Nortel hits the skids

Om has a piece today written by Venture Capitalist Allan Leinwand asking whether Canada should bail out Nortel.  He asks:  “But is preserving the country’s technological heritage reason enough to spend millions in taxpayers dollars?”

I think that the answer to the question is contained within the question.  There is no such thing as technological heritage … only a technology’s future.  Once a company has ceased to innovate with effectiveness, market forces must be allowed to run their course.

Nortel, whose turnaround CEO Mike Zafirovsky appears to be a bit of a jet-setter, was a global source of technical innovation for most of the last century, peaking in the 1980s.  Its DMS line of switches grew to become the dominant means by which incumbent local exchange carriers rolled out circuit-switched voice networks; and the means by which long-distance companies expanded their reach globally. 

This gave the company a lot of cash to throw around, chasing R&D with aplomb, but it wasn’t spent wisely and efforts to embrace IP were insincere and too little too late.  What Nortel failed to see coming was the enormous destruction of value that would occur when Voice became just another application on IP networks — and the opportunity to build massively expanded value by building new applications over that infrastructure.  Even as recently as a few years ago Nortel has been tremendously innovative, however their solutions have failed to reach into the marketplace as they were targeted at a single customer group — the incumbents — who themselves are flailing and sputtering.

They also have a broken corporate culture.  This happens when organizations get fat and lazy … and political.  I watched that culture attach itself, like a parasite, to Cisco in the late 1990s as we were hiring entire teams from Nortel and moving them to North Carolina and San Jose.

The issue of a bailout should be (but isn’t, since the Canadian taxpayer is already subsidizing the company’s operations to the tune of $30M) irrelevant:  Nortel has strong market and asset value still and should not need it.  The company suffers from the burden of expectations, both of the marketplace and of irrational shareholders; and from the criminal efforts of loathsome executives who tried to feed that beast rather than confront reality.

When AOL’s executives realized they had an overvalued asset with little-to-no real growth prospects, they limpet-mined themselves onto a depressed company with unrealized value.  That’s what Nortel could have / should have done several times in the past 15 years, but didn’t.

The chalice of innovation in telecommunications in Canada has passed on to RIM (neither of whose founders ever worked for Nortel — a rarity in the technology industry in Canada!).  Is the company wobbling simply as a casualty of the current economic cycle, or because of a deeper cancer and an endless stream of financial scandals?  Would $30M in investment be better spent on Nortel or on RIM, in the long term?

My guidance is: embrace the bankruptcy.  It’s an opportunity to restructure the business, re-orient the strategy, clear out the dead wood, and reset irrational expectations.  Nortel could yet again be an invigorating business, but shoring up the business that it is today is no way to get there.  In the meantime, Nortel has served its purpose in stimulating innovation in Canada and acting as an apprenticeship program for our country’s technology leaders.  Let it run its natural course.

There is, in most respects, not much room for the little guy. Still, many companies attempt to eke out a living by raising capital and earning free cash flow on the basis of moving the needle down a couple of stairs in the telecom industry’s giant race to the bottom. Frankly speaking, as consumers, we need these guys … they create the price pressure that leads to market pressure that forces the cabal to lower their prices. Without them we’d all still be paying $1/minute to call one or two counties over. But rarely (and I suspect Bernie Ebbers would verify this) do they ever make any real money over the long-term.

Because of my history as one of Cisco’s early Packet Telephony product managers, and having architected and helped to launch a few different services including BuzMe and RingCentral, I see a lot of VoIP deals. I’ve taken to referring to many of them as “stupid phone tricks” (in a nod to Letterman) which are clearly designed to take advantage of some gap in arbitrage within the telecom industry.

Unfortunately, this has been the model of telecom “innovation” for many, many years. The first Cowboys in the telecom game were of course the CallBack kids. They allowed you to make calls from Brazil to the USA, for example, paying the long-distance rate for calling from the USA to Brazil instead of the other way around by “ringing both ends” of the call after you first dialed their local or toll-free number to instantiate the call. This significant inconvenience was trumped by the massive savings incurred for folks living in Brazil calling to their USA-resident relatives.

With long-distance deregulation came the rise of prepaid calling card services, which did something similar. Again you traded the convenience of just simply dialing the person you wanted to call for having to call a pilot number, entering a complex string of unmemorable digits, and THEN entering the number you wanted to call in order to save a little dough. The services made money, though, because you and I would usually lose our cards or forget our numbers before we fully expended the value in the cards. This model is called “breakage”. To my utter disappointment this represented the larger part of the market I was dealing with while at Cisco.

More than 8 years ago I recall being asked by my boss, Alistair Woodman, to write an opportunity evaluation of the recently-ratified SIP protocol. My response, over the course of weeks of researching and talking to everyone involved, was a breathless vision espousing nothing short of a complete re-think of the entire Telecom industry. SIP has some epic flaws and paradoxes, like its assumption that we’d all be on IPv6 by 2001, and its paradoxical empowerment of edge devices while making no accommodations for firewall/NAT traversal or P2P.

But it was a pretty good stab at unhanding control of telecom from the cabal and placing it in the hands of scrappy innovators. And as the VON shows once attested, there are some pretty feisty and intelligent people lurking within the telecom business. For a time I hoped to have been one of the more noteworthy ones.

With the benefit of hindsight we now know that SIP just hasn’t panned out (certainly not in the way I had hoped it would). It’s become just another signaling protocol in the transport of fairly uninteresting voice calls within the existing structure of telecom. Let me repeat that in another way: The incumbents took a protocol which was conceived and designed to blow them out of the water, and used it to cost-optimize their networks. As a protocol, SIP is incredibly successful in having propagated in Telecom in the less than 7 years it’s been deployable, but I suspect its effects on the industry would today leave its creators a bit cold.

My breathless assertions that thanks to SIP the web geeks would take over Telecom — first derived in 1997 and held by me until at least 2002 — have never even come close to fruition. SIP, because it unbundles signaling from the calling path and especially because it allows for rich metadata to travel through the network with SIP messages, is rife with potential for adding value — but no one, not even Skype (which uses a protocol clearly inspired by SIP but which fixes a lot of its problems) has deployed it in a way that takes complete advantage of this to stimulate innovation.

A few weeks ago I wrote about Cubic Telecom. There’s a small amount of real innovation there, but it largely falls into my “Stupid Phone Tricks” category. It might or might not save you a lot of money making and receiving long-distance calls while you roam on your mobile phone, but does nothing to abate the greater crime that is mobile roaming charges. After I wrote about Cubic, David Pogue of the NY Times was attracted into their orbit, but got burned when others realized Cubic’s rates weren’t quite so attractive as they’d said they were. Controversy erupted and their launch marketing was irreversibly damaged (see here also) by the Streisand Effect of their attempts to correct and adjust perception.

A Googling of “telecom innovation” yields 10,700+ hits but, sadly, no real innovation. What you will read, instead, are examples of creative cost-optimization (Voice Mail was really a way to eliminate the answering machine at home, and the receptionist at the office). You’ll also see some incredibly creative and extravagant attempts to defeat the inconvenience associated with the CallBack model. Cool, but not fundamentally enabling.

What Cubic is presently caught up in is the fact that their dubious cost savings are hampered by the fact that calling mobile phones, for example, in Europe is always going to be expensive and hugely differentiated in terms of pricing from calling land lines in Europe. The rise of draconian mobile pricing models combined with the steep decline in global long-distance calling rates results in a more and more limited opportunity to cost-optimize and more and more pitfalls for the consumer. Unfortunately, Cubic’s a great example of how this happens and how it can bite one in the ass.

There are a number of artificial bottoms in the telecom industry. Long-Distance was the first and most obvious of these: when there was sufficient market pressure from a few successful VoIP guys (and other telco competitors) to reduce costs, the incumbents simply did so. Why? Their costs to provide long distance were arbitrary. Their only consideration was how much margin they could take without losing customers.

There are a couple of false bottoms in mobile at the moment (who am I kidding, there are half a dozen) including roaming, long-distance, and SMS. SMS is a great modern example of this and here’s why:

The cost for a mobile network to transact an SMS message are incalculably small — on par with your ISP handling an email message. Yet it’s become an enormous cash cow for the mobile phone industry — imagine if your ISP charged you a penny for every email sent or received. A small number of companies such as hotxt (now trutap) rose to try and take a notch out of the carriers on this front, but were ultimately thwarted by the fact that they have to take pot shots at the carriers from within their own ecosystem.

It’s not that easy to attack the SMS business model by requiring users to instead install an app and send and receive messages over wireless data, which is also ridiculously expensive.  It’s kind of like borrowing from Peter to pay Paul, and in any case I’m not sure what it accomplishes for the third-party service.  Not fun. And not particularly innovative.

There is encroachment now, by mobile telecom into terrestrial telecom, and subsequently by platforms like the iPhone and OpenMoko and the rumored GPhone. I guess this means there’s some hope for change. But all of them appear to be embracing the traditional approach to telecom and stepping up to milk the cow in collusion with the big carriers. And this, friends, is a shame. Because innovation will only be barely perceptible if we continue to allow Telecom Monopolists to write the rulebook.

-Ian.

I can say this now, since I no longer work at EQO and have no vested interest in partnering with Cingular, and have been waiting for a long time to do so:

I have never been so professionally insulted, so humbled, and so totally and completely discouraged by any interaction with a telecommunications company, as I have been by Cingular’s misguided, counterproductive, and inane FastPitch program. If you are a software, service, or application developer I would encourage you to boycott this program, and if you are considering a partnership with Cingular (now, comically, marketing itself as AT&T) my advice is: Don’t.

The FastPitch program is ostensibly supposed to provide a vetting mechanism for the hundreds of ideas which cross the paths of wireless carriers every year, and is somehow supposed to encourage developers to bring those ideas into Cingular’s service development organization. It’s an interesting idea, that has been absolutely ruined by inexperienced, arrogant personnel, and should IMHO be the laughing stock of the mobile industry.

Most carriers employ Service Development Managers, Business Deveopment Managers, and Channel Managers to entertain partnerships with 3rd party developers in order to bring new and innovative products and services to their customer base. These people actively pursue and field new ideas from all over the place, and are mandated to come up with new ideas and bring the good ones to market.

Not so with Cingular, it would appear. Instead, they’ve attempted to create a formalized process which subjects potential partners to a “Gong Show” style 3-minute panel pitch, in order to separate the wheat from the chaff of third-party applications in an efficient manner. But the effect is rather the opposite. Here’s Cingular’s boilerplate (and believe me, the whole program is boilerplate) spiel:

The FastPitch session at CTIA is an opportunity for the Cingular Developer Program and Business Development teams to gather preliminary information about ISV applications. These events are not designed to be lengthy go-to-market discussions with prospective partners.

ISVs registered for the Cingular FastPitch sessions at CTIA are asked to bring a 3 minute demonstration and pitch to present to our team. You will have 12-15 minutes total with our group, which will encompass 3 minutes for you to present your application and 9 to 12 minutes of survey about your solution.

This sounds like a compromise to the usual method of business development in Telecom: find an authorized representative, build a rapport, create an internal advocate, and work together to understand each company’s motivations and market drivers, and hopefully end up as partners bringing a new service to market.

But in practice, even the somewhat plausibly workable structure of the boilerplate was corrupted. First, when you arrived for your FastPitch appointment you were given nametags, filled in and signed a form which effectively nullified your rights to ownership of your own intellectual property, and were asked to queue in a lineup of other hapless courtiers. I stood behind one gentleman whose idea had something to do with birdhouses, and in front of a couple from a major software vendor.

When you got to the front of the line, there before you sat four Cingular employees, each in their Mid-20s (I’m guessing they weren’t VPs) who would only tell you their first name and would not, for love nor money, give you their business cards. Instead of pitching all four of these people together, who for all I know were junior sales reps from the local mall, and engaging in a quality 15-minute discussion, you instead pitched each one individually, for three minutes. Todd and I attempted to do this, but our 9-slide PowerPoint and product demo overflowed every time. During our session, just before we were to start in on the third intern, he got up and left, leaving us cooling our heels for three minutes… and we couldn’t help but chuckle at the insanity of the process. A woman surveying the whole scene held a stopwatch and literally yanked the birdhouse guy out of the way to ensure that we advanced to each successive intern in a timely fashion.

The whole process was comical. The interns asked no questions. They could not have possibly discussed our company or services with each other. Instead, they graded us on forms, wrote occasional notes (which they carefully concealed) and generally looked disinterested and weary (apparently they were subjected to these 3-minute pitches all day — accounting for lunch and time slippage, that’s 105 pitches per day for three days).

With that process and volume, I’m not sure who could pass through the filter and make it into Cingular’s developer program, but even when we did it really did little to further our objectives to work with Cingular. There were still no real points-of-contact, no internal advocates, not steps forward to advance the conversation. Instead, we were now being marketed to with the same disdain as Cingular’s victims customers.

Other carriers have indeed taken a more enlightened approach. Vodafone has a team in Walnut Creek that I’ve gotten to know quite well, and their role is to search for new ideas and applications, reaching out to partners where possible. And most ascribe to the traditional method of building personal relationships with companies who have interesting applications.

For Cingular/AT&T, though, I can think of no more appropriate fate than to be out-innovated by competitors and outsmarted by third parties who figure out a way to relegate them to the dumb-pipe providers that they are ultimately destined to become. And for the employees who represented their company so well during our FastPitch settings, I’m reminded of the myriad job postings from 2001 which were subtitled “Telecom workers need not apply.” … these may experience a renaissance during the next great Telecom purge which will inevitably arise.

-Ian.

http://www.nytimes.com/2003/07/05/business/worldbusiness/ 05VOIC.html?pagewanted=all

CCRA, Ghana, July 3 — The Internet bubble has long since popped in the United States, Europe and Asia. But in parts of Africa the Internet is serving as a powerful force for change, primarily by allowing companies and individuals to make international telephone calls far less expensively than through conventional channels.

Calls in and out of sub-Saharan Africa have long been among the world’s most costly, strangling business opportunities and burdening ordinary people. Services have been tightly controlled by government-owned telephone companies, many of which are rife with corruption and incompetence. Governments also imposed high tariffs on international calls, seeing it as a lucrative source of revenue.

But now, thanks to what is called voice-over-Internet, phone alternatives are flourishing, sharply lowering costs and expanding opportunities for business and consumers in some of the poorest places on earth — even as they pose a competitive threat to government-sanctioned telephone companies.

Sending telephone calls over the Internet is gaining ground in Africa because it makes possible a range of new services, linking the sub-Saharan to the world’s major industrial centers in ways unimaginable only a few years ago. And better digital connections, mostly via satellite, are raising the hope that Ghana — the most peaceful country in a West African region besieged by civil wars and ethnic strife — may become the regional hub for an information-technology industry.

“As Ghana improves its connectivity to the outside world, it has the potential to become for Africa what Bangalore became for India,” said Paul Maritz, a former senior executive at Microsoft who recently visited Accra to survey the nascent high-tech scene here.

Last Thursday, at a United Nations conference in New York, the secretary general, Kofi Annan, delivered a message that developing countries also need to include wireless access, known as Wi-Fi, in building an Internet system.

“It is precisely in places where no infrastructure exists that Wi-Fi can be particularly effective,” Mr. Annan said, “helping countries to leapfrog generations of telecommunications technology and empower their people.”

As the movement advances, though, many government-owned telephone companies, which dominate wired service in most African countries, are fighting a rear-guard action.

Internet telephony “is presented as the salvation for business and society in Africa,” said Oystein Bjorge, chief executive of Ghana’s national telephone carrier. “It is not.”

Mr. Bjorge, a Norwegian telecommunications consultant hired recently to do battle against the Internet telephone services, said it wreaks havoc with the economics of phone companies. Here in Ghana, the national phone company is waging a sporadic campaign against its own citizens who use the Internet to make or receive telephone calls from America and Europe, periodically turning off the lines of those suspected of doing so.

Three years ago, the government even jailed the heads of some of Ghana’s leading Internet providers. Though later exonerated by a court, the dissidents fear another crackdown. “Internet telephony is changing the whole power structure,” said Francis Quartey, chief technology officer of Intercom Data Network and one of those jailed. “The dangerous thing is that the power elite is responding out of fear and ignorance.”

Despite this opposition, American companies are experimenting with new ventures in Ghana, seeing if enthusiasm for Internet telephony can transform local technology entrepreneurs into a force for genuine economic advancement.

For example, Rising Data Solutions, which is based in Gaithersburg, Md., introduced a call center here last month, where a dozen Ghanaians — trained in American-style English — are trying to sign up customers in the northeastern United States on behalf of a wireless phone company. At least three other call centers are expected to open in Accra later this year, all relying on Internet telephony instead of telephone carriers.

Internet telephony also aids companies like Newmont Mining , which is searching for gold in Ghana, the second-largest gold producer on the continent, after South Africa. To help manage its operation, Newmont plans to link its operations within Ghana to the wider world through the Internet.

Acquiring reliable phone service is essential, foreign investors say, which is why they bypass the government-owned telephone company. Ghana Telecom has an order backlog of more than 300,000 lines; bribery is the fastest — indeed, usually the only — way to obtain new service. Even those with service suffer from frequent failures and inaccurate bills. Roughly every other call results in a busy signal, an indicator of what Ghana Telecom calls “network congestion.”

Under the circumstances, Internet telephony — which has failed so far to make serious inroads into the American telephone market because of lower voice quality — seems positively fabulous to many weaned on Africa’s creaky systems.

“Internet gives me control over my destiny,” said Sambou Makalou, chief executive of Rising Data. “My business needs to be up 24-7; we can’t get a busy signal.”

Busy signals are common in Ghana because the public phone networks are overloaded. As recently as four years ago, a dial tone was among the scarcest resources in the country, which had fewer than 200,000 phone lines in a nation of 19 million.

Few people realized how much demand for phone service was waiting to explode until Ghana’s most successful wireless company, Spacefon, was introduced in 1996. Before it started, executives thought the potential customer base was probably 3,000 people, at most 12,000. Seven years later, Spacefon has more than 300,000 subscribers.

The country’s total phone lines are now approaching 750,000, roughly two-thirds of them wireless. But completing a call is still difficult, especially between rival networks (there are five), and neither Ghana Telecom, nor the country’s legal wireless operators offer a reliable connection to the Internet.

In response to these limitations, private businesses have built scores of data networks, relying on satellite- and radio-based Internet-access systems.

But telephone service became appealing because of the high network costs: Companies typically pay from $2,000 to $5,000 a month for a robust connection to the Internet, an enormous sum when economic output per person is only about $400 a year.

“I’m paying $2,000 a month for Internet access, so I want to use the technology to the fullest,” said Austin Addo, chief information officer of Ghana Link Network Services.

Mr. Addo’s company, which began operations here early this year, helps the government calculate duties on goods imported into the country, relying on frequent updates, via the Internet, of product values. The company’s partner is based in Madrid, so Mr. Addo uses a standard device to make international calls over his computer network. He is not billed for the calls, which would otherwise cost him roughly 75 cents a minute, including the cost of line.

His telephone calls are not really free, since he pays $2,000 a month for Internet access. But he is still saving lots of money because he can speak as long as he wants without worrying about the cost. “Five years ago to get this level of communication,” he said, “I’d have to fly to Spain — several times a week.”

Such productivity gains have been a cause for celebration almost everywhere in the world. But official anxiety over Internet telephony is widespread throughout Africa and particularly rife in Ghana. At a public meeting in May, held at the largest Internet cafe in Accra, a regulator defended the government’s latest campaign against those who use the Internet to bypass authorized telephone providers. “The players have been apprehended or will be apprehended soon,” said Bernard Forson, deputy director of the National Communications Authority of Ghana.

The government is not opposed to any particular technology, Mr. Forson explained, but merely wants “regulated entities to provide telephone service,” not unlicensed and untaxed wildcatters.

Other African countries face a similar quandary, aware of the appeal of Internet voice service but fearful of its damage to the state-owned telephone company.

Neighboring Togo, for instance, allowed Internet telephony until the end of last year, when the government cracked down on behalf of Togo Telecom. So many foreign calls in tiny Togo were being routed over the Internet that a small “com” center — ubiquitous in Africa, offering calls for a fee — took in $10,000 a month from just two phones.

But some African countries have embraced Internet telephony as a way to end decades of frustration. In Nigeria, for example, the government has not officially approved telephoning over the Internet but looks the other way, partly to ease congestion on its authorized networks.

Still, the legal confusion surrounding Internet telephony has prompted some to avoid it. Affiliated Computer Services , which is based in Dallas, set up shop in Accra two years ago, relying on a private satellite connection to the Internet that supports both a data and a telephone network. Today, it is one of Ghana’s largest private employers, with 1,200 people and plans to hire another 700.

While the company runs call centers in Jamaica, Mexico and India, it does not intend to do such telephone work in Ghana. “We can’t use satellite lines” because of the brief delay in hearing a response, said Tom Blodgett, the executive who started the Ghana operation. And for now, he adds, “there is no suitable wired alternative.” A legal one, anyway.

But for all their efforts to restrain the movement, African telecom companies are probably fighting a losing battle.

“Periodically the police confiscate equipment or the telco turns off phone lines,” said Russell Southwood, a London-based consultant and publisher of a weekly newsletter on Africa’s telecom scene, Balancing Act’s News Update. “But it’s about as hopeless as Canute trying to turn

Instead, they’re hedgehogs, rolling up into a spiky ball every time anyone “threatens” the crutches they use to sustain their faltering businesses. Only by systematically removing these artificial retention tools can we force these carriers to become creative, innovative marketers who bring us services we actually need.

In the meantime, fuck ’em. Let’s force them to jump through expensive hoops and remove all of their spikes. They’ve been milking captive markets for too long.

-Ian.

—- http://story.news.yahoo.com/news?tmpl=story&u=/ap/20030416/ap_on_hi_te/ cell_phone_numbers

Wireless Cos. Fight Rule on Phone Numbers Wed Apr 16, 9:15 AM ET Add Technology – AP to My Yahoo!

By DAVID HO, Associated Press Writer

WASHINGTON – Despite static, dropped calls and dead zones, Jeff Danielson sticks with his cell phone service, not out of loyalty but because he can’t stand the thought of asking clients to call a new phone number.

“I’ve been unhappy with the service, but I’ve given up doing anything about it because I really don’t want to lose the number,” said Danielson, 27, a Washington technology consultant. “I’m afraid I would lose clients that way.”

Federal regulators are sympathetic with Danielson’s plight and have ordered cell phone companies to let people take their numbers with them when they switch to a competitor. The wireless providers asked a federal appeals court Tuesday to block the regulation, arguing that keeping the same phone number is a convenience, not a necessity.

The cell phone companies told a three-judge panel of the U.S. Court of Appeals for the District of Columbia that the Federal Communications Commission (news – web sites)’s “number portability” rules will raise costs while doing little to increase competition.

“It’s very speculative to say this even offers consumer benefits,” said Andrew McBride, an attorney representing Verizon Wireless and the Cellular Telecommunications and Internet Association.

McBride asserted the FCC (news – web sites) overstepped its authority and made legal errors in its order. Retaining the same phone number is not an essential service like making wireless providers supply enhanced 911 systems to help authorities locate cell phone users during emergencies, he argued.

The judges are not expected to rule for several months. Without court intervention, the regulations are to take effect Nov. 24.

Congress decided in 1996 that people can keep their traditional local phone numbers when they change phone companies. The FCC decided soon after that wireless carriers should offer that same ability to people in the largest 100 U.S. cities by June 1999.

The FCC extended that deadline three times, most recently granting a yearlong extension last summer after Verizon Wireless asked the commission to eliminate the requirement.

“Wireless companies will have stronger incentives to provide better service and lower prices if consumers can take their numbers,” said Chris Murray, an attorney for Consumers Union, publisher of Consumer Reports magazine. He said small businesses and self-employed people are particularly harmed when switching carriers because they lose numbers known by customers.

Most wireless companies argue that their industry is competitive enough and doesn’t need a regulatory boost. They say about 145 million people subscribe to U.S. cell phone systems, and about a third of them change carriers each year.

“The wireless industry is the most competitive telecommunications market on the planet,” McBride said after the hearing. He said the expense of providing the number switching service will take money away from better cell phone coverage and cheaper phones.

The wireless industry estimates the requirement will cost more than $1 billion in the first year and $500 million each year after that.

The industry also says the FCC’s number portability rules are unclear regarding traditional landline phone companies and give them an unfair advantage. The wireless companies want the FCC to declare that traditional landline phone companies must allow their customers to keep numbers when switching to cell phones.

Many cell phone users outside the United States, in Britain, Australia, Hong Kong and other places, already have the option of keeping their numbers when they switch carriers.

Web Calling Roils the Telecom World By SIMON ROMERO

Will the price of international telephone calls continue to decline? And will more people choose wireless technology over land lines? The answers lie in whether new technologies continue to rival existing ones in the coming year.

A glance across the humbled telecommunications industry might suggest that its largest companies are worried about other pressing issues in 2003, chief among them stabilizing the market for the tried-and-true service of placing calls from a phone tightly tethered to a jack.

After all, telecommunications and technology companies lost $7.6 billion in global market value from March 2000 to September 2002, as the industry was gripped by stunning collapses, financial scandals and an effort to absorb excess capacity on globe-spanning communications systems.

But alongside the industry’s search for its direction after such turmoil are trends that threaten to destabilize global telecommunications further in 2003. These trends could be described as the start of a cannibalization of established services by disruptive new technologies.

A November ruling by Panama’s Supreme Court indicates how friction on the industry’s margins is starting to sting the big companies at its center. In that decision, the court immediately suspended a government decree that had prohibited Panamanians from making Internet-based phone calls.

International calls routed over the Internet and placed on either computers or regular telephones are often offered at steep discounts. The technology used to route Internet calls is a relatively inexpensive way to route calls around the world.

In Panama’s case, one company, Cable and Wireless of Britain, has a venture with the government that allows it a virtual monopoly to provide international calling services. So the Panamanian government’s decision effectively strengthened Cable and Wireless at the expense of smaller companies selling cheaper international calls.

The government ban was “a vain attempt to hold back the inevitable,” said Scott Bradner, a consultant with Harvard University Information Systems.

Although its growth is still somewhat sluggish and in the early stages, Internet-based calling has expanded so much that it is understandable why monopolistic telephone companies, especially in the developing world, are feeling threatened.

Internet-based calls account for more than 10 percent of all international calling traffic today, up from almost nothing five years ago, as they reached about 18 billion minutes worldwide, up from 9.9 billion at the end of 2001, according to TeleGeography, a research firm. Most of these calls originated or terminated in poor countries.

Wholesale carriers carve out a business for themselves by taking advantage of differences in fees charged by local telephone companies to complete calls and the actual, often cheaper rates of transporting voice calls over the Internet.

Several governments in developing countries other than Panama, like Kenya and South Africa, have imposed restrictions on Internet calls, while phone companies in other nations, notably Colombia and Vietnam, have formed partnerships with wholesalers to seize on such opportunities.

For the time being, Internet-based calling volume remains relatively small, about one-eighteenth of the traffic handled by traditional phone companies. But analysts say the real disruption to the industry depends on whether large carriers decide to mothball billions of dollars’ worth of traditional switching equipment in favor of Internet-based technology.

Such a critical decision does not appear to be around the corner, and such a radical short-term shift should not be expected. Instead, analysts expect the growth of Internet-based telephone systems and, to a larger extent, the expansion of wireless calling to continue without rapidly eroding the business of traditional phone companies.

The struggle for supremacy among other telecommunications technologies offers some perspective. As Andrew M. Odlyzko, a professor at the University of Minnesota, points out, the telephone overtook the telegraph in volume in the early 20th century but telegraph use remained stable for years, reaching a peak in 1945.

The business of sending and receiving telegrams effectively died out in the 1990’s. AT&T, which did not formally change its name from American Telephone and Telegraph until 1994, transmitted its last telegram in 1991. So the cannibalization of the telegraph by the telephone took almost a century.

Still, there are reasons for traditional phone companies to be concerned. The United States has had a fourfold increase in wireless calling volumes per person since 1995.

“The substitution of cellphones for wire-line ones is finally becoming a reality,” Mr. Odlyzko said.

The rise of rival communications technologies has many implications for the industry, but in the months ahead the effects are largely expected to be deflationary, pushing down prices for local, long-distance and wireless service.

And as other new technologies emerge, like voice calling over new Wi-Fi wireless systems, at least one thing remains clear. Contrary to the expectations of the Internet zealots of the late 1990’s, the industry’s most potentially disruptive killer application will continue to be voice communications.

———–

-Ian.

Begin forwarded message:

> ———- Forwarded message ———-
> Date: Mon, 09 Dec 2002 10:44:23 -0500
> From: Dave Farber
> To: ip
> Subject: [IP] VERY INTERESTING — Some execs scored big as company
> values
> plunged
>
> http://www.bayarea.com/mld/bayarea/business/4696887.htm

> Some execs scored big as company values plunged
> By Chris O’Brien and Jack Davis
> Mercury News
>
> Running companies that became almost worthless didn’t stop dozens of
> Silicon
> Valley insiders from pocketing billions of dollars by selling their
> stock
> during the tech boom and bust.
>
> The Mercury News examined the stock sales record of insiders at 40
> companies
> in Silicon Valley that have lost virtually all their value since the
> stock
> market peaked in March 2000. The executives, board members and venture
> capitalists at these companies walked off with $3.41 billion, while
> their
> companies’ total market value plunged 99.8 percent to a mere $229.5
> million
> at the end of September.
>
> It represented a remarkable transfer of wealth from the pockets of
> thousands
> of anonymous investors — from day traders to pension funds — into the
> wallets of executives and directors who turned out to be winners even
> when
> their companies became some of Silicon Valley’s biggest losers.
>
> Coming at a time of public discontent with corporate ethics, the
> disconnect
> between the performance of these companies and the executives’
> fantastic
> rewards is symptomatic of the problems that have ignited calls to
> reform
> executive compensation and corporate governance.
>
> “The people who bought the stock they sold are the victims here,”
> said
> Charles Elson, director of the Center for Corporate Governance at the
> University of Delaware. “This money was taken from investors who
> didn’t
> have the same information as these insiders and lost their money.”
>
> The Mercury News compiled a list of local companies whose stock price
> dropped at least 99.5 percent from March 2000, when the Nasdaq peaked,
> to
> Sept. 30, 2002. Those companies were then ranked by the amount of
> stock sold
> by insiders — roughly 300 — since the beginning of 1997.
>
> This means the list leaves off some spectacular flameouts where
> executives
> weren’t shy about selling stock. For instance, JDS Uniphase missed the
> cut,
> with a 97.1 percent drop, even though executives sold $1.17 billion in
> stock
> between May 1997 and November 2002, even as the optical components
> company
> was firing two-thirds of its employees. Also absent is software company
> Ariba, whose stock dropped 98.7 percent and where insiders sold $1.26
> billion between October 1999 and November 2002.
>
> The survey also excludes some of the valley’s household names. Not
> included
> are John Chambers, who between August 1997 and February 2000 sold
> $296.2
> million in Cisco stock; Larry Ellison, who in January 2001 sold $894.8
> million in Oracle stock; and Scott McNealy, who from May 1997 to July
> 2002
> sold $107.9 million in Sun Microsystems stock. These corporate giants
> generally are older and remain strong competitors even as their stock
> prices
> have tanked.
>
> Supposed good bets
>
> The 40 companies on the Mercury News list are primarily software,
> hardware
> and telecommunications companies — the infrastructure providers that
> were
> supposed to be good bets rather than flighty dot-coms.
>
> These companies are a seriously wounded bunch. While not true of every
> company, as a group, they have a variety of problems. Most had major
> restructurings that led to mass firings. Fifteen went bankrupt.
> Several more
> are running out of cash.
>
> Almost half the companies face lawsuits from angry shareholders. Five
> of the
> Top 15 companies had to restate earnings, some from periods when
> insiders
> were selling stock. And a handful of the companies have been cited in
> investigations by Congress and the Securities and Exchange Commission
> into
> investment banks accused of manipulating IPOs.
>
> Though option grants usually get the most attention, much of the stock
> sold
> by insiders at these companies were shares they gained from being
> founders
> or early-stage venture investors prior to IPOs. Once their standard
> 180-day
> lock-up periods ended, many of these insiders began selling their
> stock like
> there was no tomorrow.
>
> For some of their companies, there isn’t much of a tomorrow:
>
> € John Little, founder and CEO of Portal Software, sold $127.5 million
> of
> stock in Portal, which is on the verge of being delisted by Nasdaq.
> Portal,
> which sells billing software, topped the Mercury News list with
> insiders
> selling $704 million in stock — more than its total revenue since the
> May
> 1999 IPO.
>
> € David Peterschmidt, CEO of Inktomi, sold $90.5 million of stock at
> the No.
> 2 company on the list. Inktomi, once a promising Internet search engine
> company, in November sold off a major division to raise cash it needs
> to
> survive.
>
> € K.B. Chandrasekhar, founder and former CEO of the former Exodus
> Communications, cashed out $135.1 million in stock at the Web hosting
> company before it went bankrupt. Chandrasekhar is now founder and CEO
> of
> Jamcracker. Exodus was bought out of bankruptcy by Cable & Wireless,
> which
> recently announced more layoffs at the hosting division.
>
> € Dennis Barsema, former CEO of Redback Networks, sold $138.4 million
> in
> stock before he left in July 2000 after 2 1/2 years at the helm.
> Barsema
> later became CEO at Onetta, another networking start-up. He donated $20
> million in stock to his alma mater, Northern Illinois University.
> Meanwhile,
> Redback announced another round of layoffs Nov. 14 and says it may
> have to
> raise more financing to stay afloat.
>
> € Jerry Shaw-Yau Chang, former CEO of Clarent, sold a measly $16.5
> million,
> though insiders at his telecom company dumped $355.8 million. Mired in
> accounting irregularities, the company has restated financial
> statements for
> 2000 and part of 2001, and been unable to report earnings for most of
> 2002.
>
> € Thomas Jermoluk, former CEO of At Home, sold $50.3 million before the
> cable broadband giant filed for bankruptcy. The company, known as
> Excite@Home, once boasted a market value of $13 billion before
> vaporizing
> following squabbles with its main shareholder and partner, AT&T.
> Jermoluk is
> now a venture partner at Kleiner Perkins Caufield & Byers.
>
> Executives at every company contacted either did not return phone
> calls or
> declined to comment, in many cases citing pending litigation. The one
> exception was Frederick D. Lawrence, former CEO of Adaptive Broadband,
> who
> agreed — after speaking with his lawyer — to discuss executive
> compensation though not the specifics of his company.
>
> He pointed out that executive pay plans are publicly available and
> that most
> investors never bother to read them. And when insiders sell stock,
> they must
> also publicly disclose the sales in filings to the SEC.
>
> “People really work hard in these industries,” Lawrence said. “They
> spend
> hours away from friends and family. Although that’s not an excuse for
> any
> poor behavior.”
>
> No surprise
>
> However, Nell Minow, editor of the Corporate Library, a research
> center that
> focuses on corporate governance, said the heavy insider stock sales
> are no
> surprise. Minow is a leading critic of allowing insiders to sell their
> stock
> because it creates the temptation to push the envelope on things like
> accounting.
>
> “They sell the stock and then they restate the earnings,” Minow said.
> “That brings it one step closer to being a Ponzi scheme.”
>
> The increasing use of stock and options to compensate executives over
> the
> past decade grew out of a broader shareholder value movement. The idea
> was
> to align the interests of executives with the stockholders who, in
> theory,
> are more important than employees or managers.
>
> But the practice has come under fire from critics who say stock grants
> have
> forced executives to become too focused on short-term results and doing
> whatever it takes to boost the stock price. That in turn can lead to
> everything from laying off employees after a bad quarter to feeling
> pressure
> to bend or break accounting rules to make the numbers.
>
> “Their decisions are distorted,” said Neelam Jain, assistant
> professor at
> Jones Graduate School of Management at Rice University. “What the
> managers
> are trying to do is maximize their own profits and not the firm’s
> profits.”
>
> Graef Crystal, a leading compensation expert in Las Vegas, believes the
> problem has been overblown. He points out that while many executives
> sold
> their stock, many of them could have sold far more, which they elected
> to
> keep and which eventually became worthless.
>
> Did they know?
>
> “The fact that they left huge amounts of money on the table does not
> suggest they knew something was coming,” Crystal said.
>
> But the criticism of these insider stock sales continues to grow. That
> backlash increased in November, when the Conference Board released an
> annual
> survey of 2,841 companies in 14 industries that showed executive pay
> and
> perks continued to rise in 2001 even as the stock market and economy
> slumped.
>
> At the same time executive compensation has exploded, bankruptcies have
> soared and publicly traded companies are facing record numbers of
> shareholder lawsuits. According to the Securities Class Action
> Clearinghouse
> at Stanford Law School, the number of shareholder suits rose from 213
> in
> 2000 to 488 in 2001 — despite a law passed in 1996 by Congress to
> discourage such litigation.
>
> While many companies dismiss such litigation as a nuisance, observers
> say
> many corporate insiders still underestimate the anger of investors who
> lost
> big sums during the boom and bust and are still feeling burned.
>
> “This is not a victimless crime,” said Charlie Cray, director of
> Citizen
> Works’ Campaign for Corporate Reform. “The argument is that they’re
> taking
> risks. But they’re taking risks with other people’s money.
>
> “This is really a question of fairness.”

-Ian.

—— http://www.nytimes.com/2002/11/18/technology/18CELL.html

November 18, 2002 Success of Cellphone Industry Hurts Service By SIMON ROMERO

Americans’ use of cellphones has increased so quickly that wireless networks are becoming overloaded, causing a growing number of customers to complain about calls that are inaudible or are cut off or are never connected in the first place.

And things could get worse before they get better, industry experts say, because even as cellphone companies are rolling out fancy features like digital photography and Internet-based games, they are hard-pressed to spend the money needed to improve basic service.

“This is a situation in which the wireless industry is a victim of its own success,” said James D. Schlichting, a deputy chief of the wireless communications bureau at the Federal Communications Commission.

Many of the industry’s service problems are a result of a huge growth of new customers. In 56 percent of the nation’s households, someone now subscribes to wireless phone service, more than double the percentage in 1995.

The surge in users is overwhelming the capacity to handle calls on wireless systems — whether because local transmitters are too few or too small, or because the local airwaves have become too crowded and carriers are unable to obtain larger swaths of radio frequencies.

The problems are compounded by basic economics. Customers have been attracted by the plunge in prices for wireless service. The average per-minute cost has dropped to 11 cents this year from 56 cents in 1995. For the phone companies that has meant a decline in average revenue per customer to $61 a month, from $74 in 1995.

And so, just when the wireless companies need to invest more money to accommodate all those new users, the companies are under increased financial strain.

As a result, the complaints are piling up.

The F.C.C. tracks only the few hundred complaints it receives each quarter — it recently reported fewer than in past years — but acknowledges that an increase in subscribers had worsened service problems. And surveys conducted for the industry itself show that complaints are rising.

“If I make 10 calls, at least three have to be redialed because they don’t go through,” said Orville Mills, who lives near Van Cortlandt Park in the Bronx and recently switched carriers to Sprint from T-Mobile. “The new services are just a distraction from not having the basics down.”

The percentage of all wireless subscribers who have called customer-service centers at least once in the last year to complain about service or because they had other problems has climbed to 61 percent, from 53 percent in 2000, according to J. D. Power & Associates, a company that measures customer satisfaction in many industries and sells it to the companies being scrutinized.

The level of such calls is higher than for many other consumer-service providers, including land-line telephone companies, cable-television operators and stockbrokers, according to Power. About 30 percent of the calls to customer-service centers were complaints related to dropped calls, bad reception or calls not going through, up from 19 percent in 2000. Other reasons included complaints and questions about billing, equipment and services.

The author of the study, Kirk Parsons, said the wireless companies are aware of the problem. He said he expected complaints to grow as the companies add new services, contributing to stress on the networks and subscribers’ confusion.

“It’s important to remember that cellphones are glorified radios,” said Travis Larson, a spokesman for the Cellular Telecommunications and Internet Association, the wireless industry’s main trade group. “They’re subject to interference from a lot of things, from building walls to sunspots to the weather. There will always be a trade-off between mobility and call quality.”

Meanwhile, the stock prices of AT&T Wireless Services and Sprint PCS, the two largest stand-alone publicly traded carriers, are down more than 45 percent this year on investor concern about revenues. And the two largest carriers, Verizon Wireless and Cingular Wireless, which are controlled by regional Bell companies, are struggling to find and pay for additional swaths of airwaves to carry calls.

The industry received something of a financial reprieve last Thursday from the Federal Communications Commission, which ruled that wireless companies would not have to pay the $16 billion they had offered for additional airwave licenses during a bidding process that is now being contested. The licenses had been seized by the F.C.C. from NextWave Communications and auctioned after NextWave filed for bankruptcy protection. But the licenses, and the airwave capacity they represent, are tied up by NextWave’s appeal of that seizure, which is now pending before the Supreme Court.

Another industry problem is the sheer technical complexity of sending and receiving wireless calls. Unlike conventional telephone systems, in which every customer is hardwired to the network, wireless systems rely on a delicate mesh of thousands of antenna towers — which often face resistance from local governments — and cellular relay stations.

The stations can easily be flooded by an increase in calling volumes. That vulnerability became clear in the hours after the Sept. 11 terrorist attacks in New York and Washington, when the local wireless networks were effectively shut down by the surge of attempted calls.

Various new companies are trying to develop towers and other forms of transmission technologies that could handle such surges. But so far carriers remain reliant on systems that, in some ways, still resemble radio communications networks that were first developed in World War II.

Because of brisk demand, financial problems at wireless carriers are not as severe as those in other areas of telecommunications, where large companies like WorldCom and Global Crossing have sought bankruptcy protection. Even so, some investors think the only way to ensure industry stability will be to winnow the competing wireless players. Instead of six nationwide carriers, they say, a more economically feasible number might be three or four.

“Consolidation among wireless companies can’t fix these problems, but it can make them less severe,” said Frank J. Governali, an analyst at Goldman, Sachs.

For months, investors have been waiting for mergers that would shrink the number of large competitors. No deals have yet materialized, though, partly because of technical obstacles. Unlike nations in Europe and Asia with higher wireless usage rates, the United States does not have a single wireless technical standard that would make it easy for carriers with different systems to combine operations.

Verizon and Sprint, for instance, employ an American-designed standard called code division multiple access, or C.D.M.A. Meanwhile, AT&T Wireless, Cingular Wireless and T-Mobile, formerly known as VoiceStream, use the global system for mobile communications, or G.S.M. format, common in Europe and Asia. Another large American carrier, Nextel, uses its own technology, called Iden.

Carriers have also resisted measures that would make the industry more consumer-friendly. In response to industry lobbying, for example, the F.C.C. has postponed until next fall a deadline for companies to start allowing “number portability” — letting customers keep their cellphone numbers even when they switch providers. The companies are reluctant to implement the measure, fearing it will create new costs while also encouraging customer defections.

“I’ve had the same number for three years,” said Sarah Vanderslice, a student at the Benjamin N. Cardozo School of Law in New York who subscribes to Sprint’s service. “The fear of losing it is the only thing that keeps me from dropping my cellular company.”

The F.C.C. has also repeatedly extended the industry’s deadlines for improving emergency-call abilities for wireless phones. Calls from cellphones are still much more difficult for emergency officials to pinpoint than calls from land-line phones. And the issue has become more pressing as the number of emergency calls from cellphones has grown to the current rate of more than 30 percent of 911 calls.

“The wireless industry is in need of a stricter taskmaster,” said David Heim, the managing editor of Consumer Reports magazine, which publishes an annual feature each year on cellular service problems. Although the F.C.C. has jurisdiction on certain operational matters, the wireless industry remains largely unregulated.

But few people expect the Bush administration’s F.C.C. to try to exert significant new authority. And even a former F.C.C. chairman from the Clinton years says that, in the main, it would be prudent to avoid more regulation.

“We have a robustly competitive wireless industry,” said Reed E. Hundt, the former F.C.C. chairman, who is now a senior adviser on information technologies for the management consultant firm McKinsey & Company. “Younger people recognize this in opting for wireless over wire line and putting up with some flaws in exchange for freedom of movement.”

Like their counterparts in Europe, carriers in the United States are hoping new services like text messaging and transmission of digital photos will eventually generate the additional revenue they need to put their finances on stronger footing. But aside from a small but loyal following of mainly younger subscribers that exchange text messages, none of the new services have attracted a large number of users.

And anyone who expects competitive market forces to quickly improve cellphones may be overly optimistic, some experts say. They note that the conventional wired telephone system has been evolving for more than a century and became widely dependable only in recent decades.

“Don’t hold your breath,” said Jeffrey Kagan, an independent telecommunications analyst in Atlanta. “Service and the economic evolution of wireless are works in progress — it might be years before customers are truly satisfied.”

-Ian.

—— http://www.business2.com/articles/web/0,1653,44771,FF.html TECH INVESTOR Who’s Afraid of WorldCom? By: Eric Hellweg Date: October 28, 2002

Think the disgraced telecom giant is dead? Guess again. Under current bankruptcy law, the company could reenter the market debt-free.

While the general public may feel smugly satisfied after watching former WorldCom (WCOM) execs Scott Sullivan and David Myers do the perp walk recently, few realize that the company itself possesses a “get out of jail free” card — thanks in part to WorldCom’s decision to file for protection from creditors in bankruptcy court last July.

By seeking protection from the court, WorldCom hopes to erase most of its $42 billion debt, allowing the company to emerge leaner, meaner, and — unlike all the other large telecoms — debt-free. As a multibillion-dollar company unburdened by debt service, WorldCom would be able to launch price wars or pad its profit margins. That’d be a pretty nifty outcome for an outfit that’s currently under investigation for the largest accounting fraud in history.

“This is unprecedented,” gasps Jeff Kagan, an independent telecommunications analyst, “that a player of this size could change its position so quickly — going in with crushing debt and coming out debt-free.”

Not surprisingly, most of the other giants in the sector, such as AT&T (T), Qwest (Q), and SBC (SBC), that are riding out the Great Telecom Bust are none too happy that a competitor whose executives stand accused of fraud could escape its troubles and gain a decided advantage. “Bankrupt companies are entitled to due process,” says Verizon spokesman Peter Thonis. “But they can’t use bankruptcy to skirt the process by which they’re held accountable to regulatory bodies, particularly when there might be criminal conduct involved.”

Perhaps, but they can certainly use it to reemerge as healthier companies, instead of being sold off for parts. Simply put, more than 200 years of American bankruptcy law was designed to favor creditors, not competitors. “It is a rare situation where an immediate liquidation of a company obtains better returns for creditors than a reorganization,” says Larren Nashelsky, head of the bankruptcy group at Morrison Foerster. “It’s the nature of value that you get better values over time.” Nashelsky says that if WorldCom emerges from bankruptcy, it will do so as a “more streamlined” version of its former self, owned in part by creditors. That is the purpose of bankruptcy proceedings. Unfortunately for the woebegone Baby Bells, WorldCom seems likely to reenter the marketplace, although that probably won’t happen for at least a year.

Mike Balmoris, a Federal Communications Commission spokesman, wouldn’t comment on the Bells’ complaints about WorldCom or what the government might do to regulate the company. But in the meantime, WorldCom is making a strong case for continuing to function as a going concern.

Last week the company filed its monthly operating reports with the U.S. Bankruptcy Court for the Southern District of New York. During the month of July 2002, WorldCom recorded $2.464 billion in revenue and a net loss of $331 million. August’s revenue was down to $2.403 billion, but the net loss was cut to $98 million. The first few months of a company’s bankruptcy are very important in determining how to obtain the best value for its creditors, and WorldCom’s improving performance will bolster the case that it should be kept around.

It’s a wholly plausible scenario: The enfant terrible of the business world could be back on top in a couple of years. Insert your own rebuttal to F. Scott Fitzgerald’s “no second acts in American lives” quote here. Telecom analyst Kagan asks the billion-dollar questions that have the Baby Bells quaking: “As an industry, how do we handle this? Is it fair to have a company have a competitive advantage based on going into bankruptcy? This could force the whole industry to restructure.”

———–