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January 15, 2009

Beware the Coyote Syndrome

Wylie Coyote sometimes runs over the lip of a cliff but doesn't start to fall until he looks down and sees that there's nothing but air under his feet. Same thing happens with companies and industries: if they're big enough, they keep on going even long after they're really dead.

Talked to someone today who'd googled me first (wouldn't you do that with a stranger?) and found a Red Herring interview in which I'd predicted Nortel's bankruptcy:

"Tom Evslin… compares the recent changes in the telecom landscape to the shift from mainframe computers to PCs. In that transition, dollars came out of IBM's pockets and into the coffers of Microsoft and Intel. Mr. Evslin predicts a similar redistribution of wealth in the telecom industry. Dollars that once went to Lucent Technologies and Nortel Networks will find their way to companies that make soft switches, voice-over-IP equipment, and replacements for expensive hardwire switches that route phone calls…"

Trouble with this prediction is that it was made in 2002. The rest of the     quote: "It will be a painful transition. Even the most optimistic don't expect things to settle down before 2004. For many companies, that will be too late." It wasn't until the next bubble burst that Nortel went chapter 11.

You can be right about trends and get the timing very wrong. Nortel WAS already toast back in 2002 but they (and their customers and their stockholders and their bankers) didn't know that so they kept going on sheer momentum. Maybe they could have used that momentum to scramble back on the cliff as the coyote's trying to do in the picture but they didn't and companies usually don't.

So what companies and industries today are really walking dead? It's a very important question because we live in a time of bailouts when zombies are kept walking with public money and may be crowding out the startups that should take their place.

Old style investment banks have already declared themselves dead and turned into regulated banks in order to get handouts. But do we really need financial supermarkets which are "too big to fail"? I don't think so. Do we need as much credit as we've been using? No. Do we need all the exotic credit instruments? No. Do we need all the people who sell all the credit we don't need and construct the exotic credit instruments? We don't need them to do that. Perhaps we need a retraining program.

Manufacturers of cars powered by internal combustion engines, particularly manufacturers with huge unfunded liabilities for past promises and huge debts, are certainly already over the cliff. Interesting article the other day – I can't remember where – about how many less parts there are in an electric or even a plug in hybrid electric where the gas engine only drives a generator than there are in a traditional gas powered car. Point is that it's much easier for an upstart to get started up building the electrics than it would have been to compete with those who are really good at building gas engines. Now where's that cliff?

Readers say I'm way too early in targeting the extinction of copper-based voice service by the end of Obama's first term. Maybe; there is the coyote syndrome to think about. But it's also possible that the coyote (or the coyote's customers or the coyote's bankers or the coyote's stockholders) happen to look down.

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