry.
Cable Television Networks
Just before re-acquiring its radio and television networks in 1985, GE began to explore cable networks. In 1982, General Electric (GE) was thwarted in an attempt to acquire Ted Turner’s CNN network.[350] In 1989, GE founded CNBC (Consumer News and Business Channel), a cable and satellite television news channel, which subsequently spread to Asia and Europe in 1997. Meanwhile, in 1996, GE partnered with Microsoft, to launch the cable news network MSNBC. In 2002, GE acquired Telemundo Communications Group “for $2.7 billion in a deal with an investment group that includes Sony and Liberty Media.” GE also acquired the Bravo Network from a deal with Cablevision and MGM for $1.25 billion.[351]
From the above, it is obvious that electrical energy companies such as General Electric and Westinghouse played a central role in many of the high profile media companies of the US even if their name was usually in the background. They represented the highest level, involving deals in the tens of billions. Our next two examples, WCS and Anschutz/Qwest, are at a much lower level. On the surface, WCS was about a small energy company that went into communications, went into debt for $6+ billion; went bankrupt and was acquired for a “mere” $270 million. We shall examine this company more closely as a case study to understand in more detail aspects of the dot.com and tele.com.bust.
Williams [Energy] Company and Williams Communication Services (WCS)
In 1985, Williams became the first energy company to harness its core competency as a builder of networks to enable competition in the communications industry when it founded a subsidiary, Williams Communications Services (WCS), of which it owned approximately 86% of the stock.[352] On 9 February, 1999, Concentric Network Corporation made an alliance with Williams.[353] In July 1999, Williams signed an agreement with “the Genesys Group, an international teleconferencing services provider and the market leader in Europe and Asia, which will acquire the video conferencing business unit”.[354] (In 2004, Genesys via the Trans company was making inroads into the Russian telecoms market). In 1999, Williams had an Initial Public Offering (IPO). For the next two years it was one of the most interesting pioneers and seemed to have every chance of being a triumphant success. On 29 January 2001, Williams sold its interest in its Houston-based enterprise services business unit to Platinum Equity.[355] On 3 April, Platinum Equity acquired all of Williams Communications. Also on 3 April, three new members were added to the board: retired Nortel Executive John A. (Ian) Craig; Nextel Co-Founder, Morgan O’Brien and High Profile Sports Executive, Julius W. Erving.[356] On 22 April 2002, Williams filed for bankruptcy because it had $6 -- some say $7 – billion in debt. On 16 October 2002, it emerged from its chapter 11 proceedings as WilTel Communications Group, Inc.[357] By October 2003, Leucadia National had acquired its entire assets for $420 million.
When we look more closely at Williams Communications, we see that it had all the right contacts. For instance, on 14 November 2000, Williams Communications teamed with Boeing to deliver a first-run major motion picture from Miramax Films in Los Angeles to AMC Theatre in New York in Digital Format.[358] On 1 November 2001, it signed a 20-year telecommunications agreement with the Boeing Company valued at $267 million.[359]
Williams had two unique features. First, it developed many international agreements. To appreciate their extent it is worth listing them in some detail. On 1 March, 2000, Williams acquired “dark fibers on Telia's 28,000-mile fiber-optic network throughout Europe.”[360] On 3 May, 2000, Williams extended its international reach as one of the largest stakeholders in the new $1.06 billion Asia-Pacific Cable Network (APCN-2.), “an intra-Asia 19,000- kilometer submarine cable project that will connect China, Hong Kong, Japan, South Korea, Malaysia, the Philippines, Singapore and Taiwan.”[361] On 14 May 2000, an agreement between Williams Communications and PowerTel Ltd. gained significant capacity on the Southern Cross Cable Network, an undersea fiber-optic cable linking Australia and New Zealand with Hawaii and the West Coast of the United States.[362] On 22 May 2000, National Grid Group ( London); Chilean carrier Telefonica Manquehue; and Williams Communications invested $220 million to found the Southern Cone Communications Company, S.A., a major new broadband fiber-optic network linking Argentina and Chile.[363] On 19 February 2001, Williams obtained a facilities-based Type I license allowing it to establish a base of operations in Japan and transport traffic from Japan to its U.S. backbone network in a full-circuit configuration via an undersea fiber-optic cable linking the two countries. By now, Williams’ U.S. network had more than 33,000 miles in operation, making it the largest next-generation network in the United States.[364] On 18 March, 2001, Williams announced that it was “providing New Skies Satellites teleport facilities for New Skies' Asia Pacific satellite, giving customers a combined fiber and satellite connection between North America and the Pacific Rim.”[365] On 26 March, 2001, two of its satellite teleports received Loral Skynet Satellite Services' Uplinker Awards. On 29 August, 2001 the Japan-US (J-US) cable consortium, comprising a group of 44 leading telecommunications companies, activated the J-US Cable Network providing direct connectivity between the US and Japan.[366] On 20 September 2001, Williams “signed a letter of intent to enter a three-year commercial business transaction to purchase network capacity.”[367] On 20 December, 2001, Williams “closed on its asset purchase agreement to obtain the fiber-optic network, intellectual property, and Internet protocol capabilities of CoreExpress.” On 10 February, 2002, Williams expanded its network's international reach through acquisition of long-term capacity on Canadian and Pan-European network segments operated by Teleglobe, a leading supplier of global broadband and data services.[368] On 20 February 2002, it expanded its relationship “with KDDI America, Inc., a wholly owned subsidiary of KDDI Corporation, the largest international telecommunications company in Japan.”[369] In short, Williams developed the best connections between US local networks and the emerging global networks. Williams second unique feature was a special relation with the Baby Bells. Already on 8 February, 1999, Williams Communications formed a unique alliance with SBC to transport long distance voice, data traffic and SBC’s Equity Investment underscored Williams Communications' network and solutions strategy.[370] On 29 February, 2000, it was announced that Williams would acquire the “long distance network assets of Ameritech Communications Inc., a subsidiary of SBC.[371] On 1 August 2001, Williams was “selected by SBC to provide long distance service to Cingular Wireless in the traditional SBC13-state region.” By this time, Cingular Wireless, a joint venture between SBC Communications Inc. and Bell South, was the nation's second largest wireless carrier.[372] On 20 November 2001, Williams became “the preferred provider for long distance voice and data traffic for SBC in Missouri and Arkansas.”[373] On 5 Febraury, 2002 Williams “signed an agreement to provide long-distance services to Verizon Global Networks Inc., a subsidiary of Verizon Communications.[374] Interestingly enough, on 31 October 2002, the day Williams emerged from bankrupty as the newly formed, WilTel Communications, Keith W, Storey became President[375] and Chief Executive Officer (CEO). Storey had 20 years of industry experience including management positions at Cox Communications, Southwestern Bell, and Bell Communications Research. In short, the special relationships with the Baby Bells, meant ultimately that someone with 20 years of experience in their network could take over Williams.
We noted earlier that after floating its initial IPO in 1999, Williams was sold to the Platinum equity firm on 3 April 2001 and that less than three weeks later declared bankruptcy. It is noteworthy that the special agreements with SBC, and Verizon continued to develop. It helps to know that in 1998, before Williams even came onto the horizon of public attention, it formed a “formal working relationship” with the Blackstone [Equity] Group, which served as their “financial and strategic advisor” and specifically advised the “sale of Williams Communications Solutions to Platinum Equity and Williams Communications Canada to Telus Corporation in transactions valued at over $400 million.”[376] We shall see later that Blackstone prides itself on its links with major firms such as AT&T (§ 9).
Williams Communications remains of interest as an example of energy firms becoming interested in new media. At the same time the story of its short lived success is open to many interpretations. Some would say that Williams simply had very bad luck making deals with Teleglobe and Global Crossing months before these impressive firms went bankrupt. Others might ask whether Williams’ amazing ability to create links between national and international networks was precisely what made it so important to the Baby Bells. Federal jurisdiction laws prevented the RBOCS from making these links on their own. But with Williams as a front much more was possible. Some would be tempted to suggest that Global Crossing and some of the other international ventures served the same purpose. They were effectively Trojan horses to enter into walled markets that had been closed to them.
On 10 July 2001, the President of Williams commented on the health of the company: “It's unfortunate that the telecom industry is being painted with the same broad brush, causing our stock and bond prices to be undervalued.”[377] In this view, the burst of the telecom bubble dragged Williams down with it. But is it not possible that the so-called telecom bubble burst was itself a diversionary tactic a) to hide some all too quick deals and more significantly b) to ensure that a lot of new companies with unknown names could serve as pawns for the really big players to enter markets which were legally beyond their reach? This would help to explain a paradox that the ITU statistics record no real slump or slowdown in the IT and telecom sectors. It might also explain why the buyouts equity firms seemed less a passive response to unfortunate bankruptcies and more an active search for fortunate companies. We shall return to this theme (§10).
Anschutz
Our second example, at a much smaller scale than the General Electric and Westinghouse networks listed above, is Anschutz “holding company for Anschutz's portfolio of companies with holdings in energy, transportation, media, communications, professional sports, agriculture, entertainment and real estate,” which began in 1958, and which is now the largest stockholder in Qwest.
Qwest started in Dallas as a small player of no real significance. It was acquired by Anschutz. It was catapulted into the world scene in 1996 when it partnered with Frontier Communications to build a national fibre optic network for the United States, a story to which we shall also return (§ 10). Soon Qwest was merged with US West. The combined company then became partnered with the Dutch national telephone company, KPN. As a result the company had access to some of the best networks in both the US and Europe.
Suddenly they also had amazing talent as their managers. From 1997-2002, Joseph P. Nacchio, formerly Chief Engineer of AT&T, became President and CEO of Qwest. Since 2002, the chairman and Chief Executive officer of Qwest has been Richard C. Notebaert,who stepped down as chairman of the board of Ameritech Corporation (cf. figure 1) in December 1999. His 30-year career with that organization included appointments as president of Ameritech Mobile Communications (1986), president of Indiana Bell (1989) and president of Ameritech Services (1992).
And yet by 2002 KPN/Qwest was bankrupt. By August 2002, the Carlyle Group had acquired its Qwest Dex online (Yellow Pages) phone book. By 2003, its amazing networks had been snapped up and, as we have mentioned by 2004, Verizon had applied to acquire 62 of its licences. Some observers would say that the Qwest saga epitomizes the tragic ups and downs of the telecom bubble burst. Companies which seemed to have all their ducks and Dex in a line suddenly found themselves sinking.
More questioning minds might consider another possibility. Qwest’s sudden links with one of the American networks served to it set up as bait for a European partnership with KPN which owned the E-Bone and had helped found Unisource (cf. §10). As a small mid-Western company it posed none of the threats of one of the telecom giants. As a small company it could also plausibly go awry. Once bankrupt those who had bigger plans could conveniently buy up the networks which they could not be perceived as wanting directly. To facilitate this they were fortunate to find the co-operation of the equity companies (§ 9). If one made enough noise about the tragedy of a little company that was successful (not mentioning that it was vastly over-inflated); failed and returned to being a small company, one might even hope that persons would overlook what happened to the treasures that were temporarily there.
This could be what happened with Williams and with Qwest. Could it be that the whole telecom bubble burst was effectively about a number of such cases which served elegantly to distract the public’s attention from a contemplated attempt to take over public service infrastructure in the US, Europe and if possible around the world? We need to consider further evidence before assessing whether this is even a plausible scenario. We shall begin with a brief look at connections between oil and media and then look at military contractors and equity firms before examining more closely the pseudo-telecom crisis and the anything but pseudo satellite crisis.
Enron
Amidst the various scandals of the Enron Corporation, which was both an energy and an oil company, very little has been said of the 200 former Enron employees who now work in the Bush administration, and even less is heard of Enron Broadband which “owns 18,000 miles of fiber network that deliver high-quality, efficient bandwidth solutions. Enron has also established pooling points in 25 key cities around the world, including cities in Europe and Asia that provide an interconnection and switching platform for providers and consumer of bandwidth capacity.”[378] By 2004, Enron also offered four new businesses: Global Semiconductor Services; Media Services; Global Voice Minutes Services; Digital Content Services (DCS).[379]
Jesse L. Lasky Company, Gulf+Western (oil) Industries gained control of Paramount. Hence, an oil company owned one of the major film studios and in 1989 renamed it Paramount Communications before merging with Viacom in 1994.[380]
the Texas-based owner of more than 1200 radio and 36 television stations in the USA, with its own syndication and tour management divisions,” the Carlyle Group, the Bush family and administration. Many other connections have been noted, e.g.:
Secretary of State Colin Powell was on the corporate board of America Online, now merged with Time-Warner, which owns CNN. A member of AOL/Time-Warner's board of directors, Carla Hills, also sits on the board of directors of Chevron. She was the first President Bush's trade representative. On the board of directors of Exxon-Mobil sits J. Richard Munro, former chairman and CEO of Time-Warner. Secretary of Defense Donald Rumsfeld was on the board of the Tribune Company, owner of the Chicago Tribune, the Los Angeles Times, Newsday, and many other newspapers as well as TV stations….The director of Texaco (recently merged with Chevron), former senator Sam Nunn, is also on the board of directors of GE/NBC….Texaco board of directors member Charles Price sits on the New York Times/Boston Globe board of directors. Corporate board member William Steere is on the board of directors of Dow Jones/Wall Street Journal. A member of the Dow Jones/Wall Street Journal corporate board, Rand Araskog, also sits on the board of directors of Shell Oil.…The connections of the current White House administration with big oil hardly need mentioning. Most notably, National Security Advisor Condoleezza Rice comes from the board of directors of Chevron -- which has a tanker named for her -- and Vice President Dick Cheney (secretary of defense during the first Bush presidency) was chairman and CEO of Halliburton, which provides construction and maintenance services to the oil and other energy industries as well as field support to the military.[381]
This quote is form an article in 2001 that listed many more such connections which, incidentally have not diminished after the 2004 election. Any attempt at a comprehensive list thereof connections would lead to a long study far beyond the scope of this paper. For our purposes it is the big picture that is of interest. Two points stand out:
1) The rise of new media in the United States were intimately connected with the energy, especially in the form of electricity and oil. Almost without exception, the greatest film studios, radio networks, television networks, cable networks, and media conglomerates were intimately connected with the energy sector.
2) these media –energy connections inevitably took us back to a handful of a) very large corporations; b) persons in the highest echelons of the administration; c) companies with close military connections (§ 8) and d) private equity firms (§ 9).
One striking example of these connections is MCI/Worldcom. In 2002, when Worldcom went bankrupt, it was “rescued” by investments from Citibank, J. P. Morgan Chase and General Electric Capital.[382] In 2002, the “bankrupt” company “jumped to eighth among all federal technology contractors in 2002, with $772 million in sales,”[383] and in 2003 it was awarded a wireless deal in Iraq.
8. Military
All over the world the military plays a significant role in the development of new media and as is to be expected many of the details of their activities in this domain remain secret. The details of such activities in the United States are not of concern in this paper. As noted earlier there are trends for individuals and organizations with close military connections to be become involved in new security systems such as TIA (cf. § 6). The details thereof are again beyond the scope of this paper. Our concern rather is with another trend whereby the military, or more specifically, the chief companies that work with the military, were increasingly becoming involved with security and information systems for the public sector and for civilian life. One example was just cited: GE which was intimately connected with the rise of the film studios, radio, television and cable networks, was also the nation's sixth largest defense contractor.
But this is only the surface. Traditionally, we think of Boeing, Lockheed Martin and Northrop Grumman as aircraft companies with strong ties to the military and space. In 2002, these three companies received $42 billion in Pentagon contracts.[384] The past decade has also seen major growth in their involvement in information systems, particularly government information systems.
Boeing
Boeing had a government information systems company, which it sold to SAIC in 1999. In April 2000, it founded “Boeing Government Information & Communications Systems, which concentrates on global positioning navigation systems; airborne early warning and control systems; integrated command, control and communications systems; and integrated battle management systems.”[385]
Lockheed Martin
“Lockheed Martin is the leading provider of information technology to the federal government--and has been for the past ten years.”[386] “For the sixth year running, Bethesda, Md.-based Lockheed Martin retained its crown with about $2.4 billion in information technology contract obligations during fiscal 1999…” “Lockheed Martin also made the first cut on the $1.8 billion, 10-year Air Force Integrated Space Command and Control contract. Lockheed Martin and TRW Inc. of Cleveland each passed the down-select phase and now are competing head to head for the lucrative contract…”[387] Lockheed and Boeing together formed United Space Alliance, a company to which NASA outsourced much of its back office needs. Raytheon was active and foresaw large growth in information technology estimating that the “tasking, processing exploitation and dissemination of information offers a market of $6 billion to $12 billion over the next five years.”[388] Lockheed Martin also runs Sandia Labs.[389] The Honourable E.C. “Pete” Aldridge Junior, was on the board of directors of both Lockheed Martin and Global Crossing.[390] [391]
On October 4, 2004, the US government awarded a contract potentially worth “$3 billion to Lockheed Martin and its partners, which include AT&T, Qwest, BellSouth, and Verizon. The service will involve the integration of all postal data communication networks into a single network service that will provide enterprise data transport, voice, wireless, remote access, network management, and managed security services.”[392]
Northrop Grumman
strong player in the government information technology market.[393][394]Vinnell-Brown&Root joint venture had at least six contracts worth nearly $200 million from 1998 to 2002. In addition to the United States, Vinnell and VBR performed work in Egypt, Oman, Saudi Arabia and Turkey. They were also one of three major beneficiaries of the “rebuilding” of Iraq. Their bill alone amounted to over $20 billion (figure 3). A full list has been made by the Center for Public Integrity.
Northrop Grumman, the current parent company, had nearly 4,000 contracts worth close to $42.5 billion from 1990 through 2002.”[395]
Vinnell Kellogg Brown and Root (Halliburton) $11,431,000,000
Parsons Corp. $5,286,136,252
Fluor Corp $3,754,964,295
Figure 3. The three biggest beneficiaries in the rebuilding of Iraq.[396]
Having completed all 21 of the B-2 stealth bombers ordered by America's air force, Northrop Grumman has contacted the Bush administration, offering to build 40 more for a mere $545m apiece. If the Lockheed Martin team wins the contract to build the JSF, then Mr Kresa's company, as a Lockheed partner, would end up with a 17% stake in America's manned fighter for the 21st century. The military revolution championed by Mr Kresa, in which wars will be fought with information rather than pilots and bullets, continues.[398]
[399][400]Between 1988 and 1991, Owens served as senior military assistant to Secretaries of Defense Frank Carlucci and Dick Cheney, the senior military position in the Office of the Secretary of Defense.”[401]
Successful companies make money. In order to begin they require money. This was traditionally the role of banks and more recently the role of venture capitalists, private investment firms and private equity firms. One of the best known of such firms was Kohlberg, Kravis, Roberts (KKR), which began in 1977 by acquiring A. J. Industries Inc. ($26 million). In 1984, it acquired Pace Industries, Inc. ($1.6 billion); in 1985, Storer Communications ($2.4 billion) and it continued to grow. In the past three decades, KKR “completed more than 110 transactions involving in excess of $118 billion of total financing.”[402] The story of how this firm began as a brash, aggressive company that slowly shed “its hostile takeover for a kinder, gentler, buy-and-build strategy,” with its new motto of “proactive, patient, creative” has been told by others.[403]A realistic businessman will rightly note that such transactions, buyouts and takeovers are a natural and necessary dimension of a healthy business environment.
For our story, KKR is of a certain interest because, as we seen on several occasions, it frequently re-appeared in complex media transactions. Our real concern lies not in such individual transactions, but rather in a trend whereby a small group of equity firms were ever more consciously and systematically investing in whole sectors of the economy on a scale that had global implications. A few concrete examples will help to make this point.
By way of introduction, a slight detour is necessary to explain the underlying ambitions of the new investors. It is important to note that the United States, which traditionally had a frontier mentality -- epitomized by the phrase “Go West young man” until stopped by the Pacific Ocean –or Hawaii,-- now saw the world as its new frontier. Some of those frontier spirits still live in the American West. One was Ted Turner, the largest individual landowner in the United States with over 1.7 million acres in Montana, New Mexico, South Dakota, Alaska and Florida.[404] Another was John Malone,[405] who headed Liberty Media and also the Eastern Management Group which had Worldcom among its clients. In 2001, there were reports that “Liberty Media is investing more than $5 billion in European cable-TV.” On June 21, 2001, Liberty Media “announced that it would acquire six cable-TV companies in Germany from Deutsche Telekom for terms that haven't yet been disclosed.”[406]
In 2001, Liberty Media also invested an additional $543 million in cash[407] in another company with the modest title of UnitedGlobalCom,[408]the European operations[409] of which were run by a firm with the equally modest name of United Pan-European Communications (UPCOY or simply UPC) in Amsterdam. Its CEO, Mark Schneider had a clear ambition: “To build a European AT&T, owning high-speed pipes that go into homes and businesses and using them to sell everything from Web content to phone service:”
It's the ultimate digital convergence play.…Schneider is running far more than a branch operation. UPC is not only providing Internet access but is also coming up with content, from TV programming in 22 languages to an Internet portal called chello. And by taking advantage of the thick cables, he's offering phone service, too….For his assault on the communications giants, Schneider has a powerful partner: Last winter, as part of an initial public offering, he sold 7.8% of the company for $333 million to Microsoft Corp….The buying spree has tripled Schneider's TV subscription base, to 6 million. And UPC, listed in Amsterdam and on the Nasdaq, has skyrocketed to a market cap of $18 billion, even though its revenues were just $419 million last year….No matter who wins, though, much of the credit for wiring Europe will belong to the onetime Washington lawyer working out of Amsterdam.[410]
One observer described UPC “as a central part in Mr Malone's strategy to build a pan-European cable empire after making billions in the US industry.” As noted earlier (§3) AT&T also invested $1.4 billion in these companies. For a very brief period, the UPC company seemed wildly successful. “In the U.S., the company's American depositary receipts soared as high as $79 in March 2000 before crashing to the current $1 level.” [411] On 30 September, 2002, “UPC, Europe's largest cable television company…filed for bankruptcy protection in the US and Netherlands. The move is part of a restructuring that is expected see United Global Com…emerge with 65.5% of the company in return for erasing two thirds of its ˆ10bn (£63bn [clearly a typo for £6.3bn]) debt.”[412]
There are two reasons for examining this case. First, on closer inspection, this was not simply a case of an investment that went wrong, went bankrupt, whereby many innocent investors collectively lost 10 billion euros. It was a company fronted by the so-called Darth Vader of media and of the information highway.[413] When the UPC company went bankrupt, many innocent investors lost their money, but the mother company, United GlobalCom, and John Malone increased their influence.
Second, if this were an isolated case, it would simply be yet another example of the dot.com bust and the burst of the telecommunications bubble that ruined Williams Communications and saw KPNQwest shut in 2002 and brought difficulties to Carrier1 and Level3 Communications “after spending billions building pan-European networks.”[414] They were not isolated cases, however, which brings us back to the main topic of this section: the role of private equity firms. We shall look first at the Carlyle Group, then at some of the other private equity firms to indicate the dimensions of the problems. We shall show that they were closely involved in some of the most dramatic crises in multimedia firms including Kirch, Bertelsmann and Hollinger.
Carlyle
Much has been already been said by others about the Carlyle Group. Connections between the Carlyle Group, Halliburton (Kellogg, Brown, Root or KBR) and the Bush family have been made by many persons.[415] Halliburton's prime contracts with the Pentagon jumped from $483 million in Fiscal Year 2002 to $3.9 billion in Fiscal year 2003, an increase of almost 700%.[416] The Wikipedia has an entry.[417] Dan Briody has written a book on these connections.[418] Alfred Mendes has warned of the dangers of this group[419] as has Sherman H. Skolnick (Citizen's Committee to Clean Up the Courts).[420] In November 2004, Henry A. Waxman, called for a Congressional hearings into the VBR’s role in Iraq alleging overcharging of $61 million. As we have intimated earlier (figure 3) this is but the tip of an iceberg.[421] There were, of course, also conspiracy theorists, who linked this group with a quest for a new world order. These have also drawn attention to the presence of a swastika on the Radio Frequency Identification (RFID) chips linked with Carlyle.[422] These topics are beyond the scope of our essay.
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Aerospace & Defense |
Automotive & Trans |
Consumer & Retail |
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Energy & Power |
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Industrial |
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Opportunistic |
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Tech & Business Sys |
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Year Acquistion by Carlyle Group and others
1992 Military electronics group from General Dynamics[423]
2002, 08 QwestDex publishing business from Qwest Communications[427]
2003, 04 [429]
2004, 06 60% of DDI pocket from KDDI[433]
2004, 06 27%, KKR 44% of Panamsat[434]
2004, 06 Loews Cineplex[435]
Figure 4 a) Focus industries of the Carlyle Group;[436] b) Media c[437]
We are concerned specifically with new media connections. It is striking, for instance, that in 2004, the Carlyle Group had as its chairman, Lou Gerstner, who used to be head of IBM; that Carlyle was closely linked with Halliburton (Vinnell, Brown and Root or VBR); that the Parsons Group, the second major beneficiary of the Iraq war, had as a director, C. Michael Armstrong, who was the CEO of Comcast, AT&T and before that the CEO of Hughes; that one of Vinnell’s heads was the same Kent Kresa, who led the military efforts of Northrop Grumman, had become a director of General Motors and was also linked with the third group that has most profited from the Iraq war: Fluor. That some of the greatest corporations in the US, IBM, AT&T, General Motors, Northrop Grumman, and Comcast, were linked through their executives to private equity firms, which also had close links to the military events in Afghanistan and Iraq was noteworthy. More significant for our purposes was the scope of Carlyle which had 10 focus industries (figure 4a). The activities of Carlyle were global. For instance, along with J. P. Morgan they were involved in selling the Korean Koram Bank.[438]
In 2004, the managing Director in telecommunications and Media at Carlyle was James A. Attwood, Jr., who oversaw corporate strategy at GTE, helped acquire BBN before spinning it off as a public company, was instrumental in the GTE – Bell Atlantic merger that led to Verizon and was Verizon’s Strategy and Development Chief.[439] He “committed more than $2 billion of equity in telecom and media investments since 2001. He led the firm's investments in Qwest Dex (now Dex Media, Inc.), eAccess Ltd., Telco Hawaii (pending) and DDI Pocket, Inc. (pending). Mr. Attwood is Co-chairman of the Board of Directors of Dex Media, and was scheduled to serve as a member of the Boards of Directors of Hawaii Telcom and DDI Pocket.”[440] Attwood’s predecessor was William E. Kennard, who was on the board of Nextel; was the director of the Federal Communications Commission (FCC), and also played a part in AT&T’s broadband strategies.[441]
It could, of course, have been a complete co-incidence but it was, nonetheless, fascinating that a single individual, who was directly involved in a number of the bankruptcies and mergers of telecom burst, was also the managing director in telecommunications acquisitions in one of the leading equity firms. One needs only to consider a few of the key acquisitions of Carlyle in the communications field to suspect that a plan, some might say a carefully orchestrated plan, was underway (figure 4b). Around the world, Carlyle was buying significant bits of infrastructure, which were hit by the pseudo dot-com bust and the pseudo-telecom bubble burst (cf. §10). These included the DDI pocket, from KDDI which entailed mobile, wireless technologies from Japan in an area where America was lagging behind the rest of the world. NTT’s recent announcement to invest $40 billion in fibre to the home infrastructure suggested that there was at least one company, which was responding to these acts of hubris in a serious way.
A full analysis of the ten focus areas of Carlyle would lead far beyond the scope of this essay. It is striking, however, that Carlyle was also involved in Vaxgen, a firm which was searching for new AIDS vaccines, although it had not yet produced an effective treatment. Meanwhile, the World Health Organization had ordered India to stop producing cheaper alternatives. In November 2004, the same Vaxgen Corporation, in which Carlyle and others had invested, received a contract of $877 million for Anthrax vaccines. Critics noted that Fort Dettrick, the national facility, had long ago developed more effective means.[442]
Similarly, the Carlyle Group apparently had stocks in the parent company of Bioport, “the recently FDA approved monopoly holder of an anthrax vaccine.” The chief stock holder of this parent company of Bioport was Admiral William Crowe, Jr., who was Chairman of the Joint Chiefs of Staff; (worked closely with the then Secretary of Defense, Frank Carlucci, Chairman Emeritus of the Carlyle Group),[443] and incidentally was also the Chair of the Advisory board of the Center for Middle East Public Policy (CMEPP).[444] On all sides, there was evidence of using public monies to subsidize private firms, in which the politicians had considerable investments of their own. We begin to appreciate the enormous range of the Carlyle Group’s interests when we realize that it was also active in the domain of e-voting.
E-Voting Software
E-voting is a hot topic in every sense. We depend on new technologies for e-voting to be assured that the counts of votes at polls have been done correctly. One of the pioneers in this domain was Diebold, which created an elections software. One of the competitors in this field was the company, Vote Here, which, according to their website, was partnering with Sequoia Voting Systems, "to provide a new level of electronic ballot verification to customers of the AVC Edge touch screen voting system."
All this sounds unproblematic until we examine the details. The Chairman of the Board of VoteHere was Admiral Bill Owens, who was also former president, chief operating officer, and vice chairman of SAIC. Hence, SAIC, which was supposed to vet Diebold's elections software, was itself in the elections business.[445] Another former SAIC board member, also on the board of VoteHere, was ex-CIA Director Robert Gates, a veteran of the Iran-Contra scandal. Meanwhile, as noted above, Admiral Bill Owens, who was also head of Nortel, “served as Vice Chairman of the Joint Chiefs of Staff and was a senior military assistant to Secretaries of Defense Frank Carlucci and Dick Cheney. Carlucci's company was Carlyle Group, while Vice President Dick Cheney's former employer was Halliburton.[446] Some would see in all this the potentials of a conflict of interests. The present administration clearly saw no such conflicts and seemed impervious to the irony of taking the high ground with respect to voting problems in the Ukraine, just after entering a second term under conditions where their own counting procedures were questioned by many.
Such problems with voting machines were compounded by allegations, already in the presidential election of 2000, concerning the use of subliminal advertising. In September 2000, it was reported that an: “ad aired for two weeks this month criticized Gore's prescription drug plan. An image of Gore was followed by fragments of the words "Bureaucrats decide," with the word "RATS" flashing for less than one second on the screen before the entire word "bureaucrats" appeared.”[447] The FCC investigated the matter. Significantly, one Commissioner, Furchtgott Koch who, as we shall see (§ 11) helped in the AT&T-BT joint venture, and was one of the most eloquent spokesmen for liberalization and deregulation, attacked the investigation stating that the FCC had no jurisdiction in this area.[448] In 2004, there were also accusations that: “CNN has been using subliminal advertising for Bush, flashing the word 'trust' in ads for CNN as well as coverage of Bush.”[449]
A diplomat of the old school would insist that countries such as the United States, which are seen as pillars of freedom and democracy, have every right to govern themselves as they best see fit. This is perfectly true and ultimately our concerns have nothing to do with American sovreignty in their own country. As even the American lawyer, Lawrence Lessig, has pointed out, however, there is grave concern internationally about the extent to which a small group of Americans, acting in the name of their people, are affecting and attempting to determine the lives of persons far beyond their own borders without these persons’ consent and sometimes very much against their will. He cited the case of some Americans who tried to tell Canadians what programmes they were allowed to broadcast on television stations within their own country. He admitted that if a foreign country were to arrive in Washington to tell the FCC what regulations they should have there would have been a great outcry and rightly so. The reason for inventing borders was that there would be some limits to what came from outside, and incidentally, also conversely.
The overzealous influence of some Americans tarnished America’s name because these extensions beyond borders were effectively twofold: 1) physical invasions into Afghanistan and Iraq which were well publicized; 2) invisible invasions of values which affected the whole world. We shall explore the reasons for this and the underlying psychology that caused it later (§ 13). For the moment, we shall begin by showing that Carlyle’s activities were not in isolation; that Carlyle worked directly with other equity firms in pursuing larger targets and that implications of their activities stretched far beyond internal matters (innere Angelegenheiten), as the East Germans used to say, i.e. far beyond American borders.
As an example in passing one could mention James A. Baker, who was in the Department of Justice as Counsel for Intelligence Policy, was a senior counsel of the Carlyle Group; actively increasing Iraq’s debts through his government and this company while serving as president’s personal envoy charged with restructuring Iraq’s $132 billion in debt which generated at least $5 billion in new revenue annually. On the surface, America made a great show of forgiving Iraq’s debt. But this was conditional on Arab nations such as Kuwait forgiving Iraq’s debt to them. Hence, Baker’s challenge was to persuade Kuwait to be forgiving in this lose-lose situation for non-Americans. This was a level of conflict of interest that proved too much even for the press and a successor was eventually found for this task.
To return to the bigger picture, we shall examine recent upheavals in global multimedia conglomerates. A reassessment of the telecom debacle and the satellite saga will reveal that much more was involved than isolated companies in single sectors.
Related Equity Firms
We noted that Carlyle played an important part in the satellite acquisitions. But they were by no means alone. In the case of Panamsat, Carlyle worked directly with KKR and “split” the results 27% and 44% respectively. There are other firms with whom Carlyle completed a series of acquisitions. A number of these appeared at events such as The 2004 European Private Equity Funds Conference in New York. Once again, we are not interested in exhaustive lists. Rather our concern is to draw attention to significant trends and dangers.
A first matter of interest is the scale of these activities, KKR, founded in 1977, claimed that “The total financing raised by KKR (including the $18 billion of equity) for management buyouts and other investments exceeds $118 billion.” Cinven which, like KKR was founded in 1977, focused on larger European buyouts which entailed transactions “in excess of 23 billion euros.”[450] Cinven was active in Europe with Gores.[451] Beginning in 2002, Cinven became very active in the media field[452] (cf. below under Vivendi). On 1 November 2004, there was a merger between Apax/Cinven/World Directories.[453]
The Blackstone Group entailed transactions of over $80 billion. The official website of the Carlyle described it as “one of the world’s largest private equity firms, with more than $18.4 billion under management.” Permira advised $13 billion; Candover made investments of 25 billion euros. Apax has invested over 12 billion euros. This included 39 media companies of which 9 were in the US and 30 were in Europe. These investments extended to some 379 companies “around the world at all stages of development”[454] in six major sectors: IT, Media, Telecoms, Healthcare, Financial Services, Retail and Consumer. Thomas H. Lee managed $14 billion; Apollo managed $9 billion; Madison Dearborn managed $ 9 billion;[455] CVC Capital managed $9 billion; Clayton, Dubiler and Rice invested $5 billion.[456] Terra Firma managed $4.7 billion; Providence a modest $2.8 billion; Oak Hill, $1.6 billion; Platinum Equity founded by Tom Gores was valued at $1.4 billion, his brother (Alec) Gores Technology a ‘mere” $400 million. In this kind of company, united we stand took on a more weighty significance.
Apax Candover, Taylor & Francis
Blackstone CVC
Carlyle Apax, Cinven, KRR
Cinven Candover
KRR Axel Springer
Lehman Private Equity J.P. Morgan
Providence Equity Thomas H. Lee; Warburg Pincus
A second interesting phenomenon was that these equity firms typically partnered with each other or some other major corporation in order to make bids as consortia (figure 5). In rare cases as in the bids to take over the bankrupt Adelphia Communications, major corporations, such as AT&T and Warner were planning to compete with other equity firms (e.g. Thomas H. Lee Partners; Providence Equity Partners; and Kohlberg Kravis Roberts (KRR). In most cases, however, the equity firms appeared to play the role of go-betweens.
A third noteworthy point was that the large banks also had their own private equity firms, with considerable funds as we learn from their websites. For instance Goldman Sachs managed “$11 billion aggregate capital commitments as of September 2002.” The Lehman Brothers Private Equity had a “total committed capital of approximately $9.5 billion.” JP Morgan had “over $19 billion under management.” Together the investments of the equity firms mentioned in the previous three paragraphs amount to over $380 billion. It is sobering to recall that in 2004, General Electric (GE) Capital had assets of “approximately $500 billion.”[457] By way of comparison, it is instructive to note that in 2003 the Gross National Product (GNP) of Switzerland, ranked as number 17 of the world’s richest countries, was 309.465 billion.[458] A combination of GE Capital and the equity firms mentioned above was greater than the GNP of Canada. Given that the equity firms had links with the highest echelons of government, the leading corporations and the major banks, they were potentially poised to wield enormous power.
Private Equity and New Media
The major equity firms made no secret of their interest in (new) media, telecoms and information technology (IT). As we have noted, firms such as Carlyle and Cinven had specific departments devoted to these sectors. The site of the Blackstone Group stated that it “has partnered with leading corporations around the world, including AOL Time Warner (Six Flags transaction), AT&T (Bresnan transaction), Northrop Grumman, Sony, Union Carbide, Union Pacific (CNW transaction), USX, and Vivendi.”[459] There was considerable reason for concern, however, since these same firms were in the thick of the enormous deals which were at the centre of dot.com bust and the telecom bubble burst. A brief look at five examples will make this clear.
AOL
In January 1998, Cinven acquired IPC (the UK’s leading consumer magazine publisher) from Reed International for 1.376[460] billion euros:
At the time of acquisition, IPC…published 67 titles in 26 market sectors including women's weeklies, home interest, fashion and TV weeklies. Its subsequent merger with LH Media, another Cinven investment, in October of the same year, added 26 specialist consumer magazines in 8 market sectors.[461]
In 2001, Cinven sold IPC Media to AOL for $1.67 billion.[462] This signified a gain of approximately $300 million over the original purchase price. In 2003, when AOL-Time Warner recorded a $54.24 billion quarterly loss, the board decided to remove the AOL name and to sell Time Warner’s music business. EMI Group Plc made a bid and lost. On 20 November, 2003, a private equity consortium bid $2.55 billion. The offer included provisions for Time Warner to retain a 20 per cent stake in the business.[463] The consortium included Edgar Bronfman, Jr. Thomas H. Lee Partners, Bain Capital and Providence Equity Partners.[464] On March 2, 2004, Time Warner sold its Warner Music Group (including its record labels Warner Brothers, Atlantic, Elektra and music publishing division Warner Chappell) to this consortium for $2.6 billion in cash.[465] On 18 July 2003, Time Warner finalized deal to sell its music distribution arm WEA (CD and DVD manufacturing division to Cinram International for approximately $1 billion.[466]
At the time, there were plans for a merger between Warner Music and Bertelsmann. Instead Bertelsmann’s BMG group merged with Sony, a move that was approved by the European Commission in July 2004, by which time there were strong rumors that “Warner Music (12%) and EMI (13%) will have to merge to keep up with the new conglomerate and Universal Music Group (23%).”[467]
Vivendi
Vivendi-Universal was one of the world’s largest media firms with investments in many sectors. In 2002, it spun off its engineering and services arm as Veolia Environment which had revenues of ˆ30.079 billion (57% from outside France). In June 2002, Vivendi sold its business and health publishing arms, Aporia and Medimedia for 523 million euros to a consortium led by Cinven resulting in Cinven 37.5%, Carlyle 28%, Vivendi Universal 25% and Apax Partners 9.5%.[468] In October 2002, Vivendi sold its US publishing business (Houghton Mifflin) to the Blackstone Equity group for 1.7 billion euros.[469]As noted earlier (§ 3), in October 2003, Vivendi Universal and GE formed NBC Universal: 80% owned by GE, 20% by Vivendi. In addition to music and theme parks Vivendi held 26.8 million shares in Time-Warner). GE claimed they paid $18 billion. Some claim $7 billion.[470]
Attentive observers have pointed out that if no objections were made within a few months, the whole of the French cable television domain would be in foreign hands, and more specifically those of John Malone of Liberty Media via United GlobalCom, which in turn had large investments from AT&T. It was hardly surprising to find the so-called Darth Varder of media trying to gobble sections of European infrastructure as if this were another bit of the Wild West especially since, as noted earlier, both he, and his henchman, Mark Schneider -- who was also the son of Gene Schneider, who founded Liberty Media-- had stated their aims so clearly. What was highly troubling, however, was to find a London based equity firm playing a key role in helping to achieve this American scheme, rather than protecting Europe’s interests. More troubling still was that companies such as Canal + were anything but struggling firms, whose lack of competence had doomed them to bankruptcy. They were among the best success stories in European new media that were being acquired, some would say, surreptitiously snatched.
This was all the distressing because it appeared to be a part of a larger movement. On 10 April, 2002 “Platinum Equity, LLC, a leading private buyout firm focused on acquiring and growing technology companies, acquired the ˆ1.5 billion (US$1.3 billion [sic!]) European operations of Alcatel's (Paris: CGEP.PA, NYSE: ALA) enterprise distribution and services business.” The new firm would be called Nextira.[473] Platinum’s website revealed that the company: “has acquired more than 25 technology-driven companies and several billion dollars of revenue from leading Fortune 500 Corporations including WorldCom, AT&T, Viacom, Dow Jones & Company and IBM. Platinum has an established infrastructure in North America, Europe, Asia and South America and a workforce of more than 10,000 employees serving tens of thousands of customers throughout the world.”[474]
The above would suggest that major corporations were using seemingly minor equity firms to acquire pieces of a bigger puzzle, which only they saw, understood and increasingly controlled. Ultimately the danger lay not so much in the Mark Schneiders (UnitedGlobalCom) or even in the supremely ambitious John Malones (Liberty Media) of this world. Individuals retire and their companies often fade with them. The deeper danger lay with the great corporations, which would then buy their mini-empires and make them part of schemes that undermined the powers of free companies and free nations.
Kirch
The Bavarian, Leo Kirch, developed one of the largest media empires in the world with assets including TV rights to the World Cup and other sports, ProSiebenSat 1 (Sat 1; Pro Sieben, Kabel 1; N24 cable channels), DSF sports channel; Taurus Produktion (Film and TV production units); Taurus Lizens and others (film and media rights); and Kirch Sport. On 8 April, 2002, when the firm declared bankuptcy, it marked “Germany's biggest corporate collapse since World War II.”[475] The Kirch empire was so complex that a full account of its holdings and their fate would be far beyond the scope of this essay. Our concern, simply is to highlight, as in the Vivendi case, the extent to which equity firms, especially American equity firms, played a role in the breakup of a media empire.
A month after the bankruptcy announcement, on 10 May 2002 it was announced that BayernLB “would team up with Lehman Brothers and J.P. Morgan to purchase Kirch's 40-percent holding in Axel Springer, a family controlled company that publishes Germany's top selling newspaper Bild Zeitung.”[476] On 9 October, 2002, the Deutsche Bank sold a stake “of 10.4 % of the equity capital of Axel Springer Verlag AG to Mrs. Friede Springer.” This reduced the stake of Deutsche Bank to below 30 per cent.[477] Exactly one year later, on October 9, 2003, the American investment firm, Hellman & Friedman LLC “signed a definitive agreement to acquire a 19.4% stake in Axel Springer Verlag AG from Deutsche Bank AG for ˆ350 million. After the sale, Deutsche Bank will only hold 10% of Axel Springer shares.”
This made the American firm the largest partner and as a result Axel Springer, which produced the notorious BildZeitung, Germany’s version of the Daily Mirror moved into American hands.[478] In this case, it was two American equity firms that set the process in motion. In 2003, Axel Springer agreed to sell Ullstein-Heyne-List book publishing interests to Bertelsmann’s subsidiary, Random House. This was another one of the mainstays of the Kirch empire, which became associated with an American name, albeit via a German holding.
Bertelsmann (Springer Verlag) and Kluwer
Bertelsmann is by any standards one of the greatest media conglomerates of the world. Rumours that it was in financial difficulties and possibly a candidate for bankruptcy seemed absurd. In retrospect, it was possible to recognize that there were ulterior motives, this time coming from two London based equity firms. The background to this attack came from an unexpected quarter. The Dutch multinational, Kluwer Academic Publishers was a successful publishing company. On 18 October 2002, Candover and Equity announced that they had agreed in principle to acquire Kluwer for 500 million euros. In fact, they each agreed “to invest ˆ107.5m in the business, with senior debt and mezzanine facilities arranged and underwritten by Barclays Capital.”[479]
Next began attempts to acquire Bertelmann’s Springer Verlag, a high level scientific publisher – that had no relation at all with the Axel Springer/Bildzeitung debacle. Three fronts emerged: 1) was led by former Springer CEO Jurgen Richter, and backed by the Venture Capital (VC) firms, Blackstone and CVC Capital Partners; 2) was a joint approach by U.K. academic publisher Taylor & Francis and VC company Apax Partners and 3) was a bid by Candover and Cinven. On 27 May 2003, Bertelsmann’s highly prestigious Springer Verlag was sold to Candover and Cinven for ˆ1.05 billion (about $1.23 billion).[480] Thereby, two of the greatest names of academic publishing, which were not in a crisis state, moved into the hands of two English private equity firms. In the process, Bertelsmann, Europe’s greatest media corporation, had lost one of its choice holdings even if, ultimately, it was not shaken and perhaps not even stirred by the threats of its demise. As in the Canal+ case mentioned above, this was another disturbing example of healthy companies being acquired in the interests of quick gain rather than long term viability. A further consequence of such shuffles was that the publishing industry found it increasingly difficult to make ends meet. New media were bringing down the costs of publishing, but the intrusions of inequitable equity companies and others were threatening a whole trade.
Hollinger
The case of the former empire of Conrad Black was very different, was undecided as of November 2004, and yet it invited comparison with respect to the tactics being used. As might be expected there were bidders for individual portions of the company. But again there were two sets of partners interested in controlling the whole. A consortium of U.K. private equity companies Candover and Apax Partners & Co. Ltd (APX.YY) put in a bid for the papers. Reports said that:
U.S. private-equity firm Kohlberg Kravis Roberts & Co. (KKR.XX) and German publishing company Axel Springer (SPR.XE) are interested in bidding for the whole of Hollinger, which also owns the Chicago Sun-Times and the Jerusalem Post. The company, which has its headquarters in Chicago, is currently trading at $18.44 a share, which values the company at $1.6 billion.[481]
The official story is so well known that it seems almost superfluous to state it once again. All was well in the new media industries until 2000-2001, when there two great setbacks: 1) the dot.com bust and 2) a crisis in the telecommunications and specifically the telephone industry. Some link these events largely or even exclusively to the events of September 11, 2001 and the received wisdom is that since then Internet developments have been as shaky as our safety has been jeopardized by terrorism.
There was almost universal consensus that the impact of these setbacks was huge. With respect to the dot.com burst, according to the San Francisco Chronicle: “the top 200 companies in the San Francisco Bay Area alone lost $409 billion in market value during 2002.”[482] Between 2001 and 2003, AOL-Time Warner lost $200 billion in market value. The telecom debacle was depicted as even worse. In 2002, in the US alone: “The telecom and cable sectors produced $40.2 billion of defaults, or 70 per cent of the first-half total.”[483] In 2004, “With over 60 bankruptcies to date, it's now clear that the sector sank under too much capacity and debt. Telecoms have now shed half a million jobs and about $2 trillion in market capitalization.”[484] Nor was this limited to the United States. For over a year it seemed as if Deutsche Telekom, France Telecom, British Telecom, Telecom Italia, KPN, indeed almost all the national telecoms were in imminent danger of bankruptcy.
Everything went very quickly. To take a concrete example: The EBone began in September 1991 “when members of several European academic and research networks met to resolve long-standing European connectivity problems.”[485] In March 2002, KPNQwest finished its acquisition of EBone for 645 million euros. At the beginning of July 2002, KPNQwest NV was shut down. On 15 July 2002, Interoute acquired the EBone for 15 million euros.[486] In November 2002, Alcatel forced Interoute into liquidation. Two weeks later it emerged from liquidation following an agreement with Alcatel.[487] There were many such examples. In the process, some of the greatest media conglomerates of the world, Vivendi, and Kirch were bankrupt within months and even the titans, Bertelsmann, and now Murdoch have felt more than tremors. Or so the story.
A number of reasons have been given for the bubble burst. These include: glut in the market; irregularities in accounting and fraud; a supposed lack of investment money; problems of competence and viability; effects of convergence and simple over-ambition. We shall outline briefly why these reasons did not explain the problem; examine in more detail the fate of one key player, Level 3 Communications, before standing back to look again at the world scene where a very different picture emerges of a healthy growth in telecoms worldwide. Were the US players ignorant of this big picture? Or was the whole telecom bubble burst ultimately a diversionary tactic? We shall suggest that the source of the crisis began long before 2000; that the real struggle involves control of key infrastructures and that that struggle did not end in 2001. In 2004, it continued full pace although it now entailed a new dimension: control of satellite networks (§ 11). An analysis of this problem will lead us to suggest that a deeper source of these crises lay elsewhere, in a struggle between a peaceful model of a society bound by law versus a military model bound by command, which saw itself above, or more accurately, outside the law. This was America’s real crisis. Perhaps they were striving to impose their crisis on the world, so that they could refashion global politics and create a new world order.
Glut in the Market
One of the most common explanations for the telecom troubles of 2000-2001 was that there was a glut in infrastructure: too many cables and networks and not enough content. If this were the cause, then all the telecoms should have been affected equally, which was by no means the case. In addition, one would expect that the building of infrastructure should have come to an abrupt halt after 2001. This was also not the case. Clearly the story was more complex and explanations need to be sought elsewhere.
Irregularities and Fraud
Another popular explanation was that the telecom meltdown arose from irregularities in accounting -- gone rampant some would add. In June 2001, Worldcom filed for bankruptcy with a $30 billion debt burden, amid allegations it hid billions of dollars in expenses. Many lawsuits ensued.[488] In May 2003, the Securities and Exchange Commission issued a Civil penalty of $1,510,000,000.[489] As noted earlier the actual amount of debt was $1 trillion with over $350 billion of unaccounted inter-company debt. By 8 August 2001, it was reported that, the European arm of Worldcom, Worldcom International, and Global Crossing UK were facing problems.[490] Such irregularities also occurred in a number of other companies that went bankrupt including Enron, and Adelphia. In some cases, simple fraud undoubtedly played a role in the bankruptcies. But a few rotten apples could not explain a large tremor in a major industry. Nor could they explain how some of the firms that went bankrupt, e.g. BBN and Williams, almost immediately went on to be very successful.
It was also often claimed that success or failure was simply a question of having or not having money from investors. A number of examples show the contrary. One of KKR’s competitor’s in New York, Forstmann Little, was led by Ted Forstmann. Since 1978, Forstmann Little bought eighteen companies, including General Instruments[491] and computer-magazine empire Ziff-Davis (1994), for $1.4 billion.[492] In January 2000, Forstmann Little invested approximately $1.5 billion in XO Communications. In April 2001, Forstmann Little invested an additional $250 million in XO. He also invested in McLeod. Each of these investments included funds that Connecticut had committed to the two Forstmann Little partnerships. Both McLeod and XO subsequently filed for bankruptcy protection, effectively wiping out Forstmann Little’s equity investments. [493] XO, originally supported by Craig McCaw and subsequently under the aegis of Carl Icahn, also had plans in Europe, which it “voluntarily” abandoned. Hence, although XO had been dubbed one of the telecom trinity (along with 360 communications and Level 3), it clearly was not part of the vision that supported Level 3. Viatel had real networks in Europe, but after its initial financial troubles had difficulties raising $60 million at a time when its competitor had raised over $14 billion. Hence, money alone could not explain success or failure.
Competence and Viability
Another of the myths connected with the dot.com bust and telecom bubble burst was that there were a great number of naïve and overenthusiastic individuals, who lacked the competence to succeed and the discipline needed to create a viable company, which became clear when the realities of the market brought them back to earth. No doubt there were such cases. But one could hardly say that companies such as BBN (Bolt, Baranek and Newman) belonged to that category. After all they belonged to that very small group that founded the American Internet. They were absolutely solid and had the best possible credentials. They were taken over by GTE, which was taken over by Verizon and renamed Genuity. As we have noted, Verizon showed no signs of bankruptcy and yet they discarded Genuity (formerly BBN), which soon went bankrupt.
Traditionally bankruptcy marked the end of a firm after all its hopes for survival had gone. The ingenuity of the new kinds of bankruptcy typified by Williams or BBN (in its guise as Genuity) was that firms with proven competence and ability saw their assets diminished, died and then, phoenix like, arose anew as if nothing had happened. Within a year of being integrated within Level 3, Genuity was thriving as never before. Far from being a case of incompetence, it almost looked as if the deeper reason for its bankruptcy was in order that someone else could profit from their competence. In the short term, this was Level 3. Perhaps there was a much larger picture: perhaps even Level 3 was merely a pawn in a vastly larger game.
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IBM Global Services Rational Software Informix Price Waterhouse Coopers Lybrand |
IBM Global Services (Lotus, Rational, Informix, Price, Waterhouse, Coopers, Lybrand) |
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EDS A.T. Kearney MCI Systemshouse |
EDS (A.T. Kearney, MCI Systemshouse) |
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Klynveld Peat Marwick Goerdeler |
KPMG (Klynveld, Peat, Marwick, Goerdeler) |
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Deloitte Touche Tohmatsu Bakkenist |
Deloitte-Touche, Tohmatsu, Bakkenist |
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Cap Gemini Sogeti Ernst Young Clarkson, Gordon |
Cap Gemini, Sogeti, Ernst and Young (Clarkson&Gordon) |
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Andersen Consulting |
Accenture (Andersen Consulting) |
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Booz Allen Hamilton |
Booz Allen, Hamilton |
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Oracle People Soft J.D. Edwards |
Oracle (People Soft, J.D. Edwards) |
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SSA Global Baan |
SSA Global (Baan) |
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Atos BSO Origin SEMA |
Atos Origin (BSO, SEMA) |
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Logica CMG |
Logica (CMG) |
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Computer Sciences Corporation |
CSC |
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CGI Group |
CGI Group |
Figure 6. The big picture: Mergers of accounting, consultancy[494] and software firms in the past decade.[495]
Convergence
Another reason given for the bubble burst was that it was part of a larger technological development or “shakedown”: a move towards convergence as the concerns of Information and Communication Technologies (ICT) shifted slowly towards Universal Convergence Technologies (UCT). As a result computer hardware and software firms, accountancy and consulting firms, which had once been very different sectors found themselves merging into new entities with expertise that bridged across these sectors. Hence, IBM, once a computer hardware firm, could sell its computer arm to the China in November 2004 and still continue as a powerful firm.
An IBM could also buy PriceWaterhouse and Oracle could buy PeopleSoft. As a result, what were 41 firms in 1990 are 14 in 2004 (figure 6). But again, notably, those which were swallowed up were not unsuccessful firms. On the contrary, in the case of Clarkson in Gordon, it was the best firm in Canada that was acquired by forces with a transnational and later a global vision. Instead of eliminating incompetent firms, convergence simply collected successful firms into much larger entities. This in itself should not have caused bankruptcies.
Over Ambition
Others have claimed that the failures were caused by the excessive greed and over ambition of a few. Again this could not be the whole story. On 11 October, 2003, Brady.com spoke of three firms in particular as a telecom trinity: XO, “controlled by vulture investor, Carl Icahn; 360Networks Inc., supported by investor Wilbur Ross and Level3 Communications, supported by Warren Buffett.[496] All three seemed realistically ambitious and extremely successful. In 2004, XO and 360 Networks were bankrupt and only Level 3 remained.
In this context, the dot.com bust and the telecoms meltdown emerged in a more complex light. It was not simply a result of a glut in the market; a lack of competence and ability or even a lack of funding. The companies that failed often had all the right ingredients and the companies that were ultimately successful often had all the appearances of being unsuccessful, going bankrupt at the same time as key investors were reshaping their future. Curiously, the epicentres of the crises were three American cities: New York, Washington and San Francisco (along with the adjacent Silicon Valley). There were of course rumblings other centres of world finance such as London, Paris, Frankfurt and Amsterdam, and Tokyo. To understand the bigger picture we need a) to zoom in on one of the key players and then b) to stand back in order to understand the world scene.
Level 3 Communications
We mentioned Level 3 in passing earlier (§5). As with Williams Communications it will be useful to examine Level 3 as a case study in order to throw light on other dimensions of the so-called telecom bubble burst. Level 3 was founded in 1985 as Kiewit Diversified Group Inc. (KDG), a wholly-owned subsidiary of Peter Kiewit Sons', Inc. (PKS), a 114-year-old construction, mining, information services and communications company, headquartered in Omaha, Nebraska.[497] On 19 January 1998, KDG announced it was changing its name to Level 3 Communications, Inc. and on 31 March 1998, Level 3 became an independent corporation traded on Nasdaq. The company had direct links with Warburg Pincus Co-President, Joseph Landy.[498] By 2000, money was not really a problem:
Through the third quarter of this year, our capital expenditures have been $4.5 billion. We expect to spend $6.3 billion on capital goods through the end of 2000. These figures both represent increases in the amounts we expected to spend at the beginning of the year. We have raised almost $14 billion and invested in people, network infrastructure and operational capability very different from those of our competitors. Important parts of our US, European, Asian and undersea infrastructure will be completed in the very near term, on or ahead of schedule.[499]
An announcement on 26 April 2001 by XO made it clear that it was working with Level 3. XO stated that it would “reduce capital spending by roughly $2 billion over the next five years by canceling its European buildout and delaying expansion and activation of parts of its U.S. fiber-optic network. In addition, the company will take payments made to Level 3 Communications related to its European network and apply them to amounts due Level 3 for XO's North American networks.”[500] On 22 July 2001, Warren Buffet invested $100 million personally and his partners invested $400 million in level 3[501]
Meanwhile, Viatel, an American company founded in 1991 had acquired a 7,700-route kilometer pan-European fiber-optic network and a trans-Atlantic cable system. On 1 March 2000, Viatel acquired AT&T’s UK subsidiary and thus expanded its pan-european routes by 1700 kilometers.[502] On 12 April 2000, Level 3 Communications and Viatel made an agreement to collaborate on the trans-atlantic system.[503] In May 2001, Viatel made use of chapter 11 bankruptcy protection in 2001 as it struggled with debts of $2.1bn. On 23 August, 2001, Level 3 Communications acquired the transatlantic network assets of Viatel.[504] On 10 September 2001 “Level 3 Communications Inc. bought back the transatlantic network it sold to bankrupt carrier Viatel last year. Level 3 released Viatel from its $9-million debt; Viatel will pay Level 3 $500,000 for a one year lease of two 2.5-gigabit wavelengths for existing customers. Level 3 will retain cash payments it has already
received from Viatel, including $94 million paid at the end of 2000. At the time of the original sale, Viatel's 25% stake in the network was valued at over $150 million.”[505] On 14 September 2001, Level 3 received another $750 million underwriiten by Goldman, Sachs & Co. (in conjunction with Salomon Smith Barney Inc.; Chase Securities Inc.; Credit Suisse First Boston Corporation; J. P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated).[506]
Good connections with the financial world continued. On 17 December 2001, Level 3 announced that it had “signed a 15-year lease agreement to provide data center space to Lehman Brothers, the global investment banking firm.”[507] On 25 February 2002, Level 3 acquired Corporate Software.[508] Meanwhile, at Viatel, Lucy Woods, who had been the head of Worldcom International, went on to become the new head. Meanwhile, creditors swapped their loans for 97% of the company's shares and on 10 February, 2002, four investors including Morgan Stanley raised $60 to keep the firm afloat.[509]Three weeks later, on 2 March 2002, Viatel was bankrupt. Level 3 acquired the whole Viatel network (figure 7).
Figure 7. Level 3 networks in 2004.[510]
In 1969, the year that the American Internet began, a small firm with strong ties to the military called BBN (Bolt, Beranek, and Newman) was also founded. BBN helped to build the original Internet, invented the e-mail protocol and "@" symbol, and in 1971, sent the world's first e-mail message.[511] It was subsequently taken over by Verizon, then dumped, changed its name to Genuity, went bankrupt and was then acquired by Level 3 in February 2003 (although the intention was announced on 27 October 2002), Level 3 acquired Genuity for $242 million.[512]
By 2004, Genuity had expanded and owned Software Spectrum, “one of the world’s largest resellers of business software” and Structure LLC, “a leading IT infrastructure outsourcing company.” On 9 August 2003, Level 3 acquired Telverse, a Voice over IP startup.[513] On 6 October, 2004, Level 3 announced “new agreements to supply network services in the UK and Ireland to ntl, one of the UK's largest broadband services providers.”[514]On 18 October 2004, Level 3 Communications announced that it had “signed a five-year, $337 million deal to provide Northrop Grumman with IP VPN services. This deal stems from a contract that Northrop Grumman signed with the U.S. Department of Homeland Security earlier this year.”[515]
Meanwhile, in April 2004, Level 3 announced the purchase of ICG Communications' dial unit for $35 million and on 1 October, 2004, it announced that it would pay $34 million cash for Sprint's wholesale dial-up Internet access business.[516] On 24 November 2004, Level 3 announced that it was launching a channel partner programme in Europe: “Commencing early 2005, Level 3 will initially focus its partner-recruitment and sales efforts around (3)Tone Business, its hosted VoIP offering for small and medium-sized enterprises.”[517]
Level 3 was not the only company to expand into Europe. We noted the activities of the Carlyle Group; Blackstone; Platinum; Cinven, Apax and other equity groups. Meanwhile, Cogent Communications (Washington) began in August 1999. In April 2000, it made a $310 million Cisco partnership agreement. In September 2001, it acquired NetRail and became a Tier One Service Provider. In April 2002, it acquired the major US operations and assets of PSINet. In January 2004 it acquired LambdaNet France, Spain, including operations in the United Kingdom, Belgium and the Netherlands. In March 2004, it acquired the German network assets of Carrier1.[518] By 2004, Edward J. Lu, the co-founder and Vice-President of Corporate Development of Cogent, was with the Carlyle Group.
The number of these takeovers was considerable. In April 1999, Global Telesystems (GTS) took “a 52% stake in Omnicom, a new entrant in the telephone market in France, for nearly $210 million, with a view to raising its holding to 67%. This access gave GTS/Hermès, which also controlled “French licence holder Esprit, a national presence plus numerous agreements with distributors.”[519]On 9 September 1999, Concentric Network Corp (San Jose) acquired Internet Technology Group plc, one of the UK’s largest ISPs.[520] On 7 April 2000, Aether Systems, Inc. acquired IFX Group, PLC “Europe's largest provider of mobile financial data.”[521] On 6 October 2000, Via Net.Works, Inc. (Reston, VA), announced that it was acquiring Highspeed-Server-Internet Verwaltungs GmbH.[522] On 6 February, 2004, AG Interactive, the new media subsidiary of American Greetings Corporation, “acquired K-Mobile and key brand Kiwee, an established major European player in the mobile content provider arena.”[523]On 16 March 2004, Air2Web, an American “top wireless solutions provider,” announced its acquisition of “Wokup SA, the European leader in providing mobile applications.”[524] On 1 June 2004, Premier Devices, Inc. (San Jose), claimed that it had acquired all of the shares of Motorola Broadband Nurnberg GmbH.[525]
To return to Level 3: The story of its success raised more questions than it answered. On the surface, Level 3’s venture into Europe via Viatel, which was linked with WorldCom International, could have been a co-incidence. It could have been entirely independent of John Malone, Gene Schneider (père) and Mark Schneider (fils), who saw Europe as another version of the Wild West, and were acquiring infrastructures by buying Noos and Canal+ France. It could also have been independent of Platinum Equity’s acquisition of Alcatel’s network. There was reason to believe, however, that they might all have been connected, for at least three reasons.
First, Warren Buffett, who supported Level 3, also recommended United GlobalCom as a worthwhile stock.[526] So he must have been aware of their basic plans. Significantly he did not invest in them directly. Second, Warren Buffett, in addition to leading a team to invest $500 million in Level 3, “[527]
In 1998, Platinum “bought the networking operations of Racal Electronics, on which Racal had lost $300 million the previous year. [Tom] Gores paid $12.5 million in cash for the business, giving Racal a ten-year note for the $35 million balance of the purchase price. Under Gores the Racal sub became Milgo Solutions…. Milgo built up its service business, advising clients before they built their data and voice networks, as well as servicing those systems when they were up and running.”[528] As we noted earlier, Platinum Technology also bought Williams Communications three weeks before it announced bankruptcy. Platinum then combined Milgo and Williams (which was soon renamed Wiltel) to form Nextira:. As Platinum’s website explained: “Nextira competes head-on with Equant, a publicly traded company being acquired by France Telecom. Equant has $1.6 billion in sales, $350 million in debt and $111 million in losses over the last 12 months. Equant's market cap: $5 billion.” [529]
|
Year |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2000 |
|
Services |
403 |
448 |
470 |
517 |
596 |
672 |
712 |
767 |
854 |
920 |
968 |
1'020 |
1'070 |
|
Equipment |
120 |
132 |
135 |
158 |
183 |
213 |
234 |
248 |
269 |
290 |
264 |
275 |
300 |
|
Total |
523 |
580 |
605 |
675 |
779 |
885 |
946 |
1'015 |
1'123 |
1'210 |
1'232 |
1'295 |
1'370 |
|
|
|||||||||||||
|
Main telephone lines (millions) |
546 |
572 |
604 |
643 |
689 |
738 |
792 |
846 |
905 |
983 |
1'053 |
1'129 |
1'210 |
|
Mobile cellular subscribers (millions) |
16 |
23 |
34 |
56 |
91 |
145 |
215 |
318 |
490 |
740 |
955 |
1'155 |
1'329 |
|
International telephone traffic minutes (billions)5 |
38 |
43 |
49 |
57 |
63 |
71 |
79 |
89 |
100 |
118 |
127 |
135 |
140 |
|
Personal computers (millions) |
130 |
155 |
175 |
200 |
235 |
275 |
325 |
375 |
435 |
500 |
555 |
615 |
650 |
|
Internet users (millions) |
4.4 |
7.0 |
10 |
21 |
40 |
74 |
117 |
183 |
277 |
399 |
502 |
580 |
665 |
Figure 8a. Growth of the telecom industry from 1991-2003 and b) related statistics according to the ITU (International Telecommunications Union).[530]
World Scene
When we stand back to look at the global picture we are confronted with what appears as a blatant paradox. As a result of the bust and meltdown, there should have been a world wide slump in both the Internet and the telecommunications industries. According to the statistics of the International Telecommunications Union (ITU), however, this was not the case. Between 1989 and 1999, the Internet grew from 100,000 users to over 100 million. Between 2000 and 2004 the Internet grew from 100 million to 800 million in September 2004. It was due to grow to 940 million by the end of 2004 and surpass 1 billion users in 2005. Between 1991 and 2003 the telecommunications industry grew from $523 billion annually to $1.37 trillion annually. The mobile market grew from a mere 16 million in 1991 to 1.329 billion in 2003. There was no slump. There was only growth (figure 8).
Meanwhile, the world changed. A decade ago the G7 seemed a comfortable club and there were polite discussions whether Russia should be included as an additional member to form a G8. By 2003, six of the original members held their place. In terms of GDP, China was number 7; Spain was 8, Canada was 9 and Russia was 16. Since August 2001, China had the largest telephone company in the world. It was now also the largest mobile phone producer in the world.
September 11 may indeed have slowed down developments in telephony and the Internet in the United States, but the world did not bother to wait. While Mr Kissinger urged Mr. Bush to work on a new world order that still reflected the world view when he was in power, a new world order of a more tangible kind was emerging. It was not concerned with either rhetoric or double-speak. It looked at real numbers. A decade ago a great majority of Internet users were in the United States and an overwhelming majority used English. In 2004, English represented 35% of the Internet, Chinese was 16% and in simple quantitative terms was predicted to surpass English within 3 to 5 years. In 2004, the United States entailed less than a third of Internet users and that percentage was dwindling daily. Nor should this really be a surprise. If the Internet was truly for everyone then a country that represented 4% of the world population needed to recognize others, even if continued to lay claim to 40% of the world’s energy.
When we look more closely at the momentous telecom battles between the RBOCs (Regional Bell Operating Companies) and their competitors; between the Turners and the Malones, between the KKR’s and their competitors; even between Tine-Warner and Disney the sums were typically in the $1-10 billion range and at most in the $10-100 billion range. This was small potatoes in a world where the big time military contracts were in the $100 billion to 1 trillion range; or for that matter in a world where the annual telecom earnings were $1.3 trillion. From this point of view the dot.com bust was a storm in a teacup and the telecom bubble burst was probably literally a bubble amidst the great telecom oceans.
Ignorance or Distraction
Why then were we confronted so inexorably with all the gory details of local events when the global picture looked so much better; is so much better? Why make such a fuss when looking further would have allayed fears, calmed markets and helped the global economy? Here again a number of interpretations and answers offer themselves. A benevolent view would note that the Americans were so caught up with their self importance that they were simply unaware of the existence of Internet life beyond the galaxy of their fifty states. No doubt it would be quite easy to find such persons on the street. Their equivalents exist in every country of the world.
A crucial point is that such “persons on the street” were hardly those who were making decisions about the future of Telecommunications and the Internet. One would expect that the heads of the Internet and the heads of ICANN, who held meetings all over the world, must have realized that the Internet was spreading. Some cynics would answer: of course they did and that was precisely why they have downplayed international aspects of the Internet while all the time paying lip-service to the importance of national representatives. Focussing attention to the crises in America made it easy to overlook that events elsewhere were rendering these crises ever less significant.
Others would point out that even this was too generous a view of the situation. Ambitious American companies such as Liberty Media, GlobalUnitedCom, Level 3, Platinum Equity; including failed ones such as Worldcom, Global Crossing, Unisource and Viatel were fully aware that Europe, Japan China, India and the rest of the world had telecoms and Internet markets which could not simply be brushed aside. Moreover, they worked with the great banks (Citicorp, Credit Suisse) and major equity firms such as Carlyle, and Blackstone, which had offices or at least officers around the world and had full access to the both the global picture and its national variants.
Conspiracy theorists would point out that companies such as Unisource and Viatel were closely linked with AT&T; that AT&T could have deliberately sold its treasured holdings to these companies; encouraged conditions which led bankruptcy; then recovered their possessions as if nothing had happened. This might well be exaggerated. In any case, American firms wishing to make inroads in these other Internet and Telecom markets had very good reasons to sell their version of the story about a dot.com bust and a telecom bubble burst even though they knew it was only local news, and were almost certainly conscious that these troubles were being self-induced. If everyone could be made to believe that this was really a global problem, prices, especially infrastructure prices, would plummet; companies could be acquired for a song. Before anyone realized what was happening, Europe would unwittingly have fallen to the wiles of the fibre barons, even more so than their ancestors had been taken in by the robber barons a century earlier. If this sounds like an overly paranoid assessment, in 2004 American telecom firms were still taking over infrastructure in Europe (cf. figure 7) and some groups continued their efforts to persuade us that the US remains the epicenter of all these activities.
|
Company |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2004 |
|
NTT |
9 |
9 |
11 |
8 |
9 |
8 |
28 |
|
Deutsche Telekom |
31 |
35 |
35 |
48 |
52 |
41 |
363 |
|
British Telecom |
78 |
73 |
66 |
64 |
72 |
84 |
76 |
|
Bell Canada Ent. |
95 |
81 |
110 |
264 |
214 |
178 |
162 |
|
France Telecom |
--- |
64 |
69 |
70 |
69 |
51 |
376 |
|
Company |
2002 Operating Revenue (US $m) |
2002 EBITDA (US $m) |
2002 EBITDA Margin % |
2002 Net profit (US $m) |
2002 Debt to market cap |
||||
|
BT Group |
33,098 |
11,160 |
34% |
1,639 |
1.11 |
||||
|
Deutsche Telekom |
56,338 |
17,721 |
31% |
(25,502) |
1.11 |
||||
|
Ericsson |
16,730 |
(996) |
(6%) |
(2,143) |
0.29 |
||||
|
FranceTelecom |
48,930 |
8,525 |
17% |
(21,937) |
1.41 |
||||
|
Nokia |
31,497 |
6,600 |
21% |
3,602 |
0.01 |
||||
|
Swisscom |
10,506 |
3,255 |
31% |
817 |
0.13 |
||||
|
Telecom Italia |
31,900 |
8,683 |
27% |
311 |
0.45 |
||||
|
Telefonica |
29,813 |
(1,126) |
(4%) |
(11,933) |
1.52 |
||||
|
Teliasonera |
6,827 |
1,192 |
17% |
(918) |
0.22 |
||||
|
Vodafone |
36,778 |
2,106 |
6% |
(25,242) |
0.16 |
||||
Figure 9a. Statistics from Forbes ranking the world’s largest telecoms; b) statistics from Deloitte concerning the top European telecoms for 2002.[531]
Traditionally the statistics produced by Forbes have been accepted internationally as synonymous with the most accurate facts available at a given time. Their lists covered top companies, richest persons and so on. Of interest to us are their statistics concerning the world’s leading international telecoms for the years 1997 through 2004. For the moment we shall focus on five companies which are universally recognized as significant players (figure 9a).[532]
Yearly fluctuations in sales and operations inevitably led to some minor shifts as seen in NTT’s position from 1997-2002. Bell Canada Enterprises (BCE) were more quixotic than would be expected. But our chief concern lies with the statistics for 2004. In the case of British Telecom (BT) which had agreements with AT&T, there was no significant change. But within the period 2002-2004 NTT moved down from position 8 to 28; Deutsche Telekom from 41 to 363; and France Telecom from 51 to 376. Meanwhile, in the full list, the top telecoms of the world were Verizon (11) and SBC Communications (26).
A comparison with the statistics of Deloitte concerning the top European Telecoms revealed that operating revenues and the profits of Deutsche Telecom and France Telecom were very much higher than those of British Telecom. Moreover, the web pages of Deutsche Telekom and France Telecom had firm statistics to show that the income of these two companies continued to increase during the period 2001-2003. It would look as if the US firms were trying to reposition themselves as the only serious players on the block. Perhaps, if their figures resembled even remotely the charts of the International Telecommunications Union (ITU) for the same period, their hubris would be less evident, and their claims more convincing. The implication, unfortunately, was that even the Forbes lists had become tainted by a focus that made them useless for impartial observers of events on the world stage. Such a loss of face and reputation could ultimately cost their native country much more than many a dot.com bust.
The obvious question was: Why would Forbes do this? It could be that the real causes of the telecom debacle lay elsewhere and that a much bigger game is involved. First, although the media focused our attention on the timeframe 2000-2001, it was striking that these problems in the telecom world began in 1996 and continued in 2004. Second, these problems affected specific domains of telecommunications, namely infrastructure and networks. Third, we shall find that these problems extended to other dimensions of infrastructure, namely satellite communications. Once we have examined these connections we shall be in a position to suggest a very different explanation of recent events.
almost 62 years and had as its goal “to let anyone enter any communications business -- to let any communications business compete in any market against any other.”[533]
In the United States, everything seemed to get off to a good start, almost. The basic Telecommunications Act was ready by 8 February although there were revisions that took until 13 January, 1997. On 8 March, 1996, Chairman Hundt of the FCC, named Solomon J. Trujillo to head the new Telecommunications Development Fund. Conveniently, Trujillo was also President and CEO of US West Communications Group.[534] “Trujillo became President and CEO of US West as a whole in June 1998.”[535] He went on to become the CEO of Orange and was a member of the Bretton Woods Committee, a “group organized to increase public understanding of international financial and development issues and the role of the Bretton Woods institutions -- the International Monetary Fund, the World Bank and the regional development banks -- in the global economy.”[536] (Frank Carlucci, Chairman Emeritus of the Carlyle Group was also a member).
Soon there two attempts to create a new US network. It would have been a bit too obvious if the head of the new Telecommunications fund, who was also a head of a Baby Bell would immediately have engaged his company to build a network to further the liberalization process. So two relatively unknown firms did the building, went bankrupt and then were taken over by the Baby Bell whose head was leading the telecommunications fund. To make sure this worked the Baby Bell acquired executive help from AT&T. To divert attention from these activities there were soon new mergers and name changes. Or at least that was one very plausible way of reading what happened.
Qwest-Frontier
We noted earlier (§ 7) that the Denver based Anschutz (holding) Company was the owner of a regional telecom called Qwest Communications, which “began in 1995 when SP Telecom, a subsidiary of Southern Pacific Railroad, combined with Qwest Corporation, a small Dallas-based digital microwave firm. “Realizing early on that the Internet would create unseen demands that existing networks couldn't possibly meet, Qwest set out to build a whole new kind of network – faster, more flexible and more robust than any network on earth. Today, the Qwest Macro Capacity ® Fiber Network contains the world's most advanced optical networking equipment and reaches 104,000 miles around the world.”[537]
On 21 October, 1996, Qwest and Frontier[538], “announced they were going to jointly build a new nationwide fiber network. This announcement sparked a huge cross-country construction boom in telecommunications.”[539] Frontier was linked with Alltell.
Since AT&T basically had its own infrastructure, one might have expected that one of the Baby Bells would be the initiators of a new national network. Instead it was two relatively unknown companies: Qwest and Frontier. However, two months and one day later, on 22 December 1996, Joseph P Nacchio, former Chief Engineer of AT&T was named CEO of Qwest.[540] He began in early 1997.
In June 1998, the US West Communications Group, the telecommunications and data networking unit, and MediaOne, the cable and international business unit, were separated into two free-standing companies.”[541] By March 1999, AT&T was attempting to buy MediaOne, (which happened within a year), and on 30 June, 2000, there was a merger of US West and Qwest.[542] This created:
a $19 billion global giant with leadership in network technology, as well as applications and services. Its advanced fiber optic networks link directly to nearly 30 million customers through more than 2.6 million miles of fiber in the U.S. The company also has a rapidly growing presence in Europe through an alliance with the Dutch telecom company, KPN, and a foothold in Asia through a new Asia-Pacific office and interests in the US-Japan Cable project. [543]
On 31 October 2000, Qwest Communications International Inc. “the broadband Internet communications company, today announced an agreement with McLeodUSA for voice and data communications services worth approximately $600 million in revenue to Qwest over three years.”[544] By 11 February 2002, Mcleod had $3.3 billion in debt and had filed for bankruptcy after having sold “350 POPs and its ISP client base to high-speed network Level 3.”[545]
Hence the Qwest company, which was theoretically creating a network to compete with AT&T, was almost immediately run by AT&T’s chief engineer; soon merged with one of the Baby Bells, which spun off its Media One. Comcast was going to merge with Media One and compete with AT&T. Instead, AT&T acquired both Media One and Comcast. We shall see presently that there were also European dimensions to the Qwest story. But the pattern was clear: As new competitors to AT&T came on the horizon they met with one of two fates: bankruptcy and/or takeover and usually in that order.
Vyxx (Williams Communications)-IXC
Two and a half months after the initial Qwest-Frontier announcement, on 8 January, 1997, Vyvx, Inc., a division of the Williams Companies, and IXC Communications also teamed up to build a new nationwide network. Vyxx was soon renamed Williams Communications Systems (WCS), whose adventures we outlined earlier (§ 7). WCS went bankrupt, was renamed Wiltel; merged with Milgro and the combined company became Nextira, which posed as a competitor for Equant. And as we have shown Williams Communications effectively became an instrument of SBC and Verizon, i.e. the Baby Bells.
Meanwhile, IXC Communications operated a digital communications network comprising of 9,300 fiber route miles of fiber optic transmission facilities. In 1998, the company acquired Network Evolutions, Inc., Eclipse Telecommunications, Inc., The Data Place, Inc., NTR.Net Corporation and Smartnap.[546] In March 1999, there was speculation that IXC might be sold.[547] On 21 July 1999, Cincinnati Bell announced it would acquire IXC in a stock swap for $3.2 billion and acquire the 20,000-km network it was building to link over 150 American cities.[548]
According to another account, [549]to acquire Focal Communications Corporation ("Focal"), a Chicago-based competitive local exchange carrier that provides voice and data solutions to enterprises, carriers and resellers for total consideration of $210.0 million.”[550]
Europe
At first sight the European turf battles for infrastructure were completely unconnected. In terms of pan-European networks there were essentially three ingredients: 1) e-Bone; 2) Unisource and 3) AT&T’s UK Holdings. Closer inspection suggests that they might have may have been more closely linked than suggested by the wide ocean separating them.
By way of context, it is useful to make a small detour on George Soros, whose investments have bridged both oceans and continents. He too was interested in networks. In 1997, the Telecom Venture Group (TVG), backed by George Soros, became a foundation shareholder in Powertel with a $17 million investment. TVG sold its stake in 1999 at more than $2 a share, representing close to a 500% return. Wiltel became the chief shareholder of Powertel. Almost predictably Powertel went bankrupt. The TVG syndicate subsequently offered $14 million for the debt and equity interests of PowerTel's largest shareholder - struggling US telecom WilTel - in a deal that would have given it a controlling interest in PowerTel.[552] The ploy did not work and instead BT acquired Powertel.
One interpretation was that TVG, Wiltel and Powertel were merely three of the hundreds of cases of small time “wannabes” that became overextended, went bankrupt and were gobbled up. This would not explain why the likes of George Soros and Warren Buffett were interested. Another interpretation was possible: As our case study of Williams Communications Systems (WCS) revealed, Wiltel was part of a much bigger picture. Two new American networks were being built: 1) Qwest+Frontier, soon to be owned by Baby Bell, US West; 2) Williams Communications Systems (renamed Wiltel)+ IXC with strong links to another Baby Bell SBC, as well as GE Capital and Carlyle. Both of these networks had their eyes on links with their European equivalents. George Soros also had his eyes on these European networks and had already made significant inroads there. This context would provide a motive for Soros’ interest in three seemingly marginal, American players: his hope being to link the established European and the emerging networks. But he was up against other players. At an individual level, it was George Soros versus Warren Buffett. But at an organizational level this meant that Soros was up against the Baby Bells, with support from GE and Carlyle, with AT&T in the background. He was not part of the inner club. What seemed to have been a brilliant plan for an integrated Euro-American network was eclipsed by more powerful interests. Soon after this, Soros receded from public attention.
As we shall see, by 1999, Qwest-Frontier merged with Global Crossing and Global Crossing acquired the first of the new American Networks. Global Crossing had quietly been commissioned into being by AT&T. Global Crossing then merged with US West. This gave them further access to the assets of a Baby Bell. Global Crossing soon went bankrupt and seemed to go to an unexpected buyer: Singapore Technologies. Fortunately they were a bona fide member of the WorldPartners scheme of which, by coincidence, AT&T was a founding member. The game was not over yet: liberalization was proving to be liberating even for former monopolists. We must now return to Europe to pick up the thread, or was it fibre, of our story.
e-Bone
The European Ebone was founded in Copenhagen in 1991 and established the first pan-European tier I, “IP backbone, providing service to Internet Service Providers and telecommunications carriers.” 1993 saw the advent of a second company, Hermes Europe Railtel, partly sponsored by Soros. This “created the first independent pan-European fibre optic network and led the industry in the adoption of advanced optical technology to serve the telecommunications market.”[553] The company had a 20,000 km fiber network as well as carrier and ISP services. By 2000, it was “the largest pan-European internet backbone, carrying approximately 50% of European traffic, impacting 100,000 European businesses.[554]
E-Bone GTS (Global TeleSystems)
Michael J. Kleeman was one of the founders of Wiltel (formerly Williams Communications Systems). He was also one of the founders of Global Telesystem Group (GTS), [555] “a company conducting telecommunications activities financed by George Soros.”[556] So Kleeman, also a Director at Arthur D. Little and the Boston Consulting Group, was a direct bridge between George Soros’ plans in both America (Wiltel) and in Europe (GTS). In 1998, Global Telesystem Group (GTS) acquired 89% of the Hermes Railtel Europe joint venture which had joined as a co-founder of the E-Bone as a company in 1993. Global Telesystem thus acquired the E-Bone and renamed its main business E-Bone “reflecting the existing name of its pan-European IP backbone.”[557] On 8 December 1998, Global TeleSystems (GTS) announced a $4.1 billion merger with Esprit Telecom.[558] For a short time George Soros seemed to be winning in the background. By 2002, however, GTS was bankrupt. By 2004, it had re-emerged as an Indian company, GTL. [559]
E-Bone KPN/Qwest
Meanwhile, in 2000, Qwest, had made an alliance with the Dutch National Telecom, KPN. From Qwest’s point of view, there were very good reasons for this alliance, because KPN, as we shall see below, had also been one of the co-founders of another network called Unisource. When GTS announced its bankruptcy, KPN/Qwest agreed to buy their holdings:
At the time the pre-negotiated bankruptcy deal was announced, Ebone claimed 250 ISP and telecom customers, 4,000 enterprise customers, 14,000 dial-up users and a total debt of EUR 2,345 million.”[560] On 18 March 2002, KPNQwest completed its previously announced acquisition of the Ebone and Central Europe businesses of Global TeleSystems (GTS) in a bankruptcy deal valued at EUR 210 million plus the assumption of EUR 435 million debt. The new combined company will operate a 25,000-kilometer network with connections to 60 major European cities. In addition, 14 Metropolitan Area Networks (MANs) will be in service.[561]
Infonet
Computer Sciences Corporation (CSC) was founded in 1959. In 1969, CSC formed Infonet to deal with its timesharing business. In the next decades CSC, expanded considerably in scope, gaining a 51% hold of the French office of KPMG and developing military contracts. On 12 June 2002, less than two weeks after KPN/Qwest went bankrupt, Infonet “won bankrupt KPNQwest's position as the supplier of IP virtual private network services to customers of the troubled data carrier's parent company KPN.”[562]
Unisource
KPN, along with Telia and Swisscom, had also developed a second European network, Unisource. In 1994, AT&T and Unisource established an “alliance,” Uniworld. On 14 May 1996, they built on this alliance: AT&T and Unisource announced the formation of two companies, AT&T-Unisource Services and AT&T-Unisource Investment.[563] Given AT&T’s subsequent links with BT in 1999, the European Commission required AT&T to sell its stake. It was assumed that AT&T would sell it back to Unisource.[564] Unfortunately, both Unisource and its founders such as KPN were also in difficulty so, instead, on 19 April 1999, AT&T sold AT&T-Unisource [Communications Services (AUCS)] to American based Infonet “for a European Reach.”[565] Europe’s two main networks were now in American hands. By 2002, Infonet and Genuity (under Level 3) were being cited in tandem.[566] On 16 November 2004, BT took over Infonet for $520 million.[567] This theoretically brought them back into the European sphere, but given the close ties that had evolved between AT&T and BT in the meantime, the connection with the European continent was still not clear. In any case, the pioneering and central role of the Netherlands in both the E-Bone and Unisource had been eliminated.
AT&T UK Viatel Level 3
In 1994, AT&T had also established AT&T UK Communications. On 30 March 1999, after AT&T set out on Concert, its joint venture with BT, the European Commission noted:
AT&T is currently the second biggest telecommunications operator world-wide by turnover, and first US long distance telecommunications operator. AT&T is also active internationally, notably in the UK where it operates a group of wholly-owned subsidiary companies including AT&T Comms UK, and ACC Long Distance UK, a subsidiary of ACC Corp.. AT&T has also recently completed its merger with Tele-Communications, Inc. (TCI), a US corporation that owns approximately 22% in Telewest Communications, a UK cable company offering television channels, telephony services, data communications services, and Internet access. AT&T currently has a share in AUCS (AT&T- Unisource Communications Services). It is also a member of the WorldPartners alliance which is made up of AT&T, KDD, Singapore Telecom, Unisource and Telstra. Both AUCS and WorldPartners provide global telecommunications services to multinational corporations that AT&T distributes in the US, as well as in the UK for AUCS services.[568]
Of course, AT&T had foreseen this. On 29 February 1999, it had sold AT&T UK communications to Viatel. As noted earlier Viatel, then went bankrupt and Level 3 got their networks. Thus another European network entered into American hands. In our discussions of giants such as General Electric we noted a pattern whereby they sold off a serious asset and then acquired them anew. Something similar seemed to be happening here: AT& T sold off its two main holdings in Europe, Unisource and its UK branch and then regained access to them. Meanwhile, it did not have to worry about the seeming, competing efforts of Pan European Communications or their owner, United Pan-Global, because these were in turn owned by Liberty Media in which AT&T had gained a significant stake by buying TCI/Liberty. Meanwhile, the heads of the company possibly had their eyes on a much bigger picture.
World
The year 1996 was significant not only because of the Telecommunications Act but also because it saw a radical breakthrough in technology:
In February 1996 Fujitsu Ltd., Nippon Telephone and Telegraph Corporation, and a team of researchers from AT&T succeeded in transmitting information through an optical fibre at a rate of 1 trillion bits per second—the equivalent of transmitting 300 years of newspapers in a single second. This was accomplished by simultaneously sending different wavelengths of light, each carrying separate information, through the optical fibre.[569]
The bad news was that AT&T’s (and indeed everyone’s) existing cable infrastructure was obsolete.[572] A new network had to be built. It would not have been very practical for AT&T to announce that it was building a new monopolistic network, the very month that the anti-monopolistic Telecommunications Act was coming into effect. As noted above, there were also revisions to the Act which took until 13 January, 1997. That same month the newspapers said nothing of the fibre optic breakthrough and simply reported: “AT&T needed to raise $750 million in a hurry to lay an underwater fiber-optic cable across the Atlantic. Risking $15 million of his own money, Gary Winnick formed a new company, Global Crossing, and raised the total in record time.”[573]
On March 20, 1997 Global Crossing[574] announced “their first fiber build – Atlantic Crossing 1 – connecting the U.S. with the U.K. and Germany. By the end of 1997, Global Crossing had also announced projects connecting the U.S. to Bermuda and the Caribbean, the U.S. to Central American countries, and the U.S. to Japan – all undersea fiber builds.[575] In August 1998, Global Crossing became a publicly traded company on Nasdaq: “Although the company had quarterly revenues of only $117.7 million in their first public report, the stock market valued the company at over $5 billion….. By March 1999, when they first agreed to purchase Frontier, the stock market value of Global Crossing had increased to $30 billion.”[576] On 30 April 1999, the FCC approved the proposed merger of Global Crossing and Frontier.[577] As a result Global Crossing, now owned “the nationwide U.S. fiber network that Frontier had built with Qwest, along with a bunch of top-notch web hosting centers and a local telephone company.”[578]
On 17 May 1999, Global Crossing announced that it would merge with US West to create a first global and local service provider called Global Crossing Corporation a “$75 billion company with 115,000 route miles” that would “connect 185 cities worldwide.”[579] On 19 June, 1999, Qwest offered “$41.3 billion for U S West, as well as $10 billion in assumed debt” and “$13.6 billion for Frontier and assume $1.4 billion in Frontier net debt.[580] On 28 September, 1999, Global Crossing completed the acquisition of Frontier Corporation for approximately $11 billion. By 2000, the scene looked even rosier: “Global Crossing Ltd. is building and offering services over the world's most extensive global IP-based fiber optic network, which will have more than 101,000 route miles, serving five continents, 27 countries and more than 200 major cities.”[581]
By all appearances, this was proof that the liberalization of the telecoms markets was working magnificently. Very conveniently, on 11 October 2000, Global Crossing had a new CEO, Thomas J Casey, who had been at the Antitrust Division of the U.S. Department of Justice (1975-1978) “responsible for the development of evidence concerning common carrier issues in US v. AT&T, the government's antitrust suit that led to the breakup of AT&T.”[582] Three years later (6 May 2003) the technology reporter, Russ McGuire, believed that Global Crossing “merely focused on managing these construction projects and selling the capacity – not operating the networks in competition with AT&T, Worldcom, Sprint or others.”[583] Like so many others, the reporter appeared to have forgotten, or perhaps never knew, that the original incentive for Global Crossing came from AT&T.
On 28 January, 2002, Global Crossing announced bankruptcy “in combination with the announced takeover of the company by Hutchison Whampoa and Singapore Technologies for $750 million (later reduced to $250 million).”[584] Platinum Technologies, Gores Equity and even AT&T had expressed an interest in buying the bankrupt firm but did not. Fortunately, there was already a World Partners alliance which linked: AT&T (40%), KDD in Japan (24%), Singapore Telecom (16%) and Unisource (20%).[585] On 9 December, 2003, Global Crossing emerged from bankruptcy. In retrospect, perhaps it was more than co-incidence that:
a) John M. Scanlon, who had 24 years of experience with AT& and Bell Labs, became the first CEO of Global Crossing when it went public in 1 April 1998.[586]
b) Robert Annunciata, who had been the CEO of Teleport, which he sold to AT&T for $12 billion in 1998, before heading AT&T's $22 billion worldwide business services group, was named CEO of Global Crossing on 24 February 1999;[587]
c) Leo Hindery, who was President and CEO of TCI, and CEO of Liberty, before they were acquired by AT&T; who was then President and CEO of AT&T Broadband & Internet Services, the business unit responsible for all of AT&T's domestic local telephony, video and Internet operations, was named CEO of Global Crossing on 2 March, 2000