Long Before Tech CEOs Turned To Layoffs To Cover AI Expenses, There Was WorldCom

Source: Slashdot

Background

Long‑time Slashdot reader theodp writes:

Jeopardy time.
A. This company spurred CEOs to make huge speculative capital expenditures based on wild unverified claims of future demand, resulting in the layoffs of tens of thousands of workers to reduce the resulting expenses, harming their core businesses.
Q. What is OpenAI?
Sorry, the correct response is, “What is WorldCom?”

In 2002, WorldCom, the second‑largest long‑distance company in the United States, entered Chapter 11 bankruptcy after disclosing accounting fraud that eventually totaled $11 billion, the biggest ever at the time. CEO Bernard Ebbers was subsequently sentenced to 25 years in prison.

The “Internet Traffic Doubles Every 100 Days” Myth

CNBC reported that an employee of WorldCom’s Internet service provider UUNet set off a frenzy of speculative investment and infrastructure over‑build after he used Excel to create a best‑case scenario model for the Internet’s growth. The model suggested that, in the best of all possible worlds, Internet traffic would double every 100 days, a scenario that would greatly benefit WorldCom, whose lines would carry the traffic.

Despite having no evidence to support it, WorldCom’s claim became an immutable “law,” and businesses around the world made important decisions based on the belief that traffic was doubling every 100 days.

“For some period of time I can recall that we were back‑filling that expectation with laying cables, something like 2,200 miles of cable an hour,” AT&T CEO Michael Armstrong said. “Think of all the companies that went out of business that assumed that that was real.”

Industry Reaction

In 2003, NBC News reported that AT&T and Sprint executives struggled to understand how WorldCom could outpace them so dramatically:

“We would look at the conduct of WorldCom in terms of their pricing, revenue growth, margins, in terms of their cost structure… and the price leader almost every quarter was WorldCom,” Armstrong said.

“We couldn’t figure out how they were pricing as aggressively as they were… How could they be so efficient in their costs and expenses?” added former Sprint CEO Bill Esrey.

Both companies began cutting jobs to push down their costs to WorldCom’s level:

“The market said what a marvelous management job WorldCom was doing and they would look over to AT&T and say, ‘these guys aren’t keeping up.’ So, my shareholders were hurt. We laid off tens of thousands of employees in an accelerated fashion [in a futile effort to match WorldCom’s phantom profits] and I think the industry was hurt,” Armstrong said.

“It just wrecked the whole industry,” says Esrey.