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A Tale Of Two Companies And The Entire Telecoms Industry

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Infrastructure

Infrastructure

When faced with obsolescence, companies react in different ways. In particular, it is useful to observe what happens when a company pioneers a technology that will disintegrate its existing business. This is a tale of morals of two such companies.

The first company was in the business of consumer cameras, and was a pioneer in digital photography. Realizing that digital cameras — the ones we just call cameras today — would kill all of the first company’s product lines, they stopped research in that field entirely and went back to their key business.

The second company was more into electronics, and realized they were able to produce a device that would… maybe not obsolete their existing product line entirely, but kill its present profitability and turn it into a niche market rather than the current mass market. Realizing that they had a competitive head start into the new kind of device, they more or less bet the company on it, and they’re now on the fourth generation of this new device that is rapidly obsoleting its previous type of product.

There’s a lesson to be learned here.

Most companies will try to stall or prevent a new type of service or device that will kill their existing business — their incentive is to keep milking the already-invested cow for as long as possible, and therefore, they cannot and should not be trusted to roll out the new kind of technology. But in economics, we learn that sunk costs don’t matter on a functioning competitive market.

The first company mentioned, Polaroid Camera Co., went bankrupt a couple of years ago. It is being cut up and divided for some intangible assets in bitter struggles.

And the second company? Well, the iPhone and iPad revenues are positively dwarfing stationary computer revenues at Apple Computer Co., replacing laptops and desktops rapidly, and Apple is one of the most valuable companies on the planet.

Now, with this in mind, we turn our attention to the telecoms industry. I still get proposals to get a fixed landline to my home. When I ask them,

“Why on earth would I want a 9.6 kilobit-per-second connection that charges by the minute and only can be used for a single application, when I have a hundred general-purpose megabits available without traffic charge?”

…they don’t even understand the question.

There’s a disconnect here. And it gets worse — at the executive level, the telecoms industry is acutely aware that the internet is going to disintegrate their current business, as shown in the example above. Therefore, they are trying their damndest to slow or prevent it from rolling out, all while pretending to embrace it, just like the railroad and stagecoach industries did to the automobile with the Red Flag Act in the UK.

I mean, just look at this:

I’m currently in Switzerland, a stone’s throw from where I live in Sweden. Still, the telecoms industry — the cartelized telecoms industry — wants to charge me SEK 120 per megabyte transferred. That’s about 13 Euros or 20 US Dollars. Per megabyte. It would cost me a month’s pay just to turn on mobile data in one of my devices as all apps would go into syncing mode and transfer some ten, twenty megs each.

I happen to know the production cost of this service, net connectivity over 3G, through my work in the European Parliament. It is on the order of one euro per gigabyte of traffic, or was last year, and is falling rapidly. In other words, the telecoms industry — all of the companies in the telecoms industry — is charging a price 10,000 times higher than the production cost. That’s a one-million-per-cent profit margin. Most companies need to settle for about five per cent, but that’s on functioning, competitive markets.

As that obviously is not intended for a service that’s competitive on the market, the only reasonable conclusion is that it’s not intended to succeed.

This is why it is absolute madness to entrust the old national telecoms monopolies with rollout of snet connectivity in general and mobile net connectivity in particular. They still have the monopoly mindset (or the walled garden mindset, not sure which is worse), and they are actively preventing competition to their rapidly obsoleting voice-only service.

Basically, mobile operators are screaming “regulate us!” to the European Commission and Parliament. That, and showing that they are working hard on becoming the next Polaroid.

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About The Author: Rick Falkvinge

Rick is the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy. He has a tech entrepreneur background and loves whisky.

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40

  1. 1
    Mumfi.

    If only polaroid had taken out enough patents to have a share from every device equipped with a digital camera… Who knows? They might even have been able to postpone the advent of smartphones and digital cameras indefinitely.

    Apple is certainly trying.

    • 1.1
      Rick Falkvinge

      Actually, they did. This was what prevented the Kodak Instamatic camera. Kodak referred to it as “the patent thicket”.

      Look how much it helped in the long run when they thought they could stop the hands of time…

      • 1.1.1
        Mumfi.

        My, admittedly somewhat badly made, point was that I object to the idolization of Apple (Primarily on principle alone.
        Apples success is not so much in the embracement of new product categories, as in realizing in which market they actually are. As was polaroid’s failure; Polaroid was in the digital film market, had they been in, or transited to, the photographic camera market they might have survived.

        Apple on the other hand at some point realized they were not in the personal computer business, nor in the OS business, but rather in the integrated solution business. They killed of the clones, locked down their systems, and started selling services and acting as gatekeepers.

        They did nothing new, really. They did the same as many before them. By integrating the hardware and software in the same solution they are able to optimize, and controlling the environment they could hide the compromises. Amiga, Acorn, Atari, and so on did the same previously, the difference was that the production prices were much lower while the margins were higher, resulting in a much bigger user base and budget. Now the production prices are even lower but so are the margins. And the hardware has improved so much that integration do not give the same advantage. Now Apple does the same as all gatekeepers have always done, they go to the legislator.

  2. 2
    Jixtreme

    Then there are companies like Comcast who sell phone, TV, and internet service separately, at ~$40/mo each, when in reality, all we’re using is Internet. They triple-dip on this one established fiber-optic infrastructure, and pass it off as three independent services. Now, I’m the last guy to support gov’t intervention, but since all the telecom industries peddle the technology this way, I think I can justify calling this industry price-fixing.

  3. 3
    Bonk!

    Unfortunately for Rick Flakvinge. It was Kodak who was the pioneer of digital cameras not Polaroid. So once again his whole plot just disintegrates.

    • 3.1

      Just because you pretend you are right without evidence?

      • 3.1.1
        Bonk!

        I certainly do not pretend. Its Mr. Falkvinge who is the pretender yet again. http://inventors.about.com/library/inventors/bldigitalcamera.htm

        • Rick Falkvinge

          There are plenty of references online to what I refer to. Here’s just one I found on first search.

        • Bonk!

          Sorry Rick but that link only mentions Polaroid doing digital cameras in the nineties. Kodak were researching and developing(?) digital cameras in the 70′s and got a lot of patents,

        • steelneck

          Swedish Hasselblad was also researching into digital imaging in the eighties, even made a device for telecom tranfer presented at the Californina olympics (1984?). Swedish journalists could publish days before others and the device made the Hasselblad electronics department prosperous, they really made profit. But in year 2000 they closed down everything that had anything to do with digital imaging, why? Simple, the professional customers of Hasselblad did not want expensive toys with crappy image quaity, back in 2000 digital cameras was just toys.

          In the seventies, and earlier, there was a swedish manufacturer of mechanical calculators Facit. They understood early the potential of elctronics and did teir research, thoughroly! For a period in the seventies they produced what was considerad world class mainframes that could outcompete IBM. But soon threafter they ceased all activities in electronics and put all effort into their old mechnichs, why? Just as simple, their customers did not need computers in the size of a small bulding sucking electrisity like a small town, and they did not need minicalculators, those did not even have a paper roll..

          This is a patter that repet it self time and time again in history. Who was first really has very little to do with it.

        • Bonk!

          Scary why are you so desperately trying to defend everything Rick drivels on about? Fact is that Polaroid failed to make it big in the digital camera business and that they were neither pioneers or ever a big player in that category.

        • Bonk!

          Steelneck fact is that Facit had an partnership with Sharp who produced Facits electronics. But then Sharp became to succesful för Facit and broke the partnership. Thats why Facit collapsed.

    • 3.2
      pop

      What difference does it make?

      • 3.2.1
        Rick Falkvinge

        Mr. Bonk appears to be missing a critical nuance in the text – that Polaroid was a pioneer in digital cameras, not the pioneer.

        • Bonk!

          But they weren’t even a pioneer. Lots of other manufacturers released digital cameras before Polaroid who probably did not even make their digital camera themselves. Had Polaroid been first or even one of the frst manufacturers of digital cameras their model would have been an instant (?) hit!

        • But that’s kinda the whole point here, Polaroid WAS one of the first manufacturers of digital cameras but they completely failed to envision the future believing, for example, that everyone would still want a hard copy rather than looking at a screen.

          http://qn.som.yale.edu/content/what-was-polaroid-thinking

          “By 1989, 42% of Polaroid’s research and development funding was being spent on digital imaging. By the late 1990s Polaroid was a top seller of digital cameras.
          [...]
          Even though it performed thorough market research, Polaroid was unable to foresee that the photo album would be replaced by the digital slide show.

          A related mistaken belief was that the Polaroid Corporation would always be able to make money through developments in chemistry, especially photographic chemistry. In spite of its early research in digital photography, the company culture had a bias against electronics that went back to the days of Edwin Land.”

          So even if they were, in fact, a pioneer in digital photography they completely failed to foresee the ramifications it would have on their core business. Failing to let go of obsolete technology it dragged them down for too long.

          The sensitive thing to do would have been to correct the mistake when it must’ve been obvious to anyone looking and either sell off the old business or just cut the losses and go 100% digital. I think this quote from says it all:

          “People were betting on hard copy and media that was going to be pick-up-able, visible, seeable, touchable, as a photograph would be.”

          They must’ve been blind, or simply too old and set in their ways to realise how arcane that reasoning was.

        • Bonk!

          Queriem. Polaroid was never a digital camera pioneer or top seller of digital cameras. Thats why they exited that market. Kodak and Sony etc. had beaten them thoroughly both in time development and product.

        • “Polaroid was never a digital camera pioneer or top seller of digital cameras.”

          Here, another link:

          http://books.google.se/books?id=byBe5drFfOwC&lpg=PA98&ots=re-Y-JbLy_&dq=polaroid%20downfall%20digital&hl=en&pg=PA98#v=onepage&q&f=false

          This rhymes pretty well with what I’ve read and heard about Polaroid before; that they were well aware of that the era of chemical film would come to an end but even though they realised that the change were coming they failed to adapt fast enough to survive. Maybe the thing that made the change especially hard for Polaroid was that they not only had to adapt from analogue to digital media but also from a monopoly to full scale competition.

          So even though they (at least partly) did understand the situation and, as Rick stated, were one of the pioneers they still didn’t manage to adapt fast, or good, enough.

        • Scary Devil Monastery

          So your personal attacks on Rick and cutting down his article is based on the sole premise that what he was stating was the equivalent of “Coca-cola, being one of the pioneers in the bottled soda industry…”.

          Honestly, “Bonk!”, I think we’ve seen you post around here before and the same answer as always awaits – get a halfway decent argument before you start swinging instead of lamely trying to defend an immature and irrelevant outburst.

          Polaroid was certainly one of the pioneers in digital camera technology. So were half a dozen others companies, simply because any new technology will draw a budget in application.

          Kodak actually succeeded because they started incorporating digital technology in their business. Polaroid chose not to and died miserably, despite certainly having both the ability, technology and infrastructure to do so. That’s what Rick is saying and what even you seem to be arguing in your later comments. Polaroid killed itself off trying to resist changing their business model as a response to technological progress.

          If you must troll at least don’t end up actually arguing for the original posters comment. That’s just embarrassingly inept.

  4. 4

    It’s easy to have such impossible prices because most people don’t know what a MB is. However everyone understands price per minute and everyone understands that the industry at leasts pretends to embrace high speeds. Let’s make a number that even a politician can understand: 120 (price) / 8 (bits in a byte) * 7.2 (megabits per second of 3G connection) * 60 (seconds in a minute) = 6480. So to use the service at the advertised speed is it’s 6480 SEK per minute! (710 EUR per minute)

  5. 5
    Thomas Fullerton

    This is why it is absolute madness to entrust the old national telecoms monopolies with rollout of net connectivity in general

    The real point of this story is the fact that people and companies are barred from entry into the telecoms business by the onerous, illegitimate and immoral licensing rules of the State.

    If anyone and any business could set up a telecoms business without restriction, you would see massive innovation and disruption regularly. This is why Skype, which did not need a license to develop its software, has changed everything; they were acting as if they were living in a free market, and everyone has benefitted tremendously.

    Once again, the elephant in the room is the State. It is the State that is preventing the rollout of net connectivity, not entrepreneurs and business and their self interest.

    Until otherwise rational and logical people face up to this fact and point directly at the problem, they will continue to pointlessly talk around the facts of what is holding everybody back, instead of attacking head on the causes of misery, absurd prices as listed in this article, and the snail’s pace of progress.

    Get rid of the State and its insane market distortions and we will arrive in a world where only man’s imagination holds us back.

  6. 6
    Rick Falkvinge

    UPDATE: I got the numbers wrong. In these insane profit margins, I wrote a profit margin of 10,000 per cent. The high numbers blinded me to the fact that it is a mark-up of factor 10,000, which is a profit percentage in excess of one million per cent. That’s obscene. Article updated to reflect this.

    • 6.1
      Bonk!

      I believe you counted wrong again and you can’t really talk about profit without knowing the companies true costs for running their services.

      • 6.1.1
        Scary Devil Monastery

        I believe he counted right as he actually seems to have numbers for this (which would be odd if he did not since he’s actually spent time doing real work on this issue and checking the official data).

        I also believe – very strongly – that you aren’t too concerned with facts at all as long as you can post a comment against the OP.

  7. 7
    Ninja (@icanhazsake)

    Rick, it’s human nature to fear changes and to try to remain in a safer ground. As it’s human nature to be greedy. MAFIAA has been providing us a good example. That “Marketing Myopia” article shows us that the Petroleum industry is alive because we keep finding uses for their product just like MAFIAA. This is no different. It’s a mix of fear, need of safety and greed.

  8. 8
    Cesar

    9.6 kilobit-per-second? Isn’t a fixed landline the equivalent of around 8000 samples per second of 8-bit A-law PCM, which is around 64 kilobits per second?

    According to Wikipedia, a V.92 modem (the latest analog phone line modem standard) can get up to 56 kbit/s download and 48 kbit/s upload.

  9. 9
    Mårten

    I had a family member who was working at one of the the mobile phone manufacturers here. I never understood why they didn’t make phones with voip and wifi functionality. Surely the idea was fairly obvious, straightforward to implement and the benefits to the consumers would be great considering the traffic rates. However, I incorrectly assumed the end users was their main customer and not the mobile phone operators. If they where to implement functions the operators didn’t like they would have been boycotted. Also, they where apparently punished economically (I don’t know the details) because of features the operators didn’t like (such as memory card readers for the mp3 players — the operators would rather have people stream music from stores on the operators network). I guess that’s also the reason they desperately tried to promote stupid services like mobile phone tv that no one really wanted (just imagine having people pay traffic fees to watch commercials)…

    • 9.1
      Putte

      Exactly. And why are there no mobiles with dual SIM cards in Europe? In India etc. dual SIM is a standard feature.

    • 9.2
      Peter Andersson

      Could that be why the development of stand alone mp3-player storage capacity have been halted for more than two years now? Apple at 160 Gb and all other brands at approx 16 Gb. Given that most phones now come with 4 or 8 there should be plenty of cheap stand alone mp3-players much bigger than that, but I’ve seen nothing new in the ads for more than two years.

      • 9.2.1

        If you’re talking about mobile players, I don’t see the point of having 500 Gb storage if you use it to listen to music, store some text documents and maybe one folder with pics,…

        I always used it as a stuff done for temporary storage, while travelling. I only had to renew my playlist from time to time.

        Who would listen to -say- 5.000 mp3′s while travelling?

  10. 10
    ghost

    My other comment was directed at this post

    Putte
    August 30, 2011 – 09:59

    Exactly. And why are there no mobiles with dual SIM cards in Europe? In India etc. dual SIM is a standard feature.

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Rick is the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy. He has a tech entrepreneur background and loves whisky.

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