In the 1990s, tech gurus like George “Infinite Bandwidth” Gilder rhapsodized that with the roll-out of fiber-optic cable, the price of making phone calls and sending e-mails would fall inexorably to zero. The investment thesis: Go long the New Economy start-ups like Global Crossing and short the incumbent Baby Bells.

After all, Verizon, BellSouth, and their sad siblings were under assault from all directions. Portable wireless phones were going to displace land lines. Juggernauts like Worldcom/MCI would eat the Baby Bells’ lunch in long-distance. Cable companies would use their fat pipes to deliver high-speed voice and data to the home. And these legacy companies, with their large bureaucracies and unionized workforces, wouldn’t be able to respond.

Gilder’s promise of infinite bandwidth was more like infinite jest. Companies like PSINet, Global Crossing, and 360 Networks piled on debt to build out telecom infrastructure and lay millions of miles of fiber-optic cable. But in a cycle reminiscent of the boom and busts that surrounded the telegraph and railroad, we got a glut of cable and vicious price competition. By late 2001, just 5 percent of the U.S. fiber-optic capacity was in use. Bankruptcy and consolidation quickly followed.

While the Baby Bells have suffered, as this five-year chart of the stocks of Verizon, SBC, BellSouth, and Qwest shows, they survived the meltdown. Consumers and businesses continued to pay their phone bills, and the companies (Qwest excepted) continued to pay their dividends. And they’ve been leading the consolidation. So far this year, as Forbes notes, SBC has agreed to buy AT&T, and Verizon bought MCI. And all the Baby Bells are furiously marketing DSL high-speed Internet connections. Collectively, the four companies are worth close to $190 billion.

More here.