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The parable of the telegraph

As previously described in an earlier piece on the transistor, there is a theory that underlies much of what this web diary is about. Telecommunications is undergoing wrenching change. And not for the first time. The history of the industry is filled with disruption and thus with drama that leads to fine storytelling.

One such great story is that of Western Union and the telegraph.

Western Union was formed as a company in 1851 and ten years later had completed the first transcontinental telegraph line. Following on that breakthrough, it introduced the first digital real-time data service, the stock ticker, in 1866. Business boomed and by 1870 it was the world’s most powerful telecommunications company.

By any standards it was innovative: it offered remarkable and revolutionary telecom data services, a century before the Internet. But in the century that followed why didn’t Western Union become the leader in voice communications, ceding that position to the Bell companies?

Alexader Graham Bell did not invent the voice telephone with the intention of toppling Western Union. In the language of today’s technology entrepreneurship he hoped Western Union would be his “exit”. He pitched the phone to them as an improvement to their core telegraphy business. Bell offered the patents for the telephone to Western Union for a mere $100,000, roughly $2 million in today’s dollars. In other words, today the deal would be: two million dollars to own all voice IP.

Western Union passed

Now why would they do that? Imagine you are an analyst at Western Union advising management on technology acquisition and M&A. What process would you use to evaluate it? First, most obviously, you would try to get feedback from marketing and sales. They should go out and survey their customer base to find out who would be interested and how much they would be willing to pay.

The sales force would naturally seek out their best customers and ask them first. Those customers were the stock ticker users. They were extremely voracious users of the ticker tape system. It should be no surprise why we have “ticker tape parades”–there was enough of the stuff lying around offices in New York to shower down and flood Broadway end-to-end”. Ticker tape was a boon to merchants and traders. Chicago would know what’s happening in the New York stock exchange instantaneously. Price data was traveling at the speed of light.  The sender and receiver were in lock-step sync. To suggest to these customers a voice product would sound like a step backward. Why would they want to talk to the other party? The data was coming on tape and it was also recorded for posterity. Speaking with the other person meant confusion and delay and a mess of record keeping.

The word from the customers would be a resounding negative.

Second would be the business model.  How would you charge for voice? Data was subscription based, and the fees were huge. Voice would be metered and the price low. If targeting consumers, telegrams were priced by the word, but you couldn’t price voice by the word. Marketing would stare back at you as if you had committed a judgement error.

Thirdly you would look at the cost side. Operations would give you more bad news. Voice technology was different enough that it needed new infrastructure. Switchboards, operators, handsets and new power and insulator requirements were all expensive and had no clear return. Voice was a loser all around.

So the decision was perfectly reasonable, smart even.

This is not to suggest that Western Union did not accept any new technology or invest in it. For decades after the phone, Western Union continued to invest in innovation: It introduced an electronic payment system (called money transfer) in 1871. In 1914 it offered the first charge card and in 1923 it introduced teletypewriters. Singing telegrams followed in 1933 and fax service in 1935. Intercity wireless microwave communications were introduced in 1943. Telex came in 1958 and the product of marketing genius, the ‘Candygram’ in the 1960s. By 1964 its network was all wireless using a transcontinental microwave system. Western Union became the first American telecommunications corporation to maintain its own fleet of geosynchronous communication satellites, starting in 1974. The fleet of satellites, called Westar, carried communications within the Western Union company for telegram and mailgram message data to Western Union bureaus nationwide.

And it wasn’t lacking in talent either. Western Union had the best telecom managers in the business and was raking in profits to fund expansion. It attracted the best and brightest engineers for generations. Western Union probably passed on hundreds of other inventions and ideas, and rightly so.

So what happened to WU?

It’s still around. However, due to declining profits and mounting debts, Western Union slowly began to divest itself of telecommunications-based assets starting in the early 1980s. Due to deregulation in the US, Western Union began sending money outside the country, re-inventing itself as “The fastest way to send money worldwide”. In 1987, an individual investor acquired control of Western Union through an outside of chapter 11 process that was a complex leveraged recapitalization. After several other changes in ownerships and moves through bankruptcy, WU is now a public company with an enterprise value of about $12 billion based entirely on international money transfer business.

3G as a disruptive technology

Today we’ve come around full circle. Whereas voice was disruptive to a data network provider in the 20th century, data is disruptive to a voice network provider in the 21st. The mis-application of 3G network technology to sustain voice-oriented business models gives one a strong sense of déjà vu.

The telecom world moved swiftly to 1G and 2G cellular voice. Each new generation of mobile telecom was sustaining the core business model of subscriptions feeding centrally managed networks and symbiotic device vendors benefiting from handset and switching system upgrades. Standardization, international expansion, lower price points and network effects made this industry the most ubiquitous technology distributor the world had ever seen.

3G however was different. It was effectively mobile broadband data. It enabled data services to be de-coupled from the network operators. IP protocols did not require the servers to be located on operator premises or even to be managed or monitored by them. Devices could be general purpose computers not specific purpose communicators. Incumbents did not adapt to this well.  They continued to build business plans according to a central-switch blueprint.

So although incumbents did not reject the smartphone as a technology, they tried to make it sustaining when plainly it isn’t. They essentially tried to cram it into their business models.

The struggle to keep the service structure of telecom centered around the network operator will continue, but short of pulling the plug on 3G and LTE, there is little that the incumbents can do to stop it.

So what’s the lesson?

Some technologies are embraced and some are rejected. You can’t fault every rejection and you can’t praise every acceptance. The most likely reason for embracing something is that it helps grow your existing business. The most likely reason for rejection is that it may harm your business. Even acceptance sometimes leads to mis-application in sustaining the core rather than planning for its demise.

The decision on how to handle something new and potentially disruptive requires a different sense of what’s right and wrong about it.

Photo: Former headquarters of WU, located at 60 Hudson, New York.

  • iOSWeekly

    The carriers should go vertical while they still have a chance – if I was verizon or AT&T, I would be looking to acquire something like RIM as an exclusive service. Or even HTC or motorola. Elimante the need to subsidize the hardware manufactures profit and offer a cheaper data service with the same profit margin.

    Or go the other way and start producing devices for consumers countrywide to create their own mesh network and charge a tiny service fee to cover the cost to seed stations or for people to use the 3G network as a backup when out of range of a mesh station.

    • FalKirk

      There is no way the aniti-monopoly forces would allow a carrier to go vertical. This is particularly true of regulated oligopolies like the cable and phone carriers. I have occasionally thought about whether Apple should try to run their own network but always dismissed the idea without giving it careful consideration because I know that it would never be permitted.

      • iOSWeekly

        As long as they don't lock out other manufacturers, there shouldn't be a problem right?

        Say verizon purchased RIM, and in the US they said any new users of rim products will only be able to get them with a verizon contract. You are still free to use other phones on verizons network, but verizon moth not offer as big a subsidy on other phones.

        How is that different from the AT&T iphone exclusivity. Agreement? Honest question.

      • http://www.asymco.com asymco
    • http://www.asymco.com asymco

      The problem with buying RIM or any other device maker is that the devices are sold very broadly. RIM sells to over 500 operators. If one of those operators were to buy them, where would sales for the other 499 go? Would an operator buy from a competitor? Even if not in direct competition, the global alliances and possible acquisitions between operators complicates any device business plan.

      Having said that operators tried to launch own devices several times. Vodafone would commission phones for its "Vodafone Live" services and many branded their own Windows Mobile devices. One does not hear much of this anymore.

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  • Paul Franceus

    The telecom industry has been fighting disruption on many fronts for a long time.

    The advent of cheap fiber optics destroyed the long distance cash cow.

    The telecoms were very late to the IP networking party. They never understood how packet networking could work, and how people would want something so "unreliable" when you could get a guaranteed bit pipe from them. I remember a proposal to install a data network at our place that was basically a huge ISDN switch. We instead proposed Ethernet and IP and routers and it was a huge battle that we eventually won.

    This has led to them being largely relegated to a dumb bit pipe for internet traffic, mostly. And companies like Google rely on dark fiber for most of their communications, disintermediating the telecoms even there.

    The mobile space is their last desperate attempt to hang on.

    • Tom

      So, Android, the open OS, crams neatly into their old school business model: take it, shape and remake it, deploy it under direct control. Fragmented suppliers lack leverage; even the OS developer has a laissez faire approach, uninterested in directing anything. Why should Google want to, anyway? The adoption of Android, even at some risk to Google (think Samsung Fascinate), usually means more paid searches and ads.
      So the carriers have one more shot at making their approach work.

      • Rhadamanthys

        Android being open source doesn't seem to be enough for operators: Orange just announced that it wants to create their own OS in collaboration with Vodafone, Telefonica and Deutsche Telekom. Note: these telcos alone have over 1 billion mobile customers….

        Source: http://www.lefigaro.fr/societes/2010/09/15/04015-

      • http://www.asymco.com asymco

        History only tells us that their "one more shot" is likely to fail.

  • trizk

    Mobile computing is indeed a disruptive shift in technology. The question remains: how will 3G and 4G enabled software be leveraged to better our lives? I am surprised that the best that we can currently offer consumers are check in games and promos. Looking back at the wired internet its widespread adoption was due mostly to its utility. Sure there are distracting fun and games, but people use it because it is inherently useful.

    I see the future of mobile computing as providing people with significant utility, such as the ability to control and interact with their surroundings using their mobile device. An example of this can be found at http://presence.co , a service that lets businesses and individuals enable locations with virtual services so that visitors can interact with them. People can then use the application to interact with everyday places and objects they come into contact with.

    The evolution of technological is rapidly accelerating and an exorbitant amount of resources are being spent by companies trying to predict and implement future trends. It will certainly be interesting to witness what impact these technologies will have on our daily lives. Thank you for this well written article.

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  • berult

    A corporation is a living, breathing entity that carries along legacy coding embedded in its business Outlook and practices. Genesis runs counter clock wise to perennity. But it seamlessly syncs with the burdensome trial of death.

    In other words, to be born and to die should be taken out of the equation of Life's causality in favor of boundary free artistic randomness.

    Life in Middle Earth fits right in with the free enterprise.

    • Tom

      OUCH!! My brain hurted!
      So, Apple gave birth to iOS devices, spurring on its previously growing divisions of computers and iPods. And we see that, while Froyo may not be completely happy about it, Fordo is…

      • Tom

        Frodo, not Fordo. Sorry…

      • David Chu

        My precious

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  • http://worldturns.wordpress.com Barry O'Toole

    Excellent article; very informative.

  • Iphoned

    So, by implication there should emerge a "Bell-like" competitor focused on just wireless data. But who? The carriers still control the airwaves.

    • mbeckner

      Perhaps a carrier at the "bottom" of the voice heap should acquire a broadband wireless data network and forego traditional voice services in favor of broadband wireless data services (which can include voice for sure).

    • David Chu

      The best candidate is probably Sprint, who has et it's company on WiMax. Unfortunately, they bet their company on wiMax which we will see if it becomes the industry standard like 3G is.

      • Tom

        LTE is the future of broadband data, and that, worldwide. Sorry, sprint.

  • Travis

    Of course it's not enough. Telcos don't want "open" at all, except open to their control.

    Android is the only viable competitor to iOS, so of course the bandwagon got full. But anyone who thinks that the carriers have any interest whatsoever in Android's alleged open qualities is delusional. It took them a little time to figure out how to do it, but we're already seeing the first steps of reasserting autocratic platform control.

    The choice has never been about open v. closed, not as long as the carriers control the networks. It's been about who will have control: handset makers or telcos.

  • capablanca

    I enjoyed this post, Horace. Well done.

    A footnote. The Western Union telegraph was itself was a disruptor. It obliterated the young (18 month old) Pony Express.

    -capablanca

  • pete

    So it sounds like Western Union had the right idea afterall – to meter the flow of money overseas…