The cart before the horse: giving vendors too much control

Ayn Rand’s "Rational Selfishness" suggests that customers should act in their own self-interest to arrive at optimal outcomes, and Adam Smith and Leon Walras argue that in so doing, customers can also contribute to the greater good. This, largely, becomes the justification for capitalism. Why then, would large powerful companies let their vendors decide their technology choices and their roadmaps for the next decade? It seems a paradox at first. But there are reasons why telecom carriers might make self-destructive decisions: The economic models make certain assumptions, and when those assumptions are false, strange things happen. Among the assumptions are the existence of perfect information in the marketplace, and the assumption that customers think long-term. So mistakes are made when buyers choose short-term gain over long-term gain, and when perfect information is distorted. We won’t try to hide the fact that we’re referring to the influence vendors, most notably Intel, have had with respect to advancing its WiMAX agenda among carriers who have clearly been reluctant. The carriers are testing, and would prefer to have proof that WiMAX works as promised, but many are being rushed by their vendors. The methods used by the vendors are fairly straightforward, as are their motives. Intel sees the increasing importance of the mobile phone industry, where they have little traction (their chip business was recently sold off), and they have little IP or influence in the dominant technology sources, the two 3GPPs. Thus it was obviously attracted to this little-known working group called 802.16, which operated in the rubric of the IEEE. At the time, an 802.16 standard was something the carriers requested of their point-to-point wireless vendors to make their equipment interoperable, so the carriers could avoid vendor lock-in. But here was a vehicle that Intel could drive into the wireless world. But whether WiMAX is an appropriate mobile technology or not, it doesn’t seem to have mattered much. Without any proof beyond PowerPoint slides and a dream, Intel threw billions of dollars at promoting WiMAX from its modest beginnings into the heir apparent of wireless networks. Some of the hundreds of millions were spent in investing in WiMAX technology providers, some was spent on investing in service providers like Clearwire and Pipex in the UK, and in other cash incentives to sway service providers. The sum effect of all these efforts is very powerful indeed. Mobile WiMAX is almost a household word, it’s the talk of every conference, on the lips of every analyst, and (like IBM in the ‘80s) is a ‘must consider’ for every service provider CTO. Not bad for a technology that isn’t yet a true standard, and has no standard compliance testing in place at all. There is not one mobile WiMAX certified piece of equipment in existence today. From the first $300 million invested in Clearwire in 2004 to get them committed to WiMAX and to grow the network, to the second investment of $900 million last month to get Clearwire committed to WiMAX and to grow the network, Intel has not backed away from its gambit to turn their dream into reality. Sprint is looking at a number of technologies, but it appears that certain groups in the company favour UMTS TDD, while others favour WiMAX. Which groups favor UMTS TDD? The technology people. Which favour WiMAX? The business-centric execs. Why the difference? Because the technologists want the solution that provides the best performance, proven stability, sensible roadmap, and global compatibility, while the Wall Street-sensitive execs have other shorter-term concerns. Telco technologists always have to plan years down the road, but the CEO is measured quarter-by-quarter by the shareholders. If Intel has swayed the Street, and if Intel can offer enough short-term cash incentives as they did for Clearwire, Sprint may be convinced to choose a technology that is worse for them in the long run - and that would be bad for shareholders. It is always the squeezed who turn to loan sharks. The shark offers a short-term fix but trades it for long-term expensive payback. Sprint is being desperately squeezed by Cingular and Verizon Wireless, whose share prices have both been traveling in the opposite, upward direction. Will they plan long-term, or swim with sharks? So there you have it: a massive hype engine and financial incentives. Using these tools, powerful vendors can force the hand of their customers. It’s an aberration of a sensible capitalist system, but it effectively exploits the weaknesses of theoretical economics. By destroying the public availability of realistic information, and influencing customers with short-term financial incentives, Intel may get it’s long-term payoff. But will Sprint? Joe Hudson is the manager, global UMTS with the TDD Alliance. He can be reached at jhudson@umtstdd.org.

The cart before the horse: giving vendors too much control

News | August 25, 2006

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