Let them fail fast!

“We hold that the primary cause of current telecom troubles is that Internet-based end-to-end data networking has subsumed (and will subsume) the value that was formerly embodied in other communications networks. This, in turn, is causing the immediate obsolescence of the vertically integrated, circuit-based telephony industry of 127 years vintage.”

Izumi Aizu, Jay Batson, Robert J. Berger, et al., Letter to FCC Chairman Michael Powell, October 21, 2002 http://pulver.com/press/powell.html

The extent of this transformation is well described in their complete letter which recommends that the FCC:

‘‘Resist at all costs the telephone industry’s calls for bailouts. The policy should be one of "fast failure."

Acknowledge that non-Internet communications equipment, while not yet extinct, is economically obsolete and forbear from actions that would artificially prolong its use.

Discourage attempts by incumbent telephone companies to thwart municipal,

publicly-owned and other communications initiatives that don’t fit the telephone company business model.

Accelerate FCC exploration of innovative spectrum use and aggressively expand unlicensed spectrum allocation.’’

Transcript

[slide32] Now, at the time, Michael Powell, son of Colin Powell, was head of the US FCC, which was the regulator for telecom in the US. And he said, "we hold the primary cause of the current telecom troubles is that internet-based end-to-end data networking has subsumed and will subsume the value that was formerly embodied in other communication networks. This in turn is causing the immediate obsolescence of the vertically integrated circuit-based telephoning industry of 127 years of age." This was a huge shock to the system. And this was a very hard thing for me to understand just what was the source of the problem until I heard a lecture by an economist talking about the problem of when you make an investment, and let's say you invest in something like a public switch, so for a town, he said it's as if you took your money and you threw it up in the air, and 30 years later, it came back down. Because the problem is, once you made your investment, you couldn't change it. You were stuck with that investment for that whole period of time. And in the traditional telephony world, public switches lasted, and were designed to last, 30 to 50 years. So they were huge investments, but you amortized them over a long period of time. You're all familiar with the idea of amortization. You essentially take that amount of money and you say every year we get back 1/30th of the money, but you don't actually. That's just how you account for it in the books. If you borrowed the money, you'd be paying interest on it. Except here in Sweden, which that wasn't a common idea before, that you would have amortization, you'd just pay interest, you'd never pay off the principal. But now you have to pay on the principal if you have your home loan. How does this contrast with the datacom world? What was the typical investment cycle? You buy a computer, you buy a server -- about 3 years. That means you had 10 chances to decide to do something different with your money, while these people couldn't change at all. Right? They disappeared like dinosaurs. This was very hard. Now of course many of these dinosaurs fought it, and some of them were successful in redefining themselves and rebuilding, but in some cases they had to basically throw away huge investments that they had made before. If you look in economics literature, these are called sunk costs. Because you put your money in it, you tied it up in fixed wires, cables, phone jacks, all of that. What do you need them for when you have your new wireless network? But you can't do anything about it because you already invested in that, you paid your money. So in a number of places in the US for instance, the telecom operators have been selling that copper wire plant off to others for very inexpensive prices. So why should they want to sell it off? Why not keep it? It turns out it's actually a liability. And the reason is that if you still own it, and it causes a problem, it's your fault. And one of the problems was many of these copper wires were insulated with what? PVC plastics. And what happens if you have a fire? PVC plastics emit poisonous fumes. So if you were an owner of enormous amounts of this wiring spread through buildings all over an area, what would you want to do? You'd say, wouldn't you like to buy my wiring? Please, take it over, because yes, you now get the liability. So why are there companies buying these plants? Because they see value in it, that exceeds their risk. Because they're putting new kinds of services on it and providing services to people in competition with others. And they were able to get these assets at very low prices. So it's a different business model. So, one of the big things was, following this FCC statement, in their complete letter they said, basically "Resist at all costs the telephones industry for bailouts. The policy should be one of fast failure." Let them fail quickly. Let's move on to the new technology. Now, politically, remember, these were huge companies that employed enormous numbers of people and that lots of people had investments in. Why? Because they were very safe investments. They were perceived as being very safe because they'd been in business for, you know, a hundred years. Isn't that a company you would want to invest in and you'd get your 3% or 5% or whatever return a year, you'd say, hey, great idea. Widows, children, wonderful funds. The problem is suddenly they were failing. And there were many who called on the government to bail them out. They said, no, don't do that. This non-internet communications equipment, while not extinct, is obsolete. Don't extend its life. So this is a very, very big shock to the system. Now, that's the bad news.