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.