Stupid Capitalism

Dear Friends,

It seems to me, when a company makes it difficult to purchase their services or products, it is clear those that run the company are either stupid or want it to go bankrupt. AT&T is one example. I challenge you to call the 800 number they advertise and purchase new service. After an hour or so in the voice response maze, with no way to talk to a human being, out of frustration you and most people, will give up and buy the services of a competitor. Companies that make it nearly impossible to purchase their products and services are not only abusing the customer and their employees but the shareholders as well. This is another example of the principle agent dilemma. Sadly, AT&T is not the only company that does this.

People work hard for their money, those that forgo instant gratification to put some away and invest in companies like AT&T, reasonably seek a return on their hard earned money. Those who run the companies however, look to maximize instant profits, (which maximize the bonuses of upper management, (the new class)), at the cost to the shareholders, (the bourgeois). In this case the virtuous behavior of the shareholders is rewarded with the villainy of their agents. AT&T is no longer the company it once was, perhaps a bit of history would help to enlighten the reader of how pernicious the incentives are for the new class.

In 1984 Judge Greene broke up the Phone company, (AT&T and Western Electric) into the “Baby Bells” as well as AT&T. The Baby bells took over the plant, Central offices, pole lines etc… while AT&T got the most profitable lines of business, Telephone sets, Business telephone systems, bell labs, long distance and the burgeoning computer end of the business. AT&T was also offered the Internet, which the new class that manage the business flatly refused. Management decided that while all the lines of business were profitable, long distance was the most profitable and required the least employees, so they began laying off their employees and shutting down every other line of business to focus on the highly profitable long distance. Back then it cost as much as fifty cents a minute to make a long distance call!

They got out of computers just at the start of the computer revolution, forgoing the tremendous profits they could have had, they flushed the telephone set business down the toilet leaving that line of business to foreign competitors, they mismanaged Bell Labs and walked away from the potentially highly profitable business of telephone systems. They laid off all their employees in those lines of business and gave themselves huge bonuses for it. At every turn they heartlessly eliminated jobs to cut the cost of doing business as they eliminated lines of business. The result? Once AT&T faced competition from Sprint, MCI and a host of others, the competition ruthlessly drove down the profitability of long distance to rock bottom driving AT&T out of business. The employees lost their jobs and the shareholders were ruined. Upper management however got golden parachutes and landed on their feet. The name AT&T was bought by a baby bell, Southern Bell, or SBC.

At one time Verizon offered a product called ISDN. It predated modern asynchronous DSL. It was only marginally profitable however, so upper management decided they didn’t want to sell it, preferring to sell the more profitable T1 service, so they made it hard to get and put in intentional problems making the service difficult to install. Today, it would seem, the same mindset prevails at the upper echelons of AT&T. They are not alone in the short sighted, company ruining, group think, Fairpoint is leading the charge to flush out marginally profitable lines of business. Residential phone service is considered a looser by those managers who seek huge profits without any employees. Maybe that is why they they make it so difficult to purchase their services and refuse to offer services people are knocking down the door to buy.

We all know the effect of the Internet, in fact, you are reading this article on the Internet. For the internet to work however there must be a high speed access to as many households as possible. The demand for high speed access is stupendous and is growing. Some claim over the air is the answer, but anyone who knows the limitations of radio, know that will only be a stop gap measure. Fiber to the premises is the product that will eventually win out. Verizon offers fiber to the premises in a few places and the product is amazing. AT&T refuses to place the fiber necessary to implement the product however, and is abandoning that product, (and the profits) to it’s competitors, as is Fairpoint and a host of other baby bells.

Here is where flushing marginally profitable lines of business is absurd, wire line telephone services are an in to the customer who seeks high speed internet service. Such services as wire line could be considered a loss leader… something a firm sells at a loss, to get customers to buy more profitable products. A lumber store might sell two by fours at a loss to pull in home builders who will later buy the more profitable windows and doors. Plain old telephone service, (POTS), could be that loss leader, pulling in customers who will later purchase fiber to the premises. Those who run companies like AT&T, Fairpoint and other baby bells don’t see it that way. Instead of building for the future, and playing to win, they are playing to lose. Albeit, to lose as slowly as possible, but when you play to loose the loss is guaranteed. But don’t worry, those that ruin the firm will land on their feet, as they always do, those that will take it on the chin are the employees, customers and especially the shareholders… as we always do.


John Pepin

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