WorldCom Write-Downs: The Storage Spin

Storage Supersite Editor David Morgenstern frets that indignation over WorldCom's recent technology write-downs will hamstring corporate storage investments, despite the industry's steady improvements in price and performance.

WorldCom is the poster child for dot-com excess, and its sorry story continues as the company crawls out from under the thumb of the bankruptcy court. While WorldComs sins are many, Im concerned about the outrage expressed last week by some in the financial community over the companys write-downs of assets: Their complaints (and the meta-message behind them) could be disastrous for the entire storage industry.

These howls began last week with WorldComs write-down of $45 billion covering the "goodwill" accrued from its long list of corporate acquisitions. This sum was $15 billion more than estimated late last fall.

The indignation grew when WorldCom announced a similar-sized write-down of capital assets, such as property, plants and equipment. The figures fell from $44.8 billion to $10 billion.

"That meant that WorldComs hard assets, including its network, are now worth almost 75 percent less than what they had cost," wrote Gretchen Morgenson in the Sunday New York Times. And dont forget, these assets were bought with actual cash, not highflying shares. "So WorldCom paid $1 for assets that are now worth 25 cents. At last we know how gross was the misallocation of capital in the telecommunications industry in the late 90s. And how deep is the telechasm," Morgenson wrote.

So whats the message here: Technology spending is bad? Or worse, innovation is bad? Thats how I read it.

While the WorldCom mess offers plenty of targets for finger-pointing, its difficult to see how this is one of them. WorldComs asset write-down of technology appears typical for any computer technology—especially for platforms, switches and storage.

For example, look at ordinary hard disk drives. According to figures from Gartner Dataquest, the average capacity and price per GB of hard drives in 2000 was 16.1GB and $8, respectively. The estimate for 2003 is 93.2GB and $1 per GB, a 50 percent decline each year.

Suppose a company bought a 20GB ATA 3.5-inch hard disk in 2000 for the average $160; what is it worth today? If were honest, nothing. A new 120GB drive is now priced less than $160, and the cost of maintaining a very low-capacity drive is counterproductive. After all, the energy cost needed to run each drive will be essentially the same.

Of course, WorldCom was working with vendors to develop new high-performance technologies in optical switches and networking for the broadband boom that fizzled rather than sizzled at the time. And figuring the sustained value for pioneering technologies can be tricky.

Price shifts in the storage area networking market can be instructive. Gartner said that the average terabyte of SAN cost $175,000 in 1999. Last year, that cost fell to $30,000.

Were storage managers wrong to buy such systems in 1999? No way. Performance can bring greater productivity or some other market opportunity. Any such investment requires a careful evaluation of its potential return, just as a similar lower-cost purchase deserves today.

But the Monday-morning financial quarterbacks could make such evaluation very difficult for IT managers and technology executives. They would always be looking over their shoulders.

Judging by the response to the WorldCom write down, the current assumption is that storage and other high-tech products are similar to automobiles. When you drive a car off the lot, its value drops by 50 percent, but thereafter falls slowly until it reaches some low but steady level.

As weve seen, storage can fall to zero or even lower. Why is that so tough to understand?

David Morgenstern is a longtime reporter of the storage industry as well as a veteran of the dotcom boom in the storage-rich fields of professional content creation and digital video.