Odd Lots - The Last Time Investors Really Got Excited For Tech Infrastructure

Episode Date: March 28, 2025

One of the biggest questions hanging over the market right now is whether or not the seemingly unlimited appetite for more AI data center spending is slowing down or not. This type of tech infrastructure has been a massive sectoral winner over the last few years. But of course, this isn't the first time investors have gotten excited about this type of trade. The late 1990s and early 2000s are often remembered as being the time of a "tech bubble" or "dot-com bubble," but one specific aspect was the buildout in broadband infrastructure, or what became known as the telecom bubble. So what was that all about? Why were investors so optimistic? And how did it end? At our recent live episode in Washington DC, we spoke with Blair Levin, policy adviser to New Street Research. He was the chief of staff at the FCC during the telecom deregulation of the 1990s, and in the early 2000s went to work on Wall Street. He tells us about differences and similarities between then and now, plus the signs of when the ride is coming to an end.Read More: What It Felt Like When Everyone Was Hopeful, Happy, and Rich Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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And I'm Tracy Allaway. Tracy, as you know, I am a sucker for any conversation that, you know, involves reminiscing about the dot-com bubble or the telecom bubble, really anything in the late 90s, when that came of age as a young man. Well, that makes sense. I think a lot of people tend to do that. I like just bubbles in general. I do not put a time period on my bubble interest. Any bubbles all the time. Let's do it. One thing that I think is really interesting about that time period is obviously there was a bubble. But I think right now, obviously, people are really curious about the AI buildout. And that really was the last time, the late 90s, when there was a specific costly CAPEX tech infrastructure part of the story. Because at that time, it was the telecom bubble, everyone laying all the broadband to power the high speed internet that we have today. It's not a perfect analog, but it's something that I've wanted to.

talk about and probably want to talk more about on the show just because of, yeah, some of the parallels to what we're seeing right now. Right. It is the analogy that everyone uses, primarily because of that big expensive capital buildout that you just mentioned. I will also say the telecoms bubble, it's kind of mixed up with the internet bubble, right? Or people tend to mix them up. Just lump it all up. Yeah. And actually, it was different in many ways. So we should talk about that, too. Totally. Well, I'm really excited. Tracy and I were recently down in Washington, D.C., where we recorded a live show, and you've already heard some of them if you've been listening to the podcast. But this was a really fun little chat that we had. We spoke with Blair Levin. He's currently a policy advisor at New Street Research, but he was actually the chief of staff at the FCC in the late 90s, and so who's involved in some of the deregulation that gave rise to all of the telecom bubble buildout, all of the telecom buildup. Then he went to work on Wall Street.

So he really had like a front row seat at the story that we're talking about. And so take a listen to our chat with Blair. People do forget that. Like they talk about the internet bubble. But it really was like a that started, or at least a huge part of it was the telecom. It was a dual bubble. That is to say there was a bubble relating to internet applications, but there was also a bubble related to telecommunications infrastructure. So other people could debate whether there is an AI bubble happen.

right now, but there is certainly an AI boom in terms of infrastructure spending. We talk all the time about data center, build out, et cetera. Arguably, I mean, it's been going on for a while, arguably the sort of the catalyst, the moment that it captivated everyone was the release of Chad GPT in late 2022. What was the moment, or what was the catalyst in the late 90s, that suddenly got people so excited about building out tele-broadband infrastructure? It was a release of Netscape, an operating system that caused people to understand what the Internet could actually be. And, of course, had existed previously.

But with Netscape, Silicon Valley got very excited. Wall Street got very excited. And a few political leaders like Al Gore, who was then vice president, got very excited because he had always wanted the information highway to connect the child in Carthage, Tennessee, to the Library of Congress. Right. And now there was really a vehicle that could do it. Joe knows a lot more about this topic than I do. But one thing I do know is when people talk... It's an age joke.

Yes. When people talk about the telecoms bubble, I mean, the thing that comes up is the telecommunications act of 1996. It goes almost like hand in hand. Yeah. Walk us through the connection there. Why does the acts get the blame for a lot of this enthusiasm? Or the credit. Or the credit.

Yeah. Look, I think people have to understand back in 1913, well, it's... do a little history. Back in 1913, the government essentially allowed AT&T to continue its monopoly. If Andrew had been there, maybe he would have opposed it, but he

wasn't there. And that continued until it was broken up. And then once it was broken, but you had the long-distance guys, and you had the local guys. And the local guys wanted to get in the long-distance business, and the long-distance guys wanted to get in a local business, and the cable industry wanted to get into both of their businesses. And so

during the 80s and early 90s, there were lot of efforts to say, instead of having one judge in charge of the whole thing, let's do this differently. And the key idea, and one embraced really in a bipartisan basis, but really seen clearly by Gore and by the chair, Reed Hunt, was right now we have these analog networks that are protected, and they just offer a single service. You have analog video coming over cable, you have analog voice going over the copper networks. Wireless was kind of a protected thing, long story, but there were only two wireless providers, so less than 10 million people used wireless services. And the idea of the 96 Act, in a way, was let's blow this all up

by making everything go digital. That was the key, because once they're digital, they all compete with each other. We didn't express it quite that way, but that was the real idea behind it. And I would argue, you know, you can say it was a successor, it was a failure. But for those of us, I'm showing my age, I was a 10-year-old kid in 1964, stood in line for two hours in New York at the World's Fair to watch, you know, a video conference that was like three bucks a minute. Well, we all do, you know, I do this with my grandkids for free now. So I view it as a success, you know, that basically by going digital,

we have faster, cheaper, better communications through competition. than we've ever had. What specifically did that telecom deregulation allow such that we got this incredible boom in laying fiber, laying copper, whatever it was? It gave the FCC a lot of authority, though that authority was challenged and we did lose a case at the Court of Appeals where the states challenged it because they wanted to have the power. But then the Supreme Court gave the power back to the FCC. But it gave the FCC a lot of authority. to do things which are not commonly recognized, but turn out to be very important. For example, one of the most important things we did was wireless number portability.

People didn't think about it at the time. But the question was, who owns your phone number? Do you own the phone number or does the company on the phone number? If Verizon owned your phone number, you would never leave them. And therefore, no matter how many competitors you have, there really wouldn't be competition. Another very big one goes to a very obscure thing, which are called access charges. So you're on one network and you call a different network. What does network two charge network one to complete that call?

The most important thing for wireless was when we said to the wireline guys who had, you know, we're connecting, completing 95% of the calls, you have to charge your real cost, not, you know, not 10 cents a minute, but your real cost is zero to connect. And then suddenly big plans started to come in and wireless really took off. Here's another one. In 1995, before the act was passed, the bell companies were trying to say to Congress, we really need to charge access charges to this new dial-up internet thing. And we said to Steve Case, we had a meeting with him.

We said, you know, here's what's going on on Capitol Hill. They want you to charge you like five cents a minute. Imagine what that would have done to AOL, though I'm not sure people in the audience can remember AOL. They remember AOL. They've read about it. Yeah, it was kind of like back in Genesis. But in any event, Steve Case got the message. If I recall correctly, within 48 hours, there were 400,000 emails hitting the hill, not the charge access charges, and we were able to continue that thing. So there were obscure things. We weren't breaking

up monopolies in the way that the government is currently thinking about doing with Google, but rather by saying we're going to create competitive situations, competitive situations, by looking at what is essential and then making sure that those are not barriers to competition. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Laqua from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no.

decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacquois wherever you get your podcasts. Okay, so people think they have an entry point into that market. There's deregulation. There's potentially more competition for new players. Why did investors want to fund what seems like a very expensive undertaking so badly? And here I have to say, the one thing I do know about the telecoms bubble, I used to be a capital markets correspondent, talked to a lot of old school bond investor guys. It was funded with a lot of debt. Huge amount of debt.

Yeah, and if you ask some of those old school guys about the big moments in their career, it's, okay, the 2008 financial crisis, but easily like the 2001 telecoms crash, which was huge for the bond market. Why were people so eager to pour money into this? So first of all, you have to understand that at the beginning of any new,

big thing. There was in the early 1900s a lot of money going into car companies. And in the 70s, there was a lot of money going into computer companies because people see what the opportunity is. So in the case of telecom, what happened was we were deregulating and increasing this digital competition at the same time that the market understood that the future is not these copper networks that the old AT&T local exchange carriers had, but big fiber digital networks. And at that point in time, MCI and other people were saying digital traffic is doubling every quarter. Turned out it was every year, which is a lot.

But if you're an investor and you believe one thing to be true and it turns out the other thing is true, you can make a really big mistake. And they made some mistakes. But I think, you know, there's a difference between what happened with the big networks and what happened to Pets.com, right? Pets.com went under Investors' lot of money, and that was the end of it. But those networks, which were built with that debt and then had to be refinanced, and I remember there was a famous, I think it was a Forbes cover, about a company called Quest,

which was building these. With the W. Right. And they ended up buying an old ILEC, an old phone company. and everybody thought it was genius and that the cover story was making money at the speed of light, and everybody kind of was buying off on this.

Well, those networks still exist, and those are the networks which actually made Google and Facebook and others lots of money when they bought them on the cheap years later. Okay, so you have this environment of deregulation in the 90s during the Clinton administration. You have this sort of realization that the Internet is going to be,

a big deal. You have these inflated claims in retrospect. Turns out it's still incredibly fast, but doubling every year is not quite the same as doubling every quarter. What was the first cool breeze that came in? When was the first moment from a telecom perspective where it's like, okay, maybe we're not quite so excited? Because what people are wondering about with AI is there going to be something? So far, we haven't seen any of the major platforms, the major high hyperscalers, they were, like, massively pulling back on KPEX or whatever. But people were looking out for that moment. What was the first sort of like, what's going on here?

So, in a way you're thinking about there was a kind of a false moment with AI with Deep Seek. Yeah, yeah. Where there was that moment where the stock went down hugely one day. But then people started to think, well, wait a minute, we're still going to need the chips. By and large, everyone is still, despite the market sell off, no one is actually like changed any of their investment commitment. Yeah, though there was the first. Lots of smaller companies that are not public because going public is different than it was in 2000.

So we don't really know what's going on with them. But I would say somewhere actually where I would place it was the day after Time Warner made probably the worst deal of all time and bought AOL. That's when people like me started to go, wait a minute. Someone is really smoking something here. and that really doesn't make sense because, you know, from our perspective, AOL was kind of an obsolete company because broadband was coming on. And in a broadband world, the logic of AOL was not true. And then the application started to fold. And then about a year later, a lot of the data network started to fold. So one of the things I remember from, I think it was Jason Calicanus

when we interviewed him, was he pointed out something interesting about a lot of of the latest startups, which is that it's not that they couldn't necessarily make money in the good years. It was that investors weren't asking them to. Investors wanted them to grow as quickly as possible, grow market share, the sort of network effect that we were talking about earlier. And then suddenly, you know, investors start saying, actually, you need to monetize this and you need to kind of show us where the money is. And so that change in behavior means that now there's pressure to be cash flow positive. Was there a sort of similar moment or similar change in investor behavior where it didn't

become about growth and the buildout, but it became about actual reality and monetization? Well, again, I would distinguish between the networks, which can run for a while, but they can't run forever, and the applications. I do remember Eric Schmidt, Reed and I had been with them shortly after he became CEO of Google, and he said ubiquity first monetization later. that works in an advertising model. It does not work in a lot of other models. And one of the challenges for network folks is,

how do you build this network, which is supposed to last for 30 years or 50 years or whatever, and not run out of money before the revenues start coming in? And we saw this with various wireless companies, and we saw it with fixed terrestrial wired companies. And it's interesting, because if you look at what the world looked like in 2000, a lot of the companies on the network side are the same. It's the cable companies, it's the wireless companies,

and it's the traditional Lex. But they've changed their business model. But when you look at the device companies and the applications companies, relative to 2000, totally different set of companies. What were the CLEX, the CLECs? What were the CLECs? So the CLEX were the competitive local exchange carriers.

And the idea was, as one Wall Street analyst said, they are the construction companies for the long-distance company, because the idea was the long-distance companies, what Congress really envisioned. I forgot about long-distance. Yeah, as most people, as well you should. But when I was in college, again, back in the days of Genesis,

you know, we stood in line to call our parents because it was really expensive, and we would call and talk for 30 seconds, just, yes, I'm okay, talk to you later, bye. And now, has anyone paid a long distance? Is there anyone here paying a long-distance bill? No, of course not. It was all a matter of regulatory arbitrage back in those days. But the idea, I think, of the act was that there would be three competitors.

You would have the cable guys, the incumbents, and the long-distance guys. Everybody knew that the incumbent local exchange carriers could easily go into long-distance. So the challenge was how do we create a path for the long-distance guys to essentially build out new networks? that'll be superior networks, and then they'll be with the old guys who have the advantages of incumbency and the cable guys are going to get in this business. Wireless was not really seen as a competitor. Now it is, and there are, again, a lot of regulatory reasons. Spectrum auctions played a big role in that kind of stuff. And we had a plan. Now, that plan was reversed by the Republican chairman of the FCC, Michael Powell, a very good guy. And he basically had the view

that that's really not going to work. The other problem, which is kind of something you can't legislate around, Bob Allen, who was the CEO of AT&T, was, shall we say, my age, as opposed to the young whippersnappers of SBC at Whitaker or Ivan Seidenberg of what was then called Nine-X. And in the middle of, just after the kind of the law passed, we're in the middle of saying, here's how we're going to make it so that the C-Lex can build these networks for 18T to eventually buy and blah, blah, blah, Alan tries to merge with SBC because he wanted to retire. And people have forgotten this little episode, but it showed up on the newspaper, and a couple days later, my boss, Reind gave a speech at Brookings saying such a deal would be

unthinkable. Actually, Alan, we were trying to figure out what to do. Alan gave a speech saying, such a deal would not be unthinkable, which gave a speech. us the open, you say, oh, really? And Reed, who was a former antitrust lawyer, just went through this, you know, very intense antitrust analysis why we cannot let them merge.

Eventually, they did merge. And that was the end, kind of of the C-Elect dream. This is great. And Joe loves reminiscing in war stories, as he said. So I got to ask, what was the craziest thing in retrospect that you saw from this era? Oh, gosh.

You know, what was crazy about, it, but totally wonderful, was, and this will sound odd, Congress gave us ridiculous deadlines, ridiculous deadlines. And a Republican guy said, you know, Blair, we gave you deadlines, you're never going to meet them, and then you're going to be so screwed. I said, thank you. Great. But Reed understood the deadlines, particularly if you're like a chief of staff, are a great thing. So the day after the act passed, we had all the lobbyists in, we had, here's all the rulemakings. Here's what we're going to do. everything, you know, like just and went to the other commissioner offices and said, with each of

these things, you're going to have five days to read the stuff, you know, like no excuses. And so we felt enormously energized and pressure. The over, the heating bill at the FCC for like one month was like an extra 400,000 dollars. That's a good detail. We were all working so hard. But it was truly, it was a wonderful spirit. And we thought we were doing something important. And by the way, at the same time, we were negotiating a World Trade Organization agreement to enable digital traffic to travel much more cheaply around the world.

It was really exciting and fun time. All right. I have one last question, which is there are various ways to play a boom, right? So some people were buying shares in Corning, the glass company, because you have to lay a lot of glass-based fiber. Some people were buying AOL. Some people were buying Pets.com. You know, various different, like, sort of ways into it. Is it the ISP?

Is it the website? Is it the glass, et cetera? Obviously with AI, it's the sort of same thing. Is it going to be the model makers? Is it going to be the companies to make the chips? Is it going to be the companies to make the cooling systems for the data centers? Various different ways into any sort of boom. From the telecom era, what is the takeaway about who makes the money in the end?

Because even in the crash, like, who makes the money in the end? The lawyers. Yeah. The lawyers. Yeah. And the heating company for that. companies at the FCC. You know, I will give you my answer, but I have to tell you, if I actually knew the real answer,

you'd have to pay me a lot more money. I'm not even asking for the AI. I'm just like, you know, like what I'm just, I do Wall Street analysis, but I'm just telling people what the policies are going to be. I'm not telling you. People paid $50 to get it. Oh, that's right, $55. You deserve a better answer.

No, look, what I love about Wall Street is you have these debates every day. And, you know, one of the big debates in my. space is what is Charlie Ergen going to do? Or should the telcos, the wireless guys, buy more fiber, all those kinds of debates. What I would say about that is, number one, infrastructure always has value. But it's also true that as every real estate developer knows, it's often the third owner who actually makes the money. Right. But the data centers are going to have value forever. There will be a couple of applications that capture the market share and that the, you know, 20 years from now, the FTC will be saying, why didn't we stop these people, you know, back in 2025 when we could have?

And whether it's open AI or it's perplexity or it's any of the others, who knows? But if you capture that, the market, you know, the return on scale is tremendous. The difference now is you do have these really well-established companies, Amazon, Microsoft, Alphabet, Meta, who are in the space. You know, one answer to would be the cloud guys. I think cloud is just going to be incredibly important in all of this, and they win no matter what. Blair Levin, a real treat. Thank you so great to chat with you. I love reminiscing.

Thanks for coming down on last life. That was our episode looking back at the telecoms bubble with Blair Levin. I'm Tracy Alloway. You can follow me at Tracy Alloway. I'm Joe Wisenthal. You can follow me at the stalwart. You can follow Blair at Blair Levin, though I don't think he's posted in eight years. Maybe if a bunch of people follow him, he'll start posting again.

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