By now I expect that many people recognize that although the recession is still very much in play there are undeniable signs of a recovery. Regrettably, jobs tend to come later in any recovery since many companies delay taking on the higher payrolls until they are confident that the recovery is real rather than a statistical blip. I like this article since it lays out many of the bald numbers in the federal government's accounts, and which do provide indications that the recovery is truly underway. This does not mean that there will be no backsliding -- nothing is ever certain about the future -- only that there is good reason to make future plans on the probable basis of better times on the way.
I don't often provide a retrospective of things I've said in this blog in the past, but that is what I will do now. A year ago I wrote a couple of articles regarding the source of the extreme impact on government finances due to sharp economic decline and loss of consumer confidence, and coupled that with a cautionary note on the government's fiscal response. At the time I expressed some liking for Flaherty's caution approach to stimulus, arguing that it was more important to raise public confidence than to inject enormous amounts of stimulus. The reason for my stance was that since the upturn in government accounts would likely recover as fast as it dropped, it was only necessary to minimally bridge the economic air pocket so that the entire economy would not spiral out of control.
With the latest published numbers it seems the government's measured approach has been sufficient. As I said in one of those earlier articles, it is the private sector that must build the economy since it is the true source of the country's wealth. All the government can do -- and should do when necessary -- is shift some of that wealth around to temporarily patch problem areas. Now that the government is declining to extend certain programs (such as the home improvement program) and is beginning to recover its investment in ailing sectors (such as the auto industry), there are few complaints. This is a good sign.
We remain at the whim of global economic forces since we are so dependent on exports, therefore until the recovery takes hold elsewhere as strongly as it is domestically we are at risk. This is why, for example, the loonie drops as Europe descends into turmoil; if they do enter a serious period of restraint, they will import less from Canada. It's nice that Canada is doing relatively well at this point, but it is not an excuse to be complacent or smug.
Friday, April 30, 2010
Tuesday, April 27, 2010
Telecom Value Chain
This article in Techdirt brought a smile to my face. Before I explain why, let's summarize the article: cable companies and telcos want to charge more for broadband because, not only are the big content providers like Google getting a "free ride", so are consumers. The poor abused broadband providers are getting hit from both groups who simply don't appreciate the tremendous value they are getting and so they must pay more for broadband.
Of course the you and I and the content providers do pay for broadband, and the broadband providers are making a decent profit from our business. Their dilemma is that they are getting pushed down the value chain, and that is always a problem when your job is to make as much money as you possibly can. In other words, they are in danger of being relegated to, once again, becoming a utility. This may be unclear so let's look at the issue more deeply.
All bit carriage is alike and is only distinguished by price, reliability and speed. This makes broadband much like any conventional commodity, be it wheat, copper or natural gas. Commodities are at the bottom of the value chain, therefore every business that uses these commodities as inputs creates something of greater value to the end user (bread, wire or hot water, respectively). Because they add value, they always derive more revenue and, potentially, profit. This is the reason, for example, farmers bemoan how little of the retail price of baked goods goes into their pockets.
The same situation applies to broadband. Google provides products that consumers value, such as search and YouTube, and their revenue from advertising dwarfs how much they and we pay the broadband providers for bit carriage. The broadband providers don't much like this; they, too, want to be further up the value chain. They have tried competing with the content providers with walled-garden and other services, but consumers prefer to go elsewhere for content. When competing fairly has not worked out for them, they have sought to impair the competition with application filters, DNS poisoning and intrusive injection of javascript-driven ads into the content provided by other companies. Hence the fight over network neutrality.
While this may seem like a new type of fight, it isn't: the value chain in telecom has always been there, just as it has been there for any commodity. Think of the lowly telephone. Whether you call your mother or you call your stockbroker, the telco gets paid the same amount. This is despite the potentially lucrative benefit you earn when the trade you place through your broker works in your favour. Long ago the telcos were content enough with this situation since they did very well out of it, having their profits virtually guaranteed by the regulators. Although little more than a boring utility, they were a very profitable boring utility. Then competition arrived.
At first the telcos struggled to introduce new vertical services that would appeal to consumers. After years of industry effort (the pace was often quite slow in that olden time) there came call forwarding, voice mail and caller id. They successfully moved up the value chain with these features and profited enormously. It got to the point where the marginal cost of these services was so low that just about 100% of every dollar of revenue from these services went straight to the companies' bottom lines.
Of course this irritated companies like Nortel (who were even further down the value chain) since they didn't benefit from this windfall. I don't recall exactly but it was something like for every dollar the telco paid Nortel for their switching equipment (hardware and software), the telco earned $50. Nortel and Lucent did both try to get a piece of the telco service revenue, but failed because they had little leverage due to the availability of competitive alternatives such as Siemens, which was itching to win big switching contracts in North America.
Now it's the major broadband providers -- the telcos and the cable companies -- that are finding they have little leverage. Every action they take to assert themselves in the internet value chain achieves little benefit for them or us, and further erodes their reputation with the so far largely complacent majority of their customers. However, they are not stupid and so they know they will lose this fight eventually. What they are trying to do is set the agenda by attempting to dictate what their customers can do, but only for the present and the immediate future, until their strategists can figure out a way to successfully (and acceptably) lever them up the value chain.
I suspect they'll fail even though I can sympathize with why they are trying. Now even Google is sufficiently annoyed that they are pushing back by offering to create an open-access fibre network for some lucky community. By blatantly showing what is possible with true open access, the restraints of the incumbents become transparent to many more people. So long as most people believed that what they were being offered in the way of broadband service was normal, the incumbents' negative tactics worked.
Google's experiment is fascinating since they can show the way a utility can in fact move up the value chain. Except that the value isn't in the network but in the content to which Google will attach its advertising. This means there is little of value in this lesson for the broadband providers since they are not in that space, they have little prospects of getting there, and they have little appetite to try. They prefer to make the money come to them rather than go to where the money will be. I think they'd better get used to the idea of being a utility again because that's exactly where they're headed with their current strategies while others innovate.
Of course the you and I and the content providers do pay for broadband, and the broadband providers are making a decent profit from our business. Their dilemma is that they are getting pushed down the value chain, and that is always a problem when your job is to make as much money as you possibly can. In other words, they are in danger of being relegated to, once again, becoming a utility. This may be unclear so let's look at the issue more deeply.
All bit carriage is alike and is only distinguished by price, reliability and speed. This makes broadband much like any conventional commodity, be it wheat, copper or natural gas. Commodities are at the bottom of the value chain, therefore every business that uses these commodities as inputs creates something of greater value to the end user (bread, wire or hot water, respectively). Because they add value, they always derive more revenue and, potentially, profit. This is the reason, for example, farmers bemoan how little of the retail price of baked goods goes into their pockets.
The same situation applies to broadband. Google provides products that consumers value, such as search and YouTube, and their revenue from advertising dwarfs how much they and we pay the broadband providers for bit carriage. The broadband providers don't much like this; they, too, want to be further up the value chain. They have tried competing with the content providers with walled-garden and other services, but consumers prefer to go elsewhere for content. When competing fairly has not worked out for them, they have sought to impair the competition with application filters, DNS poisoning and intrusive injection of javascript-driven ads into the content provided by other companies. Hence the fight over network neutrality.
While this may seem like a new type of fight, it isn't: the value chain in telecom has always been there, just as it has been there for any commodity. Think of the lowly telephone. Whether you call your mother or you call your stockbroker, the telco gets paid the same amount. This is despite the potentially lucrative benefit you earn when the trade you place through your broker works in your favour. Long ago the telcos were content enough with this situation since they did very well out of it, having their profits virtually guaranteed by the regulators. Although little more than a boring utility, they were a very profitable boring utility. Then competition arrived.
At first the telcos struggled to introduce new vertical services that would appeal to consumers. After years of industry effort (the pace was often quite slow in that olden time) there came call forwarding, voice mail and caller id. They successfully moved up the value chain with these features and profited enormously. It got to the point where the marginal cost of these services was so low that just about 100% of every dollar of revenue from these services went straight to the companies' bottom lines.
Of course this irritated companies like Nortel (who were even further down the value chain) since they didn't benefit from this windfall. I don't recall exactly but it was something like for every dollar the telco paid Nortel for their switching equipment (hardware and software), the telco earned $50. Nortel and Lucent did both try to get a piece of the telco service revenue, but failed because they had little leverage due to the availability of competitive alternatives such as Siemens, which was itching to win big switching contracts in North America.
Now it's the major broadband providers -- the telcos and the cable companies -- that are finding they have little leverage. Every action they take to assert themselves in the internet value chain achieves little benefit for them or us, and further erodes their reputation with the so far largely complacent majority of their customers. However, they are not stupid and so they know they will lose this fight eventually. What they are trying to do is set the agenda by attempting to dictate what their customers can do, but only for the present and the immediate future, until their strategists can figure out a way to successfully (and acceptably) lever them up the value chain.
I suspect they'll fail even though I can sympathize with why they are trying. Now even Google is sufficiently annoyed that they are pushing back by offering to create an open-access fibre network for some lucky community. By blatantly showing what is possible with true open access, the restraints of the incumbents become transparent to many more people. So long as most people believed that what they were being offered in the way of broadband service was normal, the incumbents' negative tactics worked.
Google's experiment is fascinating since they can show the way a utility can in fact move up the value chain. Except that the value isn't in the network but in the content to which Google will attach its advertising. This means there is little of value in this lesson for the broadband providers since they are not in that space, they have little prospects of getting there, and they have little appetite to try. They prefer to make the money come to them rather than go to where the money will be. I think they'd better get used to the idea of being a utility again because that's exactly where they're headed with their current strategies while others innovate.
Monday, April 26, 2010
Dependencies and Wind Mobile
One of the worst things you can have in a business plan is a dependency on something that is critical but out of management's control. Although this unfortunate circumstance may be unavoidable, it still means that there is substantial risk in the business venture. Wind Mobile is dealing such a dependency right now. Interesting, however, even from the little that is publicly disclosed, it appears that they are choosing the proper tactics.
There are two important dependencies that Wind has on the incumbents:
This power has been used in both cases. Wind already has a roaming agreement with Rogers, one which may benefit both Rogers and Wind. Tower sharing negotiations are proceeding, but is apparently not entirely as well as for roaming. Unfortunately the sticking points in the negotiations are not public and I have no inside knowledge. Despite this gap in what is known, I think it is useful to understand this situation and assess Wind's interesting tactics to deal with what they imply are bad faith negotiations.
Some quotes from this article in the Ottawa Citizen:
Even apart from the delayed negotiations and attempts to charged exorbitant fees, the artificial barriers that were put in these companies' paths were at times astounding. One example is that the tradesmen and engineers had to book building access long in advance and then had to be escorted every step of the way. They of course had to pay for their escort. The "cages" for their equipment were placed where, it seemed, power was unavailable, or there were concrete walls between them and the network interface equipment. They even went so far in some cases as to bar access to the restrooms, arguing that those areas were not covered by the agreements. There was more, but let's leave that for now.
Another example was local number portability, where the incumbents insisted on long and detailed form being filled out and then faxed to their office. The forms seemed to change fairly often, sometimes without notice, and they would reject or ignore any request to port a customer's number if even one letter was out of place or, so they would claim, the fax was smudged. Of course they could simply protest that the fax was never received, and there was no way to prove otherwise. It should be no surprise that they fought against electronic document transfer.
Coming back to Wind's difficulty, from the article it would appear that they have a similar situation on their hands. Rogers says that Winds kept rejecting their proposals, yet what they were is not disclosed. I can speculate that the pricing or restrictions are of the same order of ridiculousness as those US examples I gave above. It is then disingenuous for Bell to claim that "no one has been barred from using Bell cellular towers."
Unlike the CAP and CLEC examples from the US, the situation for Wind is not equivalent and, further, it appears they expected this and made plans accordingly. At the same time that they are publicizing the difficulty and appealling to the CRTC, they are erecting temporary towers in areas where they are having difficulty gaining tower access. This achieves two objectives. First, they can offer a decent though substandard level of service in the affected area, which reduces the impact of being denied acceptable terms by the incumbents. Second, using the federal laws for transmission towers to their advantage, they are bypassing municipal approvals and irritating the heck out of local residents. This guarantees a political storm that will only increase the pressure on Bell and Rogers.
To me these appear to be brilliant tactics. Now they have municipal politicians and residents adding to the clamour for CRTC action. I suspect that Rogers and Bell will soon find that they can find it in their hearts to offer better terms to Wind.
There are two important dependencies that Wind has on the incumbents:
- Roaming
- Towers
This power has been used in both cases. Wind already has a roaming agreement with Rogers, one which may benefit both Rogers and Wind. Tower sharing negotiations are proceeding, but is apparently not entirely as well as for roaming. Unfortunately the sticking points in the negotiations are not public and I have no inside knowledge. Despite this gap in what is known, I think it is useful to understand this situation and assess Wind's interesting tactics to deal with what they imply are bad faith negotiations.
Some quotes from this article in the Ottawa Citizen:
More than 70 per cent of WIND's requests to share a tower have been approved, says Ken Engelhart, senior vice-president, regulatory, at Rogers...It is a time-honoured tradition for incumbent telecom operators to use the legal and regulatory process to their advantage even when the rulings are decidedly not in their favour. Rather than run through a catalogue of these, let's focus on just a couple of US examples I'm familiar with. The first is from the early 1990s (before there was open telephony competition) when competitors (known as CAPs, or competitive access providers) were allowed to provide dedicated inter-building facilities (often known as special access). Until then you could only get these from the monopoly telco, usually one of the BOCs (Bell Operating Companies). These links were of many types, including simple copper voice circuits and digital carrier systems (e.g. T1). But to be useful, these competitors needed to interconnect with the incumbents' networks. The FCC mandated this, knowing that the incumbents would never willingly permit this.
"I am completely baffled and mystified by Globalive's (WIND's parent company's) statements," [Engelhart] said. "We have agreed to share towers with them. The vast majority of the offers we make to them they reject."
Bell was equally baffled by WIND's recent statements. Jacqueline Michelis, a spokeswoman for the company, said Bell has not turned down any requests from new cellular companies that want to share space on its towers. Michelis said while some negotiations are ongoing, no one has been barred from using Bell cellular towers.
"We have not received any final approvals from competitors to share towers. We continue our efforts to engage in this process in Ottawa and throughout the country," Campbell [CEO, WIND Mobile] said on Tuesday.
Even apart from the delayed negotiations and attempts to charged exorbitant fees, the artificial barriers that were put in these companies' paths were at times astounding. One example is that the tradesmen and engineers had to book building access long in advance and then had to be escorted every step of the way. They of course had to pay for their escort. The "cages" for their equipment were placed where, it seemed, power was unavailable, or there were concrete walls between them and the network interface equipment. They even went so far in some cases as to bar access to the restrooms, arguing that those areas were not covered by the agreements. There was more, but let's leave that for now.
Another example was local number portability, where the incumbents insisted on long and detailed form being filled out and then faxed to their office. The forms seemed to change fairly often, sometimes without notice, and they would reject or ignore any request to port a customer's number if even one letter was out of place or, so they would claim, the fax was smudged. Of course they could simply protest that the fax was never received, and there was no way to prove otherwise. It should be no surprise that they fought against electronic document transfer.
Coming back to Wind's difficulty, from the article it would appear that they have a similar situation on their hands. Rogers says that Winds kept rejecting their proposals, yet what they were is not disclosed. I can speculate that the pricing or restrictions are of the same order of ridiculousness as those US examples I gave above. It is then disingenuous for Bell to claim that "no one has been barred from using Bell cellular towers."
Unlike the CAP and CLEC examples from the US, the situation for Wind is not equivalent and, further, it appears they expected this and made plans accordingly. At the same time that they are publicizing the difficulty and appealling to the CRTC, they are erecting temporary towers in areas where they are having difficulty gaining tower access. This achieves two objectives. First, they can offer a decent though substandard level of service in the affected area, which reduces the impact of being denied acceptable terms by the incumbents. Second, using the federal laws for transmission towers to their advantage, they are bypassing municipal approvals and irritating the heck out of local residents. This guarantees a political storm that will only increase the pressure on Bell and Rogers.
To me these appear to be brilliant tactics. Now they have municipal politicians and residents adding to the clamour for CRTC action. I suspect that Rogers and Bell will soon find that they can find it in their hearts to offer better terms to Wind.
Thursday, April 22, 2010
A License To Fail
I am surprised that Finance Minister Flaherty is opposed to the growing political movement to tax the world's financial institutions. Actually I completely agree with his (and the government's) position on this, but it does seem odd for this government to especially disagree with any US government position.
From this article we see that the head of the IMF believes that this levy on the banks to create a bailout fund is complementary to effective government regulation. It isn't. It is little more than an admission that most governments believe regulation -- their regulation -- will once again fail, and they don't want to use taxpayer dollars to fund the inevitable bailout.
Worse than that, not all financial institutions are equally susceptible to failure since they are not all active in the same mix of business activities. The risk they take on is very different. That is one reason the Canadian banks came through the crisis so well. Yet now these other countries with high-risk financial institutions want a levy on Canadian banks. As an investor in this sector I am appalled at this since the levy will lower the value of my holding while doing little or nothing to protect me and others.
Better would be if these levy-happy governments take strong action to restructure and regulate the institutions within their purview. Their willingness to impose this levy shows they will not do so, or at least they know that what action they will take will have little success. I have to wonder just what conversations are going on behind the scenes between politicians and bank lobbyists that would dissuade governments from imposing stricter measures on the industry. After all, the levy would take the heat off the recalcitrant bankers, allowing them to return to business as usual.
This has some similarity to the media tax in Canada where every blank CD you purchase carries an additional charge that, supposedly, compensates the entertainment industry (though rarely if ever the artists) for your ripping of MP3's and pirating songs and movies. What? You say you don't do these things? Too bad, you still have to pay. The bank levy is like that, and each of us will pay if it goes ahead.
From this article we see that the head of the IMF believes that this levy on the banks to create a bailout fund is complementary to effective government regulation. It isn't. It is little more than an admission that most governments believe regulation -- their regulation -- will once again fail, and they don't want to use taxpayer dollars to fund the inevitable bailout.
Worse than that, not all financial institutions are equally susceptible to failure since they are not all active in the same mix of business activities. The risk they take on is very different. That is one reason the Canadian banks came through the crisis so well. Yet now these other countries with high-risk financial institutions want a levy on Canadian banks. As an investor in this sector I am appalled at this since the levy will lower the value of my holding while doing little or nothing to protect me and others.
Better would be if these levy-happy governments take strong action to restructure and regulate the institutions within their purview. Their willingness to impose this levy shows they will not do so, or at least they know that what action they will take will have little success. I have to wonder just what conversations are going on behind the scenes between politicians and bank lobbyists that would dissuade governments from imposing stricter measures on the industry. After all, the levy would take the heat off the recalcitrant bankers, allowing them to return to business as usual.
This has some similarity to the media tax in Canada where every blank CD you purchase carries an additional charge that, supposedly, compensates the entertainment industry (though rarely if ever the artists) for your ripping of MP3's and pirating songs and movies. What? You say you don't do these things? Too bad, you still have to pay. The bank levy is like that, and each of us will pay if it goes ahead.
Wednesday, April 21, 2010
Too Big To Miss
A corporation is, as is implied in the name, an embodied entity that is legally distinct from its owners and employees. This is what enables a corporation to keep its accounts and interests in its own silo, to be reported on separately for purposes of taxation and other matters. However this is not a license for the owners, directors or employees to commit crimes under the cover of an artificial legal entity. At least that is the intent.
Directors and officers of a corporation have specific legal obligations if they are to limit their liability in cases of corporate malfeasance. This is the essence of a limited liability company. Go outside those legally-proscribed boundaries and that liability limitation can be reduced or lost entirely. That is, of course, only if you're caught. Corporate law is itself a nearly-impenetrable labyrinth for even experts in the field, and there are many people who make it their business to use the law to the advantage of themselves and their clients or employers.
This is a field where government regulation is critical, to prevent those with the levers of corporate power from gaming the system to their own benefit. The losers are the individual shareholders, customers and, ultimately, all taxpayers. The ongoing financial crisis is a dreadful example of just how wrong things can go. Not only were directors, officers and employees of many of these firms deliberately gaming the system to their own personal benefit, they knew that their corporations would take the hit, passing on the losses to the company's shareholders. In the US, the SEC, the supposed regulator of these corporations, were either powerless or disinterested, probably in part for political reasons. More will certainly come out over time.
I am no expert in these matters, so I won't say more about it. I can only say that while I am far from naive, I am still astounded at just how wide and deep the corruption has gone. What I want to leave you with is a link to an article. If you are interested in how approximately $62 trillion of bad assets were created out of almost thin air, give it a read. I would judge it to be among the clearest and most accessible descriptions of how financial instruments were created and abused.
It's something we should all understand, since if we do not it could happen again. Try to imagine the thousands upon thousands of individuals involved, and that they knew full well what they were doing, and then ponder at the wonder of it all.
Directors and officers of a corporation have specific legal obligations if they are to limit their liability in cases of corporate malfeasance. This is the essence of a limited liability company. Go outside those legally-proscribed boundaries and that liability limitation can be reduced or lost entirely. That is, of course, only if you're caught. Corporate law is itself a nearly-impenetrable labyrinth for even experts in the field, and there are many people who make it their business to use the law to the advantage of themselves and their clients or employers.
This is a field where government regulation is critical, to prevent those with the levers of corporate power from gaming the system to their own benefit. The losers are the individual shareholders, customers and, ultimately, all taxpayers. The ongoing financial crisis is a dreadful example of just how wrong things can go. Not only were directors, officers and employees of many of these firms deliberately gaming the system to their own personal benefit, they knew that their corporations would take the hit, passing on the losses to the company's shareholders. In the US, the SEC, the supposed regulator of these corporations, were either powerless or disinterested, probably in part for political reasons. More will certainly come out over time.
I am no expert in these matters, so I won't say more about it. I can only say that while I am far from naive, I am still astounded at just how wide and deep the corruption has gone. What I want to leave you with is a link to an article. If you are interested in how approximately $62 trillion of bad assets were created out of almost thin air, give it a read. I would judge it to be among the clearest and most accessible descriptions of how financial instruments were created and abused.
It's something we should all understand, since if we do not it could happen again. Try to imagine the thousands upon thousands of individuals involved, and that they knew full well what they were doing, and then ponder at the wonder of it all.
Friday, April 16, 2010
They Can't All Win
Convergence Consulting Group is forecasting that the new entrants in the Canadian wireless mobile market will win 22% of the total subscribers by 2014. If this comes to pass it will be very impressive considering that, until now, Wind Mobile, the earliest and largest of them, only reached about 30,000 subscribers, or about 0.15% penetration.
I am glad that I don't know the self-proclaimed objectives of each company since my experience with these type of projections has not been positive; they are all being coy about specific targets, which is good. I hope they are also being conservative in their confidential business plans. When I worked at Nortel, I saw how these forecasts can go very, very wrong. Let me take you back a few years.
In the mid-1990s when the local telephony market in the US was opened to competition, there was a virtual flood of CLECs (competitive local exchange carriers) clamouring to enter the market. They were fueled by wild-eyed investors with money to burn, eager to profit from the ongoing bull market that a few years later would implode; this was the steep run up into the dot-com bubble. From my vantage inside the industry, I had the dubious privilege of speaking and working with many of these companies. What I saw was not pretty.
Not only were the investors blind (the epitome of dumb money) the management of these CLECs were inexperience, naive and had the same sort of obsessive mix of greed and hope that drove the gold rushes of the 19-th century. Their business plans were often little more than a modest ambition (or so they believed) to capture 20% to 30% of their target market, which was often an urban centre such as Chicago. Except that every one of them had the same objective, and there were many of them attacking the same market. When you see 8 CLECs each going for, on average, 25% of the Chicago market, it doesn't take a math whiz to see a problem. It adds up to 200%, without accounting for the incumbent's share which, naturally, at that point in time stood at precisely 100%.
This was bad enough, but it wasn't really my problem. After all, the investors and managers were grown adults and were accountable for their own mistakes. That cost me nothing. The problem that I did care about was the one that helped to bring down the giants of the network equipment business: Lucent and Nortel. It wasn't an immediately fatal blow, but the injury was severe and chronic, and followed them like a black cloud right to the end.
The equipment that Nortel and Lucent sold to the telephone companies was expensive. Even the billions of dollars that investors poured into the CLECs' coffers wasn't enough to pay for what they needed. Led by Lucent, and soon followed by Nortel, by the end of 1998 they were both financing the sale of their own equipment to many of the CLECs. In essence they were giving the equipment away, and became creditors; in other words, they were pretending to be banks, loaning the CLECs the money to purchase the equipment. Nortel and Lucent booked the sales, but also had to put the debts on the opposite site of the ledger.
Eventually the inevitable occurred: the CLECs didn't each win 25% of the markets they entered and they burned through their investors' money. Post-bubble, they couldn't raise any more. The debts that Nortel and Lucent carried on their books became ticking time bombs. When added to their other woes after the carrier cap-ex recession that began in 2000, both companies were mortally wounded. In the end, Lucent was acquired by Alcatel and, well, we all know Nortel's fate.
While I don't know how Nortel's management and board convinced themselves they were doing the right thing, I do know one of the worries they faced when Lucent ramped up vendor financing (up until then, I know from direct knowledge that Nortel refused to do the same). Nortel began losing bids to Lucent when they wouldn't ante up with financing. Somehow they convinced themselves that this was a bad thing, so bad that it was preferable to becoming a bank and take on what they knew were debts carrying a high risk of default.
Let's hope the new entrants to the wireless market are not making foolish plans and taking on financial risk that will doom them. At least the remaining equipment vendors have learned to avoid following the example of their now-defunct competitors. I want these new entrants to succeed, if for no other reason than my interests as a consumer.
I am glad that I don't know the self-proclaimed objectives of each company since my experience with these type of projections has not been positive; they are all being coy about specific targets, which is good. I hope they are also being conservative in their confidential business plans. When I worked at Nortel, I saw how these forecasts can go very, very wrong. Let me take you back a few years.
In the mid-1990s when the local telephony market in the US was opened to competition, there was a virtual flood of CLECs (competitive local exchange carriers) clamouring to enter the market. They were fueled by wild-eyed investors with money to burn, eager to profit from the ongoing bull market that a few years later would implode; this was the steep run up into the dot-com bubble. From my vantage inside the industry, I had the dubious privilege of speaking and working with many of these companies. What I saw was not pretty.
Not only were the investors blind (the epitome of dumb money) the management of these CLECs were inexperience, naive and had the same sort of obsessive mix of greed and hope that drove the gold rushes of the 19-th century. Their business plans were often little more than a modest ambition (or so they believed) to capture 20% to 30% of their target market, which was often an urban centre such as Chicago. Except that every one of them had the same objective, and there were many of them attacking the same market. When you see 8 CLECs each going for, on average, 25% of the Chicago market, it doesn't take a math whiz to see a problem. It adds up to 200%, without accounting for the incumbent's share which, naturally, at that point in time stood at precisely 100%.
This was bad enough, but it wasn't really my problem. After all, the investors and managers were grown adults and were accountable for their own mistakes. That cost me nothing. The problem that I did care about was the one that helped to bring down the giants of the network equipment business: Lucent and Nortel. It wasn't an immediately fatal blow, but the injury was severe and chronic, and followed them like a black cloud right to the end.
The equipment that Nortel and Lucent sold to the telephone companies was expensive. Even the billions of dollars that investors poured into the CLECs' coffers wasn't enough to pay for what they needed. Led by Lucent, and soon followed by Nortel, by the end of 1998 they were both financing the sale of their own equipment to many of the CLECs. In essence they were giving the equipment away, and became creditors; in other words, they were pretending to be banks, loaning the CLECs the money to purchase the equipment. Nortel and Lucent booked the sales, but also had to put the debts on the opposite site of the ledger.
Eventually the inevitable occurred: the CLECs didn't each win 25% of the markets they entered and they burned through their investors' money. Post-bubble, they couldn't raise any more. The debts that Nortel and Lucent carried on their books became ticking time bombs. When added to their other woes after the carrier cap-ex recession that began in 2000, both companies were mortally wounded. In the end, Lucent was acquired by Alcatel and, well, we all know Nortel's fate.
While I don't know how Nortel's management and board convinced themselves they were doing the right thing, I do know one of the worries they faced when Lucent ramped up vendor financing (up until then, I know from direct knowledge that Nortel refused to do the same). Nortel began losing bids to Lucent when they wouldn't ante up with financing. Somehow they convinced themselves that this was a bad thing, so bad that it was preferable to becoming a bank and take on what they knew were debts carrying a high risk of default.
Let's hope the new entrants to the wireless market are not making foolish plans and taking on financial risk that will doom them. At least the remaining equipment vendors have learned to avoid following the example of their now-defunct competitors. I want these new entrants to succeed, if for no other reason than my interests as a consumer.
Wednesday, April 14, 2010
Peak Resources
By now I expect that most people have heard of the concept of peak oil. This is the observation that we have reached, or may soon reach, the historical maximum oil production. Like any prediction based on limited data, the timing is uncertain. What we do know is that the quantity of petroleum, in all of its naturally-occurring forms, is finite. Therefore there has to be a peak sometime.
Of course, peak oil can come about for reasons other than resource depletion. Examples include reduced demand (rampant environmentalism?) and an unexpected replacement energy source (fusion, high-efficiency solar). For the present discussion let's assume that the present demand trends continue so that we can focus on production. We know that oil -- or any natural resource, including gold -- cannot last forever. But how much is there, and how can we know?
These may be the wrong questions. Though studied extensively, the composition of the Earth's crust remains unknowable. It is simply too vast and sampling can only give us an imperfect statistical picture of its contents. It is in fact very likely that there is far more oil, natural gas, gold, and other valuable ores than is forecast in the most optimistic resource reserve calculations. That isn't the problem. The correct problem is one of economics: what it costs to access and extract the resources.
The marginal cost of extracting the resource is inexorably climbing. This is no surprise since profit-seeking companies seek the lowest-cost resources; this is the so-called low-hanging fruit. Resource deposits may be long ignored until the market price rises above the deposit's extraction cost, since this is the only way to achieve profitable production. There are abandoned gold mines in northern Ontario that are now getting a second look since their residual deposits may now be profitably mined because of current high gold price. A key measure to estimate the cost of mining mineral resources is the desired resource's concentration in the ore. As the concentration gets lower, more rock must be processed to produce a given output, and that increases the cost. As technology improves or the market price increases, lower concentrations become profitable. Get the price high enough and it is conceivable that even the gold in ocean water and river effluent could be profitably extracted.
Oil and natural gas have similar economics. With better and more-expensive technology, more impure and less accessible deposits become profitable. The northern Alberta oil sands (bitumen) is so impure that it is mined rather than pumped out of the ground. In addition to this expense, the heavy oil has to be upgraded before becoming suitable for refining into sellable products. This has a high price. The oil sands are only profitable with the market price of a barrel of crude oil that is somewhere north of $60.
Another deposit that is a common object of attention in the idiotic chain emails that pour into my inbox is the Bakken Formation, which straddles the US-Canada border. The theme here is the vast forecast reserves of oil and gas in this deposit, and how it can sustain the US economy on its own for a hundred years or more. While this may be true, it is irrelevant since the bulk of the deposits, perhaps 99% of it, is currently inaccessible, and even it were accessible the extraction costs would be far above current prices. Get the price high enough and it might as well not exist. The more-easily accessed parts of the deposit are now being extracted and, while significant, it is not going to solve the any country's supply needs.
As finite natural resources are depleted, their prices will rise. Not because of peak oil, peak gold or other trendy buzz words, but simply because extraction costs will continue to climb as we deplete the most accessible deposits. There is lots of any resource, if you are prepared to pay the price.
Even if we do not voluntarily reduce our consumption of these resources, the higher prices give innovators and entrepreneurs the incentive to develop alternatives. This is what is driving the solar industry today. It is still only marginally viable, but as oil and gas prices trend higher over the long term, investment into these alternatives will drive down costs through production volume and a steady stream of scientific discovery and technological innovation.
Better than any regulations, publicity stunts (like turning out the lights for an hour on Earth Day), or pleas for ethical business practices, it is basic economics that will ultimately halt exploitation of non-renewable resources. If you're an investor like me, there are lots of ways to profit from this since the prices of many commodities will continue to trend higher and emerging technologies (though not necessarily any particular company) will see their own prospects rise alongside resource prices.
Of course, peak oil can come about for reasons other than resource depletion. Examples include reduced demand (rampant environmentalism?) and an unexpected replacement energy source (fusion, high-efficiency solar). For the present discussion let's assume that the present demand trends continue so that we can focus on production. We know that oil -- or any natural resource, including gold -- cannot last forever. But how much is there, and how can we know?
These may be the wrong questions. Though studied extensively, the composition of the Earth's crust remains unknowable. It is simply too vast and sampling can only give us an imperfect statistical picture of its contents. It is in fact very likely that there is far more oil, natural gas, gold, and other valuable ores than is forecast in the most optimistic resource reserve calculations. That isn't the problem. The correct problem is one of economics: what it costs to access and extract the resources.
The marginal cost of extracting the resource is inexorably climbing. This is no surprise since profit-seeking companies seek the lowest-cost resources; this is the so-called low-hanging fruit. Resource deposits may be long ignored until the market price rises above the deposit's extraction cost, since this is the only way to achieve profitable production. There are abandoned gold mines in northern Ontario that are now getting a second look since their residual deposits may now be profitably mined because of current high gold price. A key measure to estimate the cost of mining mineral resources is the desired resource's concentration in the ore. As the concentration gets lower, more rock must be processed to produce a given output, and that increases the cost. As technology improves or the market price increases, lower concentrations become profitable. Get the price high enough and it is conceivable that even the gold in ocean water and river effluent could be profitably extracted.
Oil and natural gas have similar economics. With better and more-expensive technology, more impure and less accessible deposits become profitable. The northern Alberta oil sands (bitumen) is so impure that it is mined rather than pumped out of the ground. In addition to this expense, the heavy oil has to be upgraded before becoming suitable for refining into sellable products. This has a high price. The oil sands are only profitable with the market price of a barrel of crude oil that is somewhere north of $60.
Another deposit that is a common object of attention in the idiotic chain emails that pour into my inbox is the Bakken Formation, which straddles the US-Canada border. The theme here is the vast forecast reserves of oil and gas in this deposit, and how it can sustain the US economy on its own for a hundred years or more. While this may be true, it is irrelevant since the bulk of the deposits, perhaps 99% of it, is currently inaccessible, and even it were accessible the extraction costs would be far above current prices. Get the price high enough and it might as well not exist. The more-easily accessed parts of the deposit are now being extracted and, while significant, it is not going to solve the any country's supply needs.
As finite natural resources are depleted, their prices will rise. Not because of peak oil, peak gold or other trendy buzz words, but simply because extraction costs will continue to climb as we deplete the most accessible deposits. There is lots of any resource, if you are prepared to pay the price.
Even if we do not voluntarily reduce our consumption of these resources, the higher prices give innovators and entrepreneurs the incentive to develop alternatives. This is what is driving the solar industry today. It is still only marginally viable, but as oil and gas prices trend higher over the long term, investment into these alternatives will drive down costs through production volume and a steady stream of scientific discovery and technological innovation.
Better than any regulations, publicity stunts (like turning out the lights for an hour on Earth Day), or pleas for ethical business practices, it is basic economics that will ultimately halt exploitation of non-renewable resources. If you're an investor like me, there are lots of ways to profit from this since the prices of many commodities will continue to trend higher and emerging technologies (though not necessarily any particular company) will see their own prospects rise alongside resource prices.
Monday, April 12, 2010
"Look, the Cabinet Minister Has No Clothes!"
Most people have a good opinion of themselves. Indeed, many would consider themselves to be above average, regardless of the metric they choose for themselves and others, including intelligence, honesty, caring, patience, courtesy, etc. Yet it is clearly impossible for most people to be above average.
Criminologists have studied perceptual dissonances like this in an effort to understand the thinking by which criminals take to crime. While some might find it surprising, those who commit crimes or other bad deeds are like most people in that they have a good opinion of themselves. If someone breaks into your home and steals your possessions, it must seem nonsensical to imagine that the perpetrator could not realize how reprehensible their behaviour was, or that he could imagine himself to have done anything even remotely proper. Even more peculiar, many of these same thieves would feel much the same as you if someone else were to steal from them.
There is one example of this that I heard long ago in a media interview with a former burglar that gives some insight into their thinking process. The thief, having a good opinion of himself, for whatever reason sees that he is poor or disadvantaged relative to you in some way, and wonders how this could be possible. If you have nice things and he doesn't, and he can't afford to buy them, he sees injustice. After all, he's certainly as good as you, maybe even better, so those things should be his. Therefore he makes them his own by taking them, thereby restoring order to his world. Since this is only a short-term solution and because there are other things he doesn't have, the cycle repeats until he is caught and stopped. With this unfortunate turn of events, he licks his wounds and bemoans the unfairness of the world. Later, when he's back on the street, he is likely to slip back into the old ways.
Not all thieves think this way, perhaps not even most, but it is reasonably common. In my youth, when for some years I lived in a poor neighbourhood, very nearly a slum, I saw this very attitude among many of the kids and adults around me. When power or privilege is added to this mindset, greater trouble isn't far off. This brings me to the ongoing problems of ex-Minister Helena Guergis.
It's popular now to label the type of behaviour I've described above as having a sense of entitlement. It would be presumptuous of me to ascribe motives to Ms. Guergis, yet I see glimmers of that thieving mindset at work. I think it is uncontroversial to say that she has a good or even inflated opinion of herself and, because of that, when she looks around her and sees things that she does not have, she wonders why that is. Since she is no common criminal, and would probably be horrified at the thought of burglarizing someone's home or business, she would have to find some other way to correct the perceived imbalance between what she deserves and what she has. Political power was her tool in this unseemly quest.
Property may not have been her objective (although that remains to be seen). Instead she seemed to believe that she was not given the respect and privileges that were her due. Therefore she exercised her power in an attempt to coerce those responses out of others. This would explain her tantrum in Charlottetown and the letters sent by her staff to a local newspaper. Her objective was respect, not things. It isn't only politicians that are prone to this fault; you can see it in some businessmen and investors who come into unexpected success, professional athletes, recently-promoted corporate managers, and, really, there are examples to be found in any field of human endeavour. One characteristic that they share is that even if what they've gained was due to luck, they always attribute it to their superior qualities.
Further to their high opinion of themselves, they are also blind to their misbehaviour. If they steal from office supplies or pad their expenses, they think that no one notices. If they strut with head held high and speak or treat others harshly, they imagine others envy, respect or fear them, since they crave or more of these. Common criminals also get that way, if they survive long at their trade, imaging that they are untouchable due to their great talent.
I have worked with people just like this, and I suspect that most everyone has. I have seen coworkers take things home, I have seen acquaintances cheating on their spouses, and I have seen students plagiarizing or copying the work of their fellows. In all cases they seem unable to see that many of the people around them notice what they are doing. Like the fable of the emperor whose new outfit, though not visible, he believed to clothe him in the highest of high fashion, they are able to strut in plain sight and be completely oblivious to the pointing and giggles of the populace. That is until someone in the crowd shouts: "Look! The Emperor has no clothes!"
Instead of a little boy, in this case it was the Prime Minister. Now the ex-Minister is, metaphorically speaking, aware of her nakedness and is rushing for cover. She now knows what everyone else has known all along. I imagine that she still craves and feels entitled to the respect and reverence that she believes is her due, so it must sting to know that it is now further away than ever, and what little she thought she has achieved towards that goal was merely a mirage of her own making. I can almost pity her.
Criminologists have studied perceptual dissonances like this in an effort to understand the thinking by which criminals take to crime. While some might find it surprising, those who commit crimes or other bad deeds are like most people in that they have a good opinion of themselves. If someone breaks into your home and steals your possessions, it must seem nonsensical to imagine that the perpetrator could not realize how reprehensible their behaviour was, or that he could imagine himself to have done anything even remotely proper. Even more peculiar, many of these same thieves would feel much the same as you if someone else were to steal from them.
There is one example of this that I heard long ago in a media interview with a former burglar that gives some insight into their thinking process. The thief, having a good opinion of himself, for whatever reason sees that he is poor or disadvantaged relative to you in some way, and wonders how this could be possible. If you have nice things and he doesn't, and he can't afford to buy them, he sees injustice. After all, he's certainly as good as you, maybe even better, so those things should be his. Therefore he makes them his own by taking them, thereby restoring order to his world. Since this is only a short-term solution and because there are other things he doesn't have, the cycle repeats until he is caught and stopped. With this unfortunate turn of events, he licks his wounds and bemoans the unfairness of the world. Later, when he's back on the street, he is likely to slip back into the old ways.
Not all thieves think this way, perhaps not even most, but it is reasonably common. In my youth, when for some years I lived in a poor neighbourhood, very nearly a slum, I saw this very attitude among many of the kids and adults around me. When power or privilege is added to this mindset, greater trouble isn't far off. This brings me to the ongoing problems of ex-Minister Helena Guergis.
It's popular now to label the type of behaviour I've described above as having a sense of entitlement. It would be presumptuous of me to ascribe motives to Ms. Guergis, yet I see glimmers of that thieving mindset at work. I think it is uncontroversial to say that she has a good or even inflated opinion of herself and, because of that, when she looks around her and sees things that she does not have, she wonders why that is. Since she is no common criminal, and would probably be horrified at the thought of burglarizing someone's home or business, she would have to find some other way to correct the perceived imbalance between what she deserves and what she has. Political power was her tool in this unseemly quest.
Property may not have been her objective (although that remains to be seen). Instead she seemed to believe that she was not given the respect and privileges that were her due. Therefore she exercised her power in an attempt to coerce those responses out of others. This would explain her tantrum in Charlottetown and the letters sent by her staff to a local newspaper. Her objective was respect, not things. It isn't only politicians that are prone to this fault; you can see it in some businessmen and investors who come into unexpected success, professional athletes, recently-promoted corporate managers, and, really, there are examples to be found in any field of human endeavour. One characteristic that they share is that even if what they've gained was due to luck, they always attribute it to their superior qualities.
Further to their high opinion of themselves, they are also blind to their misbehaviour. If they steal from office supplies or pad their expenses, they think that no one notices. If they strut with head held high and speak or treat others harshly, they imagine others envy, respect or fear them, since they crave or more of these. Common criminals also get that way, if they survive long at their trade, imaging that they are untouchable due to their great talent.
I have worked with people just like this, and I suspect that most everyone has. I have seen coworkers take things home, I have seen acquaintances cheating on their spouses, and I have seen students plagiarizing or copying the work of their fellows. In all cases they seem unable to see that many of the people around them notice what they are doing. Like the fable of the emperor whose new outfit, though not visible, he believed to clothe him in the highest of high fashion, they are able to strut in plain sight and be completely oblivious to the pointing and giggles of the populace. That is until someone in the crowd shouts: "Look! The Emperor has no clothes!"
Instead of a little boy, in this case it was the Prime Minister. Now the ex-Minister is, metaphorically speaking, aware of her nakedness and is rushing for cover. She now knows what everyone else has known all along. I imagine that she still craves and feels entitled to the respect and reverence that she believes is her due, so it must sting to know that it is now further away than ever, and what little she thought she has achieved towards that goal was merely a mirage of her own making. I can almost pity her.
Friday, April 9, 2010
Chain Emails and the Reality Quotient
As much as I hate to admit it, like many people I have a circle of friends and family (but never business colleagues) that provide a steady flow of chain emails into my in box. This is nothing remarkable, just something to hide since it's a little bit embarrassing to know people like that. When I do look at these emails before I send them to the trash, it is not because I'm interested or curious about the content, but rather the further insight it gives me into the sender. I never mention this to the individuals in question when we do meet in person, although it does affect my regard for them.
I recently got one of these that especially amused me because it told me something about the forwarders' RQ scores. RQ is like IQ, except that it measures a person's awareness of the real world; RQ is a Reality Quotient**. However, keep in mind that emails containing urban myths only partly measure a person's RQ since these are often forwarded out of laziness rather than a low RQ. The (very) few times I have asked the sender why they sent me a particularly steaming load of manure, the lazy ones are those who, it turns out, barely skimmed the first paragraph before forwarding it on to everyone on their contact list. A typical response I get is along the lines of: "well, I didn't really give it any thought but I thought that since it might be true you might like to know." In other words, the sender is too lazy to devote even a moment's thought to it, and instead off-loads the thinking to dozens of others who, sadly, are likely to do the exact same thing. A month later when they receive the very same email or some variation thereof, they do exactly the same thing. Perhaps this is unsurprising since how can they remember or understand an email that they never actually read the first time.
Which brings me back to that recent email I received. This is the one that is purportedly originated by a computer technician who wants to warn low-RQ internet denizens that chain emails are bad. Some of them are so bad that they contain magical computer thingies that will suck up all your private personal details, bank accounts, health records and who knows what else, and send them to the evil ones in a slum on the outskirts of Nairobi, Lagos or Sao Paolo, who will then sell it all to the mafia, and it is they who will proceed to separate you from all of your worldly possessions. When you forward on these dreadful chain emails, the very same thing will happen to everyone you know. You get the idea.
This is nothing remarkable in itself since despite the near-ubiquity of internet access, many people understand very little about the technology and even reasonably intelligent people with a decent enough RQ are willing to at least entertain the idea that there is some small grain of truth in these tales. What amused me about this email from a "computer technician" is that it ends (I'll bet you've already guessed) by instructing you to forward the email to everyone you know so that they, too, will know that they should not forward chain emails.
Pretty soon I expect to start having a recurring nightmare where the world's average RQ finally drops so low that humanity devolves back into a non-self aware and non-intelligent species whose only reality is grubbing for their next meal. Who could have guessed that the internet would come back to so viciously bite its creators.
**RQ is not a widely-accepted term, but it is in use. An internet search turns up many examples, but none that I care to link to.
I recently got one of these that especially amused me because it told me something about the forwarders' RQ scores. RQ is like IQ, except that it measures a person's awareness of the real world; RQ is a Reality Quotient**. However, keep in mind that emails containing urban myths only partly measure a person's RQ since these are often forwarded out of laziness rather than a low RQ. The (very) few times I have asked the sender why they sent me a particularly steaming load of manure, the lazy ones are those who, it turns out, barely skimmed the first paragraph before forwarding it on to everyone on their contact list. A typical response I get is along the lines of: "well, I didn't really give it any thought but I thought that since it might be true you might like to know." In other words, the sender is too lazy to devote even a moment's thought to it, and instead off-loads the thinking to dozens of others who, sadly, are likely to do the exact same thing. A month later when they receive the very same email or some variation thereof, they do exactly the same thing. Perhaps this is unsurprising since how can they remember or understand an email that they never actually read the first time.
Which brings me back to that recent email I received. This is the one that is purportedly originated by a computer technician who wants to warn low-RQ internet denizens that chain emails are bad. Some of them are so bad that they contain magical computer thingies that will suck up all your private personal details, bank accounts, health records and who knows what else, and send them to the evil ones in a slum on the outskirts of Nairobi, Lagos or Sao Paolo, who will then sell it all to the mafia, and it is they who will proceed to separate you from all of your worldly possessions. When you forward on these dreadful chain emails, the very same thing will happen to everyone you know. You get the idea.
This is nothing remarkable in itself since despite the near-ubiquity of internet access, many people understand very little about the technology and even reasonably intelligent people with a decent enough RQ are willing to at least entertain the idea that there is some small grain of truth in these tales. What amused me about this email from a "computer technician" is that it ends (I'll bet you've already guessed) by instructing you to forward the email to everyone you know so that they, too, will know that they should not forward chain emails.
Pretty soon I expect to start having a recurring nightmare where the world's average RQ finally drops so low that humanity devolves back into a non-self aware and non-intelligent species whose only reality is grubbing for their next meal. Who could have guessed that the internet would come back to so viciously bite its creators.
**RQ is not a widely-accepted term, but it is in use. An internet search turns up many examples, but none that I care to link to.
Thursday, April 8, 2010
Broadband Competition vs. Regulation
The recent court decision in Comcast's favour has put the issue of net neutrality firmly back on centre stage. There is the expected emoting by the various interested parties, including consumer advocates, which may do not to obfuscate the issues than to enlighten. Although I am familiar with much of the law and regulation under which the FCC operates (from a part I played earlier in my career), I have no intention of getting into that here; not only would it most likely put you to sleep, it would also put me to sleep. Instead, I want to take a brief look, once more, at why how these disputes come about: lack of competition.
I would like to simplify the public policy alternatives -- perhaps somewhat extreme but in a way that I believe brings some clarity -- into two approaches the government can take to create a vibrate broadband internet industry, one that gives consumers service that they would consider to be acceptable and at an affordable price. It is one I've addressed before, perhaps most directly in my comment on this earlier article. These are the alternatives as I see them:
When competition is limited or non-existent (monopolies), the service providers tend to grow fat (high internal costs), and have both poor service and high prices. Since there are few market incentives to change, creating a different outcome requires external intervention in the form of government regulation. This has its own costs since the providers will then spend money on lobbying and otherwise fighting the government and their own customers (resulting in higher prices) and there is political risk for the government since they can become culpable for all the industry's faults in the eyes of the public.
There is nothing unique about broadband in this dichotomy. The same thing happens with most utilities and other industries with high barriers to entry. Telecom, which includes broadband, is notorious for this very problem. Net neutrality is nothing more than one of poor industry behaviour due to limited competition and a politically-sensitive regulatory regime. That is, if there would be sufficient broadband competition, net neutrality would simply become one of many service differentiators that one or more providers would offer so as to draw customers from those that filter content. This is why, for example, Canadian ISPs like Teksavvy and others offered unfiltered broadband and advertised this aspect of their service. At least, that is, until Bell Canada and the CRTC decided otherwise.
Because of the political risks of regulating broadband, governments in both Canada and the US would prefer that more competition would arrive, and soon. All they can do is create an environment that does not dissuade new entrants, but they cannot guarantee -- nor should they -- that there will be effective competition. They can directly intervene occasionally, such as they did with Globalive, to clear the path, but they can do nothing about the fact that it takes lots of money and time, and willing investors and entrepreneurs.
All these fights over Globalive here and Comcast there are nothing more than skirmishes that highlight how much governments and their regulators wish that competition would come to the rescue and free them from this public policy morass. Be prepared for much more of the same in the coming years.
I would like to simplify the public policy alternatives -- perhaps somewhat extreme but in a way that I believe brings some clarity -- into two approaches the government can take to create a vibrate broadband internet industry, one that gives consumers service that they would consider to be acceptable and at an affordable price. It is one I've addressed before, perhaps most directly in my comment on this earlier article. These are the alternatives as I see them:
- Competition
- Regulation
When competition is limited or non-existent (monopolies), the service providers tend to grow fat (high internal costs), and have both poor service and high prices. Since there are few market incentives to change, creating a different outcome requires external intervention in the form of government regulation. This has its own costs since the providers will then spend money on lobbying and otherwise fighting the government and their own customers (resulting in higher prices) and there is political risk for the government since they can become culpable for all the industry's faults in the eyes of the public.
There is nothing unique about broadband in this dichotomy. The same thing happens with most utilities and other industries with high barriers to entry. Telecom, which includes broadband, is notorious for this very problem. Net neutrality is nothing more than one of poor industry behaviour due to limited competition and a politically-sensitive regulatory regime. That is, if there would be sufficient broadband competition, net neutrality would simply become one of many service differentiators that one or more providers would offer so as to draw customers from those that filter content. This is why, for example, Canadian ISPs like Teksavvy and others offered unfiltered broadband and advertised this aspect of their service. At least, that is, until Bell Canada and the CRTC decided otherwise.
Because of the political risks of regulating broadband, governments in both Canada and the US would prefer that more competition would arrive, and soon. All they can do is create an environment that does not dissuade new entrants, but they cannot guarantee -- nor should they -- that there will be effective competition. They can directly intervene occasionally, such as they did with Globalive, to clear the path, but they can do nothing about the fact that it takes lots of money and time, and willing investors and entrepreneurs.
All these fights over Globalive here and Comcast there are nothing more than skirmishes that highlight how much governments and their regulators wish that competition would come to the rescue and free them from this public policy morass. Be prepared for much more of the same in the coming years.
Monday, April 5, 2010
Proportional Representation - The Numbers
Representation in the House of Commons is roughly proportional to population. This is typical of most representative democracies. The introduction of bill C-12 by the federal government last week continues that important tradition by adjusting federal ridings to reflect the rapidly-growing Canadian population.
There is some controversy regarding the additional seats for Ontario, Alberta and British Columbia, which there ought not to be since objections can only be coming from those who would wish to move to disproprotional representation. I will therefore ignore the controversy and move on to what I believe is a more important question, one that is well and humourously put forward by the very first commenter on this National Post article:
It is a good question to ask, apart from having "30 more sources of hot air", what is the value of increasing the number of MPs? The politics of instead reducing the number of seats for some provinces might annoy some, but a reduction is no loss since either way the proportion would be the same. Yet with 30 more MPs we, the taxpayers, carry the added costs of their salaries, office staff and expenses, and, perhaps most irritating, their gold-plated pensions. We should demand that there be value commensurate with the increased cost to us.
First, let's compare the formulas for the House of Commons and the US House of Representatives. For our House, there is a long-standing fixed electoral ratio that C-12 leaves as is:
With regard to defending and promoting constituency matters, there is an argument to be made for a lower ratio. Despite the best efforts of the staffers, the real political work must be done by the representative. I suspect that the higher ratio in the US (this also impacts their elected Senators) makes it easier for special interest lobbyists to drown out the voices of the more numerous, but fragmented, constituents. Lobbyists also work hard to get the staffers on side, who then use their position of trust to influence their boss.
When it comes to voting there is no advantage of a lower electoral ratio. Unfortunately, all votes of any importance are whipped: MPs are required to vote according to their party's position, regardless of what their constituents prefer. I would rather there were less of this, but recognizing that it does exist and is unlikely to change soon, the extra members have no value to constituents on House votes; the voting percentages are the same either way.
My conclusion is that it is time to transition to a formula similar to one in the US. Otherwise we are about to end up with more than 2/3 of the number of House members for 1/9 the population, and with diminished value.
There is some controversy regarding the additional seats for Ontario, Alberta and British Columbia, which there ought not to be since objections can only be coming from those who would wish to move to disproprotional representation. I will therefore ignore the controversy and move on to what I believe is a more important question, one that is well and humourously put forward by the very first commenter on this National Post article:
broke: "Lord thundering Jesus, now we're going to have to listen to 30 more sources of hot air. We have way too many politicians. Soon they'll outnumber the voters. The least they could do is reduce the Senate by 30."How many MPs do we really need? There is no reason to increase the number of seats to make the adjustment to population; we could just as easily keep the same total and change the geographical allocation. For example, in the United States, their House of Representatives is fixed at 435 seats, which they periodically reallocated in response to the census.
It is a good question to ask, apart from having "30 more sources of hot air", what is the value of increasing the number of MPs? The politics of instead reducing the number of seats for some provinces might annoy some, but a reduction is no loss since either way the proportion would be the same. Yet with 30 more MPs we, the taxpayers, carry the added costs of their salaries, office staff and expenses, and, perhaps most irritating, their gold-plated pensions. We should demand that there be value commensurate with the increased cost to us.
First, let's compare the formulas for the House of Commons and the US House of Representatives. For our House, there is a long-standing fixed electoral ratio that C-12 leaves as is:
3. In these rules, “electoral divisor” meansBy fixing the number of seats, the House of Representatives has seen its electoral ratio climb over the country's history, and now stands above 650,000. In other words, each member of the US House represents more than 6 times the population that an MP does. One of the important tasks our politicians performs is to advocate on behalf of their constituents (typically, when one of us runs afoul of poor governance), and another is to advocate for the broader interests of their constituency, such as getting federal funding for local projects. It can be argued that the former task is better accomplished with Canada's lower representation ratio. However, this is compensated for in the US by funding larger staffs for members' offices, who in both countries do most of the listening and follow-up on issues raised by constituents; the staff only involve the member when political action is required. The House of Commons could do the same and preserve the level of service at less cost to taxpayers; on an individual basis, office staff is less expensive than MPs.
(a) 108,000, in relation to the readjustment following the first decennial census completed after the coming into force of the Democratic Representation Act; ...
With regard to defending and promoting constituency matters, there is an argument to be made for a lower ratio. Despite the best efforts of the staffers, the real political work must be done by the representative. I suspect that the higher ratio in the US (this also impacts their elected Senators) makes it easier for special interest lobbyists to drown out the voices of the more numerous, but fragmented, constituents. Lobbyists also work hard to get the staffers on side, who then use their position of trust to influence their boss.
When it comes to voting there is no advantage of a lower electoral ratio. Unfortunately, all votes of any importance are whipped: MPs are required to vote according to their party's position, regardless of what their constituents prefer. I would rather there were less of this, but recognizing that it does exist and is unlikely to change soon, the extra members have no value to constituents on House votes; the voting percentages are the same either way.
My conclusion is that it is time to transition to a formula similar to one in the US. Otherwise we are about to end up with more than 2/3 of the number of House members for 1/9 the population, and with diminished value.
Friday, April 2, 2010
Mercury and Venus
Back in January I mentioned that Venus was about to become prominent in the western sky after sunset. Ten weeks later it is out there, shining brightly. While that's a pretty sight, it's even better for the next week or more since it has been joined by Mercury, it's smaller but still quite bright cousin.
With the skies so clear now, and probably Friday and Saturday as well, not to mention the unseasonably warm evening air, if you have never seen Mercury before, this is an ideal opportunity. Venus is the bright beacon you simply can't miss, and Mercury is easily found by looking a few degrees to the right of Venus and down just a bit. If you extend your arm with your palm facing the sky, the width of your hand is approximately the distance between the two planets. Mercury isn't as bright as Venus, but unmistak
able once you know where to look.
Here in Ottawa I would say the best time to see them is between 8:00 and 8:30, when the sky is dark enough to make both easily visible and still far enough above the horizon that low obstructions won't be in the way.
I took a picture of them with a camera phone Thursday evening a little after 8 PM. Venus comes through ok, but since Mercury was a barely brightened pixel even with an image-manipulation program, I circled its position so you can get a good idea where it is relative to Venus. Keep in mind that their position and separation will change each night. Mercury will reach its highest point in the night sky next weekend (April 10), and will then quickly swing in between us and sun to become invisible once more.
With the skies so clear now, and probably Friday and Saturday as well, not to mention the unseasonably warm evening air, if you have never seen Mercury before, this is an ideal opportunity. Venus is the bright beacon you simply can't miss, and Mercury is easily found by looking a few degrees to the right of Venus and down just a bit. If you extend your arm with your palm facing the sky, the width of your hand is approximately the distance between the two planets. Mercury isn't as bright as Venus, but unmistak
able once you know where to look.Here in Ottawa I would say the best time to see them is between 8:00 and 8:30, when the sky is dark enough to make both easily visible and still far enough above the horizon that low obstructions won't be in the way.
I took a picture of them with a camera phone Thursday evening a little after 8 PM. Venus comes through ok, but since Mercury was a barely brightened pixel even with an image-manipulation program, I circled its position so you can get a good idea where it is relative to Venus. Keep in mind that their position and separation will change each night. Mercury will reach its highest point in the night sky next weekend (April 10), and will then quickly swing in between us and sun to become invisible once more.
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