Revenue Recognition Issues in Telecom Industry
Wrong Number: Telecom Tricks
The telecommunications industry had its own bizarre take on revenue recognition during the boom. From 1997 to 2000, Global Crossing took on over $7 billion of debt to lay 1.7 million miles of fiber-optic cable to transport data via the Internet. When completed in summer 2001, the network spanned 27 countries and 200 major cities around the globe. The company’s debt load didn’t seem to faze investors—Global Crossing’s market capitalization reached $40 billion in 1999. But then other carriers entered the market, worldwide economic growth began to slow, and Internet usage, while growing fast, was not taking off quite as fast as company management had expected.
As a result, demand for Global Crossing’s fiber-optic capacity began to wane. Fearing that deteriorating financial performance would cause its share price to collapse and call into question the company’s ability to service its debts, management began concocting revenue from capacity swaps with other carriers. In one such swap, executed in the first half of 2001, Global Crossing “sold” $100 million of capacity to Qwest Communications, which was also suffering a demand slowdown, while “buying” an equal amount of capacity from the same firm. The $100 million price tag was an essentially arbitrary value placed on the transaction by executives of both companies. The asset they were trading was unused fiber-optic capacity (known in the industry as “dark fiber”), for which there was no demand and for which there might be no demand for years to come. Nearly 20 percent of Global Crossing’s $3.2 billion in revenue in the second quarter of 2001 came from capacity swaps. For the first nine months of 2001, such swaps accounted for $600 million of Qwest’s $15 billion in revenue. While the amount of the swaps appears modest as a percent of total revenue, it accounted for most of the company’s sales growth in that period.
When the accounting treatment was questioned, Global Crossing defended
The telecommunications industry had its own bizarre take on revenue recognition during the boom. From 1997 to 2000, Global Crossing took on over $7 billion of debt to lay 1.7 million miles of fiber-optic cable to transport data via the Internet. When completed in summer 2001, the network spanned 27 countries and 200 major cities around the globe. The company’s debt load didn’t seem to faze investors—Global Crossing’s market capitalization reached $40 billion in 1999. But then other carriers entered the market, worldwide economic growth began to slow, and Internet usage, while growing fast, was not taking off quite as fast as company management had expected.
As a result, demand for Global Crossing’s fiber-optic capacity began to wane. Fearing that deteriorating financial performance would cause its share price to collapse and call into question the company’s ability to service its debts, management began concocting revenue from capacity swaps with other carriers. In one such swap, executed in the first half of 2001, Global Crossing “sold” $100 million of capacity to Qwest Communications, which was also suffering a demand slowdown, while “buying” an equal amount of capacity from the same firm. The $100 million price tag was an essentially arbitrary value placed on the transaction by executives of both companies. The asset they were trading was unused fiber-optic capacity (known in the industry as “dark fiber”), for which there was no demand and for which there might be no demand for years to come. Nearly 20 percent of Global Crossing’s $3.2 billion in revenue in the second quarter of 2001 came from capacity swaps. For the first nine months of 2001, such swaps accounted for $600 million of Qwest’s $15 billion in revenue. While the amount of the swaps appears modest as a percent of total revenue, it accounted for most of the company’s sales growth in that period.
When the accounting treatment was questioned, Global Crossing defended