Telecoms in the Internet Age: From Boom to Bust to . . . ? [Hardcover]

When the value of telecommucations stock collapsed in 2001, everyone spoke of greed, or mistakes, or both, and looked for a culprit. This way of looking at things may have some moral interest, but it does not address the key question: why did it happen? Greed is universal; mistakes are human. But why did a general belief in unlimited growth of data transmission suddenly occur in the 1990s? Martin Fransman tackles the issue as the professor of economics that he is, and the results are surprising.

First, the most obvious point: the liberalization of the telecommunications industry that began in the 1980s led to the arrival of a completely new breed of entrepreneurs (Mr. Fransman takes as an example WorldCom's CEO, Bernard Ebbers, whose background was as a football coach and motel operator) - not exactly the usual mix of engineers and lawyers that constituted the basis of most telecom carriers all over the world. Dealing with new entrants was an entirely new experience for carriers that were used to working in a monopolistic, and therefore well-known, environment. How many carriers were there before the market was opened to competition? Maybe 200, and 20 of them controlled 90% of world telecommunications, including AT&T, NTT, British Telecom, Deutsch Telekom, France Telecom, and Bell Canada. Their managers all knew each other by first name, they frequently met, and when a deal was concluded, nobody ever doubted that all of its terms would be fulfilled.

Mr Fransman does not try to assess whether liberalization was good or bad. It was probably unavoidable and carried with it many tangible benefits, the first being the quick spread of the Internet. But it put an end to the careful planning of world telecommunications. Before liberalization, every company had its five-year network investment programme with yearly updates and shared its plans with its government and regulator, and it of course cooperated with its foreign counterparts through well-established channels, mainly the International Telecommunications Union (ITU) though its various committees. Traffic growth was meticulously calculated and forecasts were as scientific as possible. More important: all data were publicly available and whenever a error occurred, it was corrected - and there were many errors, the most recent being the underestimation of traffic growth. In the 1990s, the known facts were replaced by confusion. New entrants had no background in planning; nor did they have any interest in learning how to plan. The idea was to raise enough cash to deploy state-of-the-art optical networks that would give the new companies a decisive advantage over the antiquated carriers. Nobody paid any attention to the lack of statistics on traffic, especially data traffic. Who knew that after the Internet was privatized by the National Science Foundation (NSF) there was no agency in charge of collecting the data on the very network that was supposed to be at the core of the telecom revolution?

One of Mr. Fransman's most interesting analyses deals with he calls the "R&D conundrum" of the telecommunications industry. Traditionally, R&D strategy was designed by the telecom carrier and conducted through an independent laboratory that could focus on long-term projects while being protected from the day-to-day requirements of business operations. The model of this structure was provided by AT&T and its prestigious Bell Labs, whose researchers had won six Nobel Prizes(1). When AT&T spun off its manufacturing division in 1995 (as Lucent), what was left of its labs was redirected to development of new services, while Lucent inherited the bulk of hard research, mainly in data communications. In Canada, Bell gave up its investment in Bell-Northern Research (BNR) in 1998 and the laboratory was fully integrated into Northern (now Nortel). While common carriers were downsizing their investments in R&D, the new entrants never put a penny into it and relied entirely on their manufacturers. As a result, the balance of power abruptly swung from carriers to manufacturers, which now took the lead in shaping the future of the telecom industry. But traditional telecom manufacturers such as Lucent, Nortel, and Alcatel were used to dealing with a few well-known and reliable clients, not with thousands of new entrants of various sizes, with very little knowledge in technology and even less in operating a network, and with unknown financial credentials apart from over-valued stock.

Telecoms in the Internet Age provides an in-depth analysis of the telecom boom and crash of the 1990s. Without concealing the responsibilities of the main actors in the industry, it provides a reminder of the importance of the political and regulatory environment to the telecom industry. In fact, in the 1990s this environment was thrown off balance by a series of liberalization decisions that were supposed to foster competition in a monopolistic market. Instead of the good guys expected by the legislators and the regulators, however, came a wild bunch of "broadband barons" with no expertise in telecom and no tradition in managing a public network. As governments and regulators could not tolerate the failure of their policies, they had to back the new entrants as long as possible and rescue them when they went bankrupt. In my opinion, nobody should venture into the telecom business or public policy without reading, and appreciating the lessons in, Mr. Fransman's book.