Echo and the Money Men; or Misinformation in the Information Economy

The telecommunications and Internet businesses fooled the investing public with empty promises, but they fooled each other first. Their codependent hopes and fears, echoing in capital markets and business media, show that in the information economy what you say does matter.

From the perspective of those building new economy companies, the sight of WorldCom, Qwest, Global Crossing, and others laying all that fiber in the ground gave credibility and confidence to all the promises and hopes of the online community. In return, two Internet statistics gave credence to telecoms’ vision: the doubling of Internet traffic every 100 days and the Internet’s 8 percent share of U.S. electricity consumption. Neither number was true, but each was widely circulated and unchallenged. These two Internet myths helped justify a huge build out.

From 1998 to 2001, according to University of Minnesota researcher Andrew Odlyzko, growth in telecommunications capacity was 125 times greater than growth in demand. The potential disaster was equally huge. Lenders worldwide hold an estimated $1 trillion in telecom debt; share prices and CEOs have tumbled; more than 500,000 people in the U.S. alone have lost their jobs; and an even greater number have lost their pensions. This debacle dwarfs the entire universe of flamed-out dot-com start-ups.

Of course, two Internet myths are not alone responsible. Empty-headed competitiveness, systematic criminality, and a surfeit of capital available for investment round out the causal factors. But the Internet myths — because they illustrate the role of public information in the information economy — have lessons for practitioners.

As a matter of fact, Internet traffic did double every 100 days, but only for a short period of time, in 1995 and 1996, when the text-only Internet was replaced by the graphical World Wide Web and America Online decided to let its members go on to the Web, too. Never revised, this number replicated unchecked in initial public offering (IPO) red herrings, financial road shows, conference presentations, industry analyst reports, and feature stories in business media.

Odlyzko, a former AT&T employee, traced the claim to WorldCom. The smoking guns are a 1997 WorldCom press release referring to Internet traffic doubling almost every quarter and a 1998 U.S. Department of Commerce report attributing the figure to UUNET, the world’s largest carrier of Internet traffic and a WorldCom subsidiary.

Intimations of duplicity aside, it’s the gullibility that shocks. Grey-haired executives in established telecom companies discounted their companies’ private measurements that showed slower growth in network demand and instead tried to catch up with the mythic pace. Upstart telecom companies, citing the myth, got the venture capitalist firms to pony up, and the endorsement of such capital infusions further spooked the big players. Meanwhile, soaring prices for dot-com stocks were interpreted as meaning consumers were actually clamoring for this Internet stuff and thereby for the bandwidth to deliver it.

A similarly important myth was that the Internet used 295 billion kilowatt hours, or 8 percent of total U.S. electricity consumption, in 1999. Calculated by two policy analysts working for the coal industry and publicized in a Forbes magazine feature story, the statistic was challenged by a team from University of California’s Lawrence Berkeley National Laboratory, which argued that truth was closer to 3 percent.

The latter figure is the more accurate, according to Wall Street Journal columnist David Wessel, but what’s instructive is his list of those responsible for continuing to spread the mythic one, including Deutsche Bank (May 2000), BusinessWeek (August 2000), Salomon Smith Barney (September 2000), Munder Capital Management (June 2001), and Newsweek (May 2002), among others.

In both cases nonverified public information — wishful thinking or unfounded fears, depending on your point of view — displaced reliable private information. Of course, private information (or its illicit cousin, inside information) is always more reliable, but public information can be more powerful.

First, just on its face, public information always seems inherently authoritative, especially when that public is not the unwashed masses but the financial establishment, the investing public, and the media that portrays them. What’s more, public information has a self-fulfilling quality: Everyone pays attention to it because everyone assumes everyone else is paying attention to it. Finally, if we could find villains, the rest of us could be victims, but instead we were all coconspirators.

Except those who saw the Net as an elite medium, everyone who wanted the Internet to grow had no reason to question the numbers. Even when up-to-date numbers showed a slowing in the rate of growth and even after penetration leveled off at two-thirds of the population, future expansion was still anticipated because the Internet was supposed to be a mass medium.

To be sure, the technologies, businesses, and stock prices of the telecommunications, energy, and Internet industries were, are, and will remain interlinked. At the same time, each heard, believed, wanted to believe, were afraid not to believe, acted upon, justified, and validated the other in a collectively reinforcing, vicious cycle of wish fulfillment and competitiveness that reverberated in the communications vortices of the capital markets and media.

Bias is easy to spot. Issues announce themselves. But facts are presented as objective truths. Those that confirm our pre-existing notions of how the world works or where it’s going are emotionally attractive and especially hard to confront. And when you do, it’s hard to deconstruct those dimensions and components, much less figure out which of them should be challenged. In the final analysis, perhaps the only thing any of us can really do when faced with the herd on the hoof, whether it’s running up the street or down, is to get out of the way.