The Company that Broke Canada

The Company that Broke Canada

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Big thank you to Nebula for sponsoring this video. This is John Roth. He’s the CEO of a  company called Nortel. He’s about to   be smug. Deservingly so. "Uh, let's move  onto Lucent the big competitor south of   the border. What do they do better than  you?" "Uh, not much." *Laughs* "Pretty  

good at marketing but if you look at the  results we grew 43% in the carrier space   in the US last ye-well this last quarter.  I think that's double their numbers." At the time of this clip Nortel was the 2nd  highest Canadian company on the Global Fortune   500 list, at rank 216. But he doesn’t plan on  stopping there. Just one year from now Nortel   will be the 9th most valuable company in the  entire world. 75% of North America’s backbone   internet traffic travels through his company’s  networks. An achievement that will earn him the   title of Canadian CEO of the year. This is  also John Roth. Or rather it’s a comedian   impersonating John Roth. Not particularly well,  mind you. There’s no genuine attempt at his voice,  

and the mannerisms are way too high energy.  And yet the audience is eating it up.  "Now final question Mr Roth, where will Nortel be  say a year from now?" "Uh Linda Nortel is strong,   I guarantee investors I will continue to generate  profits for them. Now if you'll excuse me,   I have to get back to work.....Spare  some change?" *Audience Laughter* In this moment, however brief it was, John Roth  was maybe the most hated man in Canada. Nortel   had been the widely held stock in the country.  And it had just cost them their pensions. Nortel   had broken an entire country’s economy. How did  it happen? Three words: It’s ancient history.

Here’s a statement: The telephone was invented  in Canada. It’s a statement that could be true,   so long as you don’t look that hard at the several  footnotes that are necessary to justify it. But   let’s go ahead and do that. Alexander Graham Bell  was a Scottish immigrant who moved to Canada with   his parents in 1870. Later on he got a job as  a teacher, and began experimenting with sending  

voices over metal wires as electrical signals.  Over the years he would develop this idea with   his partner Watson, and in 1876 Bell said his  famous words “Watson, come here, I need you”   over a working telephone prototype….in Boston.  The Canadian claim to the telephone is frankly,   very silly. Bell supposedly wrote about the  underlying mechanism of a telephone at his parents   home in Brantford Ontario, but he wouldn’t get a  working prototype for another 2 years. You can’t   even really argue it based on citizenship either,  because Bell was never technically a Canadian,   but a self-identified Scotsman who was  actively applying to become an American.  Of course, this isn’t even the biggest elephant  in the room. Bell was beaten to the invention by  

at least one person, maybe more. There’s Antonio  Meucci whose telephone prototype predates Bell’s   by almost a decade. His lawsuit against Bell  was headed to the Supreme court until he died   in 1889. Elisha Grey, famously, submitted a  patent on the exact same day as Bell. There   are disputes over the exact timeline here, but  it’s a bit of a moot point because neither man   had made a functioning prototype yet. Bell  did get one working a week later, but the   design of his receiver had been altered, becoming  suspiciously similar to the one in Grey’s design,   info he shouldn’t have known about unless he  had somehow been shown Grey’s application.  

Hmmmm. As you’re gonna see many times in this  story, the history of industry is not about   the first to invent, but the first to market. Bell got the patent for the telephone because   he hired a better lawyer. Simple as that. The most  lucrative patent in history led to a factory, the   factory led to a company, and the company became a  behemoth. Through decades of aggressive expansion,  

brutal board room takeovers, underhanded back  alley sabotage, and the limitless funding of   J.P Morgan, that single patent evolved into the  most ruthless corporation in American history.   AT&T. A terrifying beast that gobbled up hundreds  of independent phone companies. A monopoly that   at its peak once controlled 82% of the America’s  telephone lines. Footnotes or not, the history of   the telephone is an American one. But why then,  have I seen this statement,at least in part,   claimed by multiple Canadian sources? Why is this  a hill that some Canadians seem willing to die on?  Because the Canadian identity, if there is  such a thing, is one defined in opposition to   the United States. If you want to be dramatic,  and I do sometimes, Canada is just a slightly  

more autonomous 51st state. Both countries descend  from a combination of English and French colonies,   built on territories stolen from its indigenous  inhabitants. Land divided by a border so arbitrary   most of it is literally just the 49th parallel.  Why some of the colonies rebelled against   the British and why others stayed loyal came  down to language, religion, local economies,   and proximity to the British empire. The settlers  in these two colonies always had a lot in common,   and due to their geographic proximity, there has  always existed an uncommonly close relationship.  

It just so happens that that relationship is more  than a little lopsided. Pierre Trudeau, one our   more outspoken prime ministers, summed up it like  this. “Living next to you is in some ways like   sleeping with an elephant. No matter how friendly  and even-tempered is the beast, if I can call it   that, one is affected by every twitch and grunt.” America is simply a much older, and densely   populated nation. America’s first colonists  arrived almost two centuries earlier than the   bulk of Canada’s, and the Americans had gone and  finished their civil war before modern Canada was   even created in the 1860s. Couple that with a  colder climate and harsher terrain, for almost  

the entire time the two countries have existed,  Canada has had one tenth the population, and one   tenth the economy of its Southern neighbor. Even  just California, despite having roughly the same   population, has an economy 50% larger. Ever  since the war of 1812 ended in a stalemate,   Canada has never had to worry about being  militarily annexed by the United States. Instead,   Canada has spent most of its existence fending off  another more indirect form of control. Economic   subservience. The company that owns the majority  of our newspapers is 2/3rds owned by an American  

hedgefund, most of the media we consume is  American, and the basis of our economy is ripping   natural resources out of the ground, shipping  them off to America, and buying them back for   twice the price in the form of fancy toys. We’re  America’s biggest customer, but they’re not ours,   and that’s a precarious position to be in. Canada’s first Prime minister, John A MacDonald,   had just returned to power in the election of  1878. Canada was in the midst of a deep depression   that was partially brought on by the Americans  cancelling a trade agreement in the middle of   their civil war. MacDonald was keenly aware  of the public’s distrust of American business,  

and although behind closed doors he was in  favour of free trade with the Americans,   he knew they would never sign a new agreement.  And so he used Anti-american rhetoric to call the   rival Liberal party “veiled traitors”, and managed  to win both the 1878 and 1891 elections by stoking   fears of American annexation. MacDonald’s  platform was called the National Policy,   the centerpiece of which was an aggressive  import tax on allAmerican products. The tariff  

was designed to keep cheap American products  out of Canada to promote a strong home grown   manufacturing industry. The National policy and  anti-Americanism dominated Canada’s political   agenda for decades, and a later attempt at  a free trade agreement similarly defeated   the government of Wilfrid Laurier in 1911, where  it was once again painted as an act of treason.  However, the National Policy, who stated  goal was to keep Canada British, had   arguably backfired. It had only made Canada more  reliant on American industry. Take for example,   AT&T. Having secured the Canadian patent for the  telephone, their original plan was to simply make  

telephones in America, and ship them up to Canada.  The new tariffs made that a complete no-go. So,   the company hatched a plan. They hired a former  Confederate ship captain, sent him off to Canada   with a boatload of money, where he proceeded  to execute a series of business moves so rapid   that in just a few months he owned almost all the  telephone lines in the entire country. Alongside   this purchase was a single telephone factory  in Montreal, a necessary condition to retain   the Canadian patent. Parts would be shipped  up from the US, and assembled in Canada,   completely negating the import tax. This was the  birth of the Bell Telephone Company of Canada,  

and how Canada became a branch plant economy. And as of 1895, that little Montreal branch   plant was given a name: Northern Electric &  Manufacturing Limited. We got about a century   to go still, but the family resemblance between  these two names is clear. Northern made a bunch  

of stuff. Fire alarms, sleigh bells, gramophones,  telegraphs, kettles, toasters, lighters, stoves,   washing machines, radios. If it ran on electricity  they could probably make it. But their bread and   butter was always telephones. Although legally  they were separate entities, AT&T was always in   the background pulling the strings of Bell  Canada. With its endless monopoly money,   Western Electric was cranking out telephone tech  like there was no tomorrow, and Northern Electric   got access to technology that no one else did  without having to actually do any R&D. They  

just took the designs that Western gave them,  made their tweaks, and sold them to Canadians.   Sometimes the only thing that would change was  the logo on the phone. Always the branch plant,   never the brains. This symbiotic relationship was  just a microcosm of the larger Canadian economy.  

Even in the 1910s, when AT&T is forced to sell  off its foreign holdings due to antitrust reasons,   it’s allowed to keep its stake in Canada  because the two countries were so interlinked.  Canada had spent its first 50 years relying  on its commonwealth parent of Great Britain,   but by the 1920s Canada was now trading more with  the US. As productivity began to rise as America   modernized its factories, Canada’s were quick to  follow. Then out of nowhere the markets crashed,   ushering in the great depression across North  America. The 1930s saw 80% of Northern’s   employees laid off. World war 2 then breaks  out yanking the country out of its depression,   Northern becomes a dedicated supplier of military  equipment for the government. Canada, like the US,  

emerges from the war in a relatively prosperous  position compared to Europe. Northern now had   a backlog of nearly 100,000 telephones orders  they had to full-fill. Dragged there by the US,   Canada had achieved the 2nd highest adoption rate  of phones per 100 people in the entire world,   going from just 28,000 phones in  1895, to almost 1 million in 1942.  And then suddenly the elephant rolled over. For  years AT&T had been accused of running a vertical  

monopoly by owning its manufacturer, Western  Electric. Desperate to keep its prized possession,   AT&T settles out of court, and makes a trade  on two key conditions. The first, is to stay   out of the computer business. Considering that  Bell Labs had just invented the transistor,   they were really going to regret this one in  about 10 years. The second, is more relevant  

to our story. AT&T now had to offer the same  licensing deal for its patents to anyone who   asked. But because AT&T owned Bell Canada and was  sharing its patents with them for free, that meant   that any other US company would be entitled to  that same deal. So rather than be forced to give   away its patents for free, AT&T said, you know  what? Canada is on its own.The CEO of Northern   at the time described it like this: “We are the  child of wealthy parents…this is the boot that   kicked us out the door. A Canadian subsidiary  of a US company lives a very comfortable life.   This is the tragedy of Canada: we’ve made a  virtue of imitation.” But he also said this:  

“I’m confident history will say this is the best  thing that ever happened to us”. Would you believe   me that in a little more than half a century,  the mouse would be trying to eat the elephant? *To music* "North East South  West everywhere you gooooo,   Northern Electric is the name to knowwww,  from coast to coast in Canadaaaa" In the 50s, the Canadian government contracted the  company A.V. Roe to build a stealth interceptor   jet called the Avro Arrow. It was widely  considered to be one of, if not the best in  

its class in the world. Costing around $2.2  billion Canadian dollars in today’s money,   the Arrow had been the single most expensive R&D  project in Canadian history, and it put Canada on   the map in global aerospace industry. But there  was no one to sell it to. The American and the   British militaries wanted to produce their own  jets, and in fact, America turned around and said,   hey, why don't you buy our jets instead? In  the most controversial move of his career,   Prime minister John Diefenbaker fell in line with  American defense policy. He cancelled the project,   ordered all prototypes destroyed, and left 14,000  Canadians unemployed. Although you can argue over   the merits of the Avro Arrow itself, the real  failure here was that the government refused   support a transition for the facility it had  already spent millions on, a facility that   could have been converted to civilian aircraft  and given Canada its own equivalent to Boeing.  It's ironic that Diefenbaker is remembered for  capitulating to American influence. Justdays  

before the election that made him Prime Minister,  Diefenbaker had declared that if the Liberals were   re-elected, “Canada will become a virtual  forty-ninth economic state in the American   union”. You see, Anti-Americanism  never truly disappears in Canada,   but rather it come in waves. The stretch of  time bookended by the two world wars was a   notable period of cooperation between the two  nations. But now in the era of the cold war,   Canadians were becoming uncomfortable with the  idea that they were simply a sidekick to the US.  

1956 saw the government release the results  of the Gordon Commission, an economic panel   which had spent the last year researching  the rapid Americanization of Canada. First,   there was culture. By the mid 1950s, 80% of  magazine sales were from American brands.   Canadian newspapers were still Canadian owned, but  any international coverage was usually borrowed   from American papers. The Canadian film industry  was almost entirely non-existent, but even if we   had films to show, film distribution was owned  entirely by Hollywood and they had no interest   in showing Canadian films. Even our education  system tended to be biased towards America.   There’s a particularly infamous textbook  on Canadian Politics, that for some reason,   had Abraham Lincoln on the cover. The real  heart of the issue though, was economic.

In 1967, 58% of Canada’s manufacturing industry  was owned by firms whose headquarters were   outside of Canada. And 80% of that fraction was  American. And the more specialized you got, the   higher the fraction went. Transport, electronics,  chemicals, extremely American. The worst by far   was cars. Can you name a single Canadian car  brand? You can’t, because there are none left. Natural resources, which had formed the bedrock  of Canada’s economy for decades, were lining   American pocketbooks. Pulp and paper, smelting,  mining. And oil and gas, Alberta’s pride and joy,   was as nearly 2/3rds owned by Americans. This  was such a touchy subject that there was once  

a debate in parliament over whether to allow  an American company to build an interprovincial   oil pipeline. The debate got so heated, three MPs  were hospitalized, and one died of heart attack.   Canada was a branch plant economy and that was  scaring people all across the political spectrum,   On the left wing you had labour organizers,  who feared that the US would simply set   up branch plants in Canada, extract natural  resources, and then ship them back down South,   where Americans would get to reap the benefits  from any newly created manufacturing jobs. On   the right wing the complaints tended to focus on  how Canada should instead be reestablishing ties   with Britain and the monarchy, and that a loss of  economic power to the Americans could eventually   lead to a loss of political independence. But between these differing sides there was   one common shared concern. American technology was  a crutch. Canada had a huge technological deficit.   That’s one of the key features of a branch plant  economy. Branch plants tend to supply jobs that  

require less training, like resource extraction  or assembly lines. Jobs that are easily moved   elsewhere if the cost of labour gets too high.  Jobs like finance, marketing, and critically,   R&D, are best kept centralized in the home  country. In 1959, if you looked at dollars   per capita spent on R&D in the private sector,  the US was spending almost 4 times as much as   Canada. Here’s an even more shocking stat, a  government commission in the mid 60s looked   at every patent registered in Canada, 95% of them  were held by someone outside of the country. And  

2/3rds of that number was in the US. That meant  that Canadian industry had to spend millions each   year licensing out patents from Americans,  or costly imports of high tech equipment.  Case in point, Northern Electric. In 1956, the  year that AT&T had to divest itself, Northern only   made 1% of its revenue from its own designs. All  the rest were American. For over 60 years Northern   operated mostly on autopilot, assembling American  parts using American blueprints. The company   atmosphere was described as sleepy and complacent.  The CEO at the time joked that you could only get  

fired "for screwing the boss' daughter, and then  only if it was on company premises". Bell Canada   was so unsure of Northern that there were multiple  times where they considered only two options:   Sell it, or shut it down. But there was a  3rd option. Break the branch plant cycle.   Make a Canadian company self-sufficient.  And as we’ve just seen the political  

climate at home had never been more supportive. It’s not that Northern lacked smart employees,   they just hadn’t been in charge of the  decision making until now. In fact,   Northern’s engineers were likely some of the  most capable in the country. Because of their  

prior connections to AT&T, the engineers at  Northern Electric some of the first outside   America to be able to reverse-engineer and  learn about the transistor. By the end of   the 1960s they were the single largest microchip  supplier in Canada. They helped build the world’s   largest microwave comms system, the Trans Canada  Skyway, and they managed to develop an antenna   designed to track satellites. But the 60s were  still a slow period for Northern. When they  

began the decade only 1% of their products were  Canadian designs. By 1969 they had only managed   to increase that number to 6%. The switchover  was going too slowly. The only way to get ahead   would be to give Canada its own Bell Labs. B…N…R, Bell Northern Research. Founded in   Ottawa in 1971, it mimicked Bell Labs in every  way it could. There was a bounty of $500 for  

every patent you filed, the atmosphere was like  that of a University campus, and there was even   a signature colour, purple, that the employees  rallied behind. Even its first President, Donald   Chisholm, had been poached from the real Bell  Labs. Look, I’m going to be candid for a second   here. BNR is the reason I live in the city I do.  My grandfather was one of the founding engineers   hired to work there, and he moved my dad’s family  from Montreal all the way to Ottawa. BNR is not a   name most of you would have heard of, and it sadly  doesn’t have any Nobel Prizes. But so much of the  

modern communications landscape, the technology  that powers the video you’re watching right now,   was invented in Ottawa. BNR was about to  gamble everything to leapfrog Bell Labs.  Telephone switches are the most basic building  block of a telephone network. Back in the days   of Graham Bell they were originally just sold  in pairs, phone A and phone B, and you put them   wherever you needed with a giant wire running in  between. Obviously that’s not super scaleable,   so people decided to designate one building in  town as an exchange, where human operators would   physically move wires around to connect different  phone lines. This too was phased out in favour of   electromechanical contraptions that were the  size of entire rooms. This finally gave way to   fully electronic switches, which had fewer moving  parts, were much less noisy, and overall far more   reliable. This was the state of telephone  technology as the 60s turned into the 70s. 

Telephone calls had been analog for as long as  they had existed. An electronic wave with smooth   curves. But since the advent of the transistor,  electronic signals could now be sent in binary.   Enough 1s and 0s could encode any analog signal  with enough precision that barely information   would be lost. That was how computers operated,  through massive processors crunching thousands   of bits and bytes. People realized fairly quickly  that if you could combine phones with computers,  

the possibilities would be endless. Costs would  go down, reliability would go up. You could send   multiple phone conversations over the same wire.  Signal degradation and noise over long distances   was far easier to correct. You could also expand  into what we now consider basic features, like   call forwarding, or busy line notifications. And  maybe, in the far future, you could even use phone  

lines to send data between two computers. Can you  imagine that? Sending something other than voice   over telephone lines? That’d be like some kind  of inter… I don't know maybe there's a   better name for that. The problem is that digital  signals can’t talk to analog signals, at least not  

directly. You need to convert them using a codec.  Bell Labs had figured out in 1963, but the process   was so complicated and expensive, that it was only  worthwhile to do it for giant long distance cables   and the connections between huge central offices.  There was still no fully digital switch at the   local level. There was a full-on race between at  least 7 countries to break this digital barrier.   and Canada was way in last when it jumped in with  BNR. So how did Canada come from behind the win it  

all? It's because AT&T had become too complacent. Despite having a huge technological headstart,   AT&T was telling customers that digital switching  wouldn’t be available for several more years. See   this is the inherent contradiction of monopolies.  Their endless resources allow them develop the   best technology and offer the best service. But  because they have a such a stranglehold on the   market, they sometimes stifle innovations that  threatens their business model. Case in point,   answering machines. Bell Labs invented the  technology to record phone calls in the 1940s,  

but AT&T suffocated it, worried that people would  stop using phones for business if they knew they   could be recorded. Answering machines wouldn’t  catch on until the 1970s. It was the same with   cells phones. Bell Labs first demonstrated  a wireless phone in the 1970s, but again,   AT&T refused to develop it. Why would they create  a competing type of phone that didn’t use the   billions of dollars worth of infrastructure that  they had taken decades to establish. Cell phones   wouldn’t catch on until the 1990s. It was  the same thing with digital switching. AT&T   would be required to update its entire technical  ecosystem at a huge cost, not to mention they’d be   making their older switches completely redundant. This was an attitude echoed by some executives  

within Bell Canada, they were certain that a  digital switch kill sales of their just released   SP-1 model. But as future CEO John Roth would  later say: “If you’re going to be cannibalized,   it’s best to be cannibalized by yourself”. In  1976 Northern unveiled their new switch, the SL-1,   at a trade show they called Digital World, which  they hosted at none other than Disney World. The   timing was everything. By committing when everyone  else was too hesitant, they had caught the rest of   the industry by surprise. Because it was the  only one of its kind for nearly 2 years, the  

SL-1 became the best selling switch in the world.  After that the size of switches kept increasing,   The SL-1 became the SL-10, then the DMS-10, then  the DMS-100. Northern could handle up to 100,000   phone calls through just a single switch. Last time we checked in, Northern made just   6% of their own designs. By 1975 it was 50%,  and by 1977 they were up to 70%. This was an  

unrecognizable company from just two decades  ago. In fact, this newfound success was worthy   a name change. Northern Electric was far too  generic. Everything was electric these days.   How about…Northern Telecomm? This was a perfect  time to go public. In 1973 they go live on the  

Toronto Stock Exchange, and a couple years  later they made it into the big leagues:   Wallstreet. This was the major leagues, this was  not just a branch plant. During the 70s Northern   had gone from having earnings of $5 million to  $111 million, and the workforce grew to 33,000   people. If Northern was an American company, it  would have been ranked 160 on the Fortune 500.   Northern’s CEO during this time was a man name  John Lobb, and there’s a quote from him that   has pretty much become company folklore. He would  often go around asking employees what the company  

made, hoping they’d take the bait. When they  inevitably answered with switches, he’d hit them   with the real answer: “We don't make switching  goddamn it. We make money." Look I’m a sucker for   unsubtle metaphors. Northern’s first president was  a literal former sea captain. For almost a hundred   years Northern was shielded from the perils of  the open market. Northern was a ship only ever  

sailing close to shore, enclosed in a protective  bay created by its monopoly. By going public on   the stock market this was Northern setting out  to sea, taking a risk that it was a Canadian   company that could go global. And lucky for them  the hammer came crashing down at the perfect time. "Helping you stay on top of change  today...and tomorrow. That's the power of   networking." *static* "Buying a phone? Buy the one  that phone companies have relied on for over 100   years. Northern Telecom. A voice you'll recognize  from a name you know. *Bark bark!* Cool it Rex." The breakup of AT&T is the picture perfect  definition of hubris. AT&T was *the* biggest  

corporation in the world. It employed around  1 million Americans and provided the cheapest,   and for many decades, the best phone service  in the world. For many Americans they were   the only company you get a telephone from.  And it did so through absolutely crushing  

business tactics. Although the days  of literal sabotage were in the past,   now it resorted to brutal board room takeovers,  political lobbying and fighting tooth and nail to   prevent 3rd party companies from tapping into its  network. It had done all of this with the tacit   approval of the US Government, which granted  it the right to exist as a regulated monopoly,   one that had an immense role in the US defense  industry. The maternalistic image of Ma Bell   however had been slowly deteriorating for  decades. For some people, AT&T was brute,   a bully whose arrogance had gone unchecked for  far too long. Service quality had slipped in  

recent years, and yet phone bills continued to  go up. AT&T finally overstepped when it tried   to crush a new rival, and later attempted to ram  a bill through congress, a bill that would once   and for all crown it the one telephone company  to rule them all. This pissed off just the right   people in the Justice Department, which initiated  an excruciatingly slow and complex legal battle   that played out over a decade and 4 different  Presidents. Although it initially looked like   AT&T would walk away with just another slap  on the wrist, to the horror of the executives   they gradually realized that their behemoth wasn’t  nearly as invincible as they thought it was. The   breakup agreement in January of 1982 is perhaps  the single most impactful and controversial event   in the history of American industry. Unlike the  1956 settlement, which saw AT&T make a few small  

concessions, this new ruling was a devastating  defeat, and it left a massive power vacuum.  AT&T had been desperate to keep Western Electric  under its control, but in exchange they had to   watch the rest of their empire be smashed  into 22 pieces. The local phone companies,   the Baby Bells, as they were called, could now  buy their equipment from anyone they wanted. And   of those 22 Baby Bells, Northern snatched up 21 of  them. Former Vice Chairman, David Vice once said:  

"When the divestiture took place, we found that  our customers embraced us in a bloody bear hug.   They'd been with AT&T; and Western Electric all  those years and had been taken for granted."   In just a couple years, Northern rockets up  to become the #2 telecomm equipment company   in North America, right behind to Western, their  much bigger, but now extremely depressed cousin.  

Previously, Northern had negotiated an unspoken  deal with AT&T that they stay out of their turf,   they would only sell to the independents  who despised AT&T. But now, the big bad   mob boss had been whacked. The impact of this  ruling is obvious on Northern's stock price.  You can see in 82 when it becomes clear that AT&T  is going to have to give in that Northern begins   to slowly tick up. By the time the breakup becomes  official in 84 Northern’s stock price is 3 times   what it was. It had broken the curse of the branch  plant. As of 82, Northern was officially making   more money in the US market than in Canada. This  was always bound to happen. The market in America  

is 10 times as big. The real question was how  much of it they could capture. The expansion   was rapid. Nortel began setting up major plants  in California, Texas, Georgia and North Carolina.   Soon there were 13,000 Americans working for  Northern. When it came to grand marketing gestures   nothing was too expensive. Northern chartered  a cruise ship, the SS. Rotterdam filled with   members of the Fortune 500 community and wined  and dined them for days. When an elaborate trade   show in Europe was almost shut down due to  concerns over poor ventilation, Northern   paid to have an expensive hole cut into the roof. With the financial backing of Bell Canada behind  

them, Northern was unstoppable. Which raises an  interesting point. Why did AT&T get broken up,   but Bell Canada was allowed to live on?  Bell Canada, although it tried very hard,   never quite maintained a true monopoly like AT&T  had managed to down south. Although at the peak   of its power in the early 1900s, it had steadily  lost ground ever since. In terms of sheer land   mass the US and Canada aren’t that far off,  but the vast majority of Canada is extremely   remote. Maintaining a presence in the less  populated regions proved so costly that service   was often unreliable, angering the locals. In the  Maritimes Bell itself had been pushed out by some   local rivals. In the prairies the locals were so  fed up with the poor service that the provincial  

governments bought Bell out and turned them into  provincial utilities. Easily the 2nd coolest the   prairies have done after giving us universal  healthcare. And B.C was so far away Bell never   even bothered to try and get a foothold on  West Coast. If Bell Canada had a monopoly,  

it was restricted to the Windsor-Quebec City  corridor, the home of over half the population.   Bell Canada had managed to achieve the ideal size.  The Goldilocks zone. Big enough to dominate the   market, but small enough that the politicians left  it alone. The few attempts at cracking down on   Bell’s monopoly fizzled out as Canada’s regulatory  agencies were undermined and overruled by the   government. And if I had to hazard a guess, I  think Pierre Trudeau and his cabinet were happy to   sit back and watch the American telephone company  implode so Canada could pick up the scraps.  The Canadian-American divide of the 50s  continued to surge during the 60s and 70s.  

JKF hated Dienfenbaker for his flip-flopping over  the Cuban missile crisis, LBJ hated Pearson’s guts   for not backing them in Vietnam, and then you  had Nixon and Trudeau. Two men who could not   have been more different in both personality and  politics. Whether it was because of Trudeau’s open   diplomacy with China and Cuba, or Nixon’s abruptly  announcing a 10% import tariff with no warning,   the Canadian-US relationship truly hit a low point  in the 70s. It was in this climate that Trudeau’s   government, with a push from the left wing NDP,  created FIRA. The Foreign Investment Review Agency  

was, on paper, a way to block foreign takeovers  and screen foreign investment that didn’t bring   “a significant benefit” to Canadians. FIRA was  never very popular. The right wing called it   overreaching, the left wing called it toothless,  and the left wing of the left wing were over in   the corner chanting the word “nationalization”  over and over. Trudeau himself had not been much   of an economic nationalist. He’d been pushed  into creating FIRA by a minority parliament,   and by the 80s the Liberals were desperately  trying to woo back the private sector. Pierre   Trudeau had served one of the longest  tenures of a PM in the country’s history,   and his later years had been dominated by issues  of national unity, and an economic downturn.  The East-West divide that had always existed  continued to widen, Trudeau’s nationalization   of the oil industry had made him a pariah out in  the oil-rich West. Trudeau, a longtime opponent of  

Quebec’s growing separatist movement, had become  increasingly unpopular in the province after he   pushed through a new constitution without their  approval. And the practice known as the Sixties   Scoop had continued into the 1980s, where  indigenous children were forcibly taken from   their parents and placed up for adoption  with White families, and others placed in   residential schools, where all semblance of  indigenous languages, cultures and heritage   were forcibly stamped out. This was not a united  country. For a multitude of reasons there were   and still are millions of people living within  Canada’s borders who do not identify as Canadian,   who do not identity with this flag. If there had  been a strong nationalist movement in the 70s,  

it had fractured into pieces by the 80s.  Bell and Nortel were among the leading   voices in Canadian capital that were demanding  a changing of the guard. High tech, they said,   was the industry that would yank Canada out of  its recession. They wanted a government that   would lower their taxes and reduce trade barriers  for expanding into the newly vulnerable US market.   They would get their wish in Brian Mulroney. Mulroney’s and his Tories delivered one of the  

most lopsided electoral wins in Canadian history.  He was cut from the same ideological cloth as   Ronald Reagan and Margaret Thatcher. Deregulation,  privatization, and the free market. 23 of Canada’s   61 Crown Corporations were privatized under  Mulroney. FIRA, which was already a rubber stamp  

machine at this point, was dismantled even further  and renamed Investment Canada. It’s oversight over   new investment was completely eliminated, and its  ability to block foreign takeovers was scaled back   so much, that the act has only been invoked  a handful of times since. Mulroney declared   that “Canada is open for business”. He didn’t  see American money as a threat, and he openly  

welcomed it. As public polling around free trade  began to shift, he believed that by adopting it as   his party’s key policy plank, it would carry them  through the next election. Critically through,   he would never have considered it if not for  his extremely close friendship with Ronald   Reagan. Reagan’s advisors feared phone calls from  Canada because quote “he could get the President  

to do anything he wanted.” Mulroney was the only  foreigner to speak at Reagan’s funeral. Without   this close relationship, free trade between  the two countries may never have been adopted.  We’ve seen only small glimpses of it, but  the US has a long history of its own economic   protectionism. Several times in the past century  and a half, Americans tariffs have sent the   Canadian economy spiralling. When it pulled out  of the reciprocity clause in 1850, the Smoot-Hawly   tariffs during the great depression, the Nixon  shock of the 70s, and most recently, Ronald Reagan   had been championing a Made in America policy  that threatened to block companies like Northern   from America altogether. Canadians weren’t  necessarily afraid of free trade, what they were   afraid was getting the short end of the stick in  negotiations with a country that many perceived as   a bully. This was the message being championed by  Liberal leader John Turner. He considered himself  

a proponent of free trade but not a bilateral  agreement directly with the US. It’s one thing   to negotiate in the context dozens of countries  coming together, it’s another to try and negotiate   1 on 1 with a country 10 times your size. Thanks to TV ads like this one, free trade became   the defining issue of the 1988 federal election. "Since we're talking about this free trade   agreement, there's one line I'd like to change."  "Which line is that?" "Well this one here. It's   just getting in the way." "Just how much are we  giving away in the Mulroney free trade deal?"

It also culminated in one of the  most explosive moments ever to   happen in a Canadian political debate. "I happen to believe you've sold us   out. I happen to believe that once you-"  "Mr. Turner you do not have a monopoly on   patriotism" *overlapping arguments* "and I  resent the fact the your implication that   only you are a Canadian. I want to tell you I  come from a Canadian family, and I love Canada,  

and that's why I did it!" *static* "We a  built a country east and west and north,   we built it on an infrastructure that deliberately  the continental pressure of the United States. For   120 we've done it. With one signature of a pen,  you've reversed that thrown us into the North   South influence of the United States, and will  reduce us, reduce us I am sure to a colony of the   United States. Because when the economic levers  go, the political independence is sure to follow."

This moment resuscitated what many had been  calling a dead campaign. There had been talks   of replacing Turner as leader mid campaign,  but the Liberals surged into first. Ultimately   Turner’s past record weighed him down, and the  Tories would clinch the election. The free trade  

agreement would be enacted soon after. And  that was that. With the exception of a few   staples like lumber or dairy, the playing  field had been wiped clean. It was time to   get in the ring and start throwing some punches. Northern's success in the 80s was dependent on   entering the hostile American market. After having  a pair of Canadian CEOs at the helm, it became  

clear Northern needed a CEO with connections  in Washington. That’s how they landed on Edmund   Fitzgerald. A former US marine, part owner of the  Milwaukee Brewers baseball team, and the descent   of a wealthy Wisconsin shipping family, Fitzgerald  was perfect for the job. A Republican with  

extensive lobbying experience, he rallied hard  in Washington against new bills that threatened   Northern's southward expansion. Although still  Canadian, Nortel spoke with a fluent American   accent when it needed to. The sales numbers spoke  for themselves, but the symbolic victories also   helped. The telephone switches in the White  House, which had previously belonged to AT&T,   were now made by Nortel. Although America was the  main target of Nortel’s expansion, the 80s was the   decade that Northern went global. They expanded  into Europe, the Caribbean, the entire Pacific   Rim. They truly made history in Japan, becoming  the first ever non Japanese company to install a  

telephone switch there. In 1987 Northern has an  almost perfect marketing moment fall into their   lap. An earthquake hits just outside of Tokyo.  All the switches break as the mechanical parts   are torn off. The only exception was Northern’s  DMS-10, which was fully digital. The trend of   American CEOs continued as Edmund Fitzgerald  sought out a successor. He chose Paul Stern,   a former IBM exec who he had met while serving  on Reagan’s telecommunications committee. One  

former VP said, Paul Stern “arguably has the most  bloated ego of anyone I’ve ever met”. He insisted   on being referred to as doctor Stern, which is  one of those things he can technically do, but   is also one of the most annoying things anyone can  do. He also assumed the 3 top jobs of President,   CEO and Chairman of the board at the same time,  an embarked on a company-wide PR tour on the   corporate jet, reminiscent of a political  campaign, all the while he began hacking   and slashing budgets, shutting down factories,  and firing VPs who looked at him the wrong way.  The 90s were a new decade. Northern Telecom had  pretty much been shortened to Nortel by this   point. By 1991 Nortel had pulled even with AT&T in  the US switching market, with a 40% share. The new  

Russian President Boris Yeltsin even found time to  visit the BNR labs on a visit to Ottawa in 1992,   where he jokingly tried to pocket a microchip. BNR  meanwhile had spent the last few decades on a new   way to send phone calls. The pipes that humans  have used to send phones calls hadn’t really   changed much since the 1800s. They started out  using iron cables, which although functional were   highly sensitive to noise and distortion. Early on  many companies made the switch to copper cables,  

and the world mostly stuck to those for over a  century. But now they were hitting their upper   limit, and something better was needed.  Although they didn’t invent the concept,   Bell Canada published one of the very first  papers on fiber optics in 1966. Using ultra   pure strands of glass, you could pulse lasers  to send digital 1s and 0s as incredible rates.   Unveiled under the name FiberWorld, Nortel  showcased a line of fiber optics nodes could   achieve transmission speeds of 2.5 Gigabits  per second. Once again they had achieved  

a multi-year head start over their rivals. As the 80s ended, Nortel was on top of the world.   Here’s ex-Nortel employee Dave Roberts explaining  how they did it: “The company built great phone   systems. And when I say that they built them, they  really did. They developed their own CPUs, wrote   their own operating systems, manufactured all  the boards and sheet metal and whatnot.” “These   customers moved slowly. Products were installed  and then expected to run for a decade or more,  

with nothing but backward-compatible upgrades  provided during that time. “You charged an arm   and a leg for what you delivered, and it was very  profitable.” When you’ve been at sea for this long   riding the waves of the market, the previous highs  and the lows begin to feel insignificant. What was  

once the pinnacle of success is now just a small  crest, the halfway point to a bigger and better   wave. Nortel had built a 13,000 tonne tanker  optimized to serve telephone companies, and the   sheer momentum of that looked like it would carry  them for the next decade. But that momentum would   turn out to be a critical flaw. The age of the  telephone company was coming to an abrupt end. "Our lives are..." "Busy!" "And now,  from Northern Telecom, a solution!"

1993 saw a big shakeup in leadership for  both Nortel and Canada. Paul Stern’s abrasive   personality and budget blood lust was tolerated  up until 1993 when Nortel’s biggest customer,   Atlanta Bell, dropped Nortel following a string  of reliability concerns. Paul Stern’s cuts had   reached the R&D centers, and product lines weren’t  being updated as much as before. Customers were   noticing, and they began to lose ground to AT&T  again. Previously heralded as a genius, now Paul  

Stern’s tactics were seen as short sighted, and he  was painted as a tyrant. Bell Canada intervened by   blocking the appointment of Stern’s close friend  as President, instead slotting in one of their   own, Jean Monty. Furious at being undermined,  Paul Stern resigned in protest. The Paul Stern   years are not remember fondly at Nortel, and if he  had any lasting legacy at Nortel, it was beginning   the tradition lucrative golden parachutes. When  he resigned he left the company with $5.4 million   in compensation. Jean Monty, quickly promoted  to CEO, had his work cut out for him. 1993 was   the middle of a deep recession for Canada,  and Nortel’s stock price reflected that. 

Speaking of the recession, oh boy did people  hate Brian Mulroney. Plagued by scandals and   unpopular policies, Mulroney resigned from  politics just months before his party suffered   the worst election defeat in Canada’s history,  forever dooming the PC’s to irrelevance. The   pendulum finally swung back to the Liberals,  seeing former cabinet minister Jean Chretien   ascend to the PM’s office. If Mulroney was our  Reagan, then Chretien was our Clinton. A Liberal,   yes, but a Liberal who had been pushed to the  right by a decade of Conservative rule. The  

Chretien years would be defined by an obsession  with cutting the deficit. Housing, healthcare,   nothing was off limits as long as the number went  down. Chretien had also partially campaigned on   renegotiating NAFTA, a revised free trade  agreement that would now include Mexico,   but he didn’t try very hard. Negotiations had  been pretty much finalized by Bush and Mulroney,   and reopening the terms was just as likely to kill  the deal altogether, which was a political no-go.  

The asymmetry between the two countries meant  there was very little weight Canada could throw   around. Even then, on a personal level Chretien  was not sympathetic to the Canadian nationalists.   As finance minister Chretien had once been in  charge of FIRA, but he had always felt that   American money in Canada was a necessary pill to  swallow. Years earlier he said that there were “a   lot of places in Canada where people don’t give  a damn who owns what. They want a job.” And years  

later he said “protectionism is not left-wing  or right wing, it is simply passe”. The free   trade debate had effectively been settled. This new political paradigm was followed by   radical changes in Canada’s Telecom Policy,  and by that, I mean massive deregulation. It   was a burning down of the entire playing field in  the name of increased competition. Bell Canada’s  

monopoly on long distance calls was broken. Their  preferred supplier agreement with Nortel was torn   up. Phone companies could be TV companies now. TV  companies could be phone companies. Cell phones   were a thing now too, and everyone was welcome  to take a crack at those as well. To survive you   could no longer be *just* a telephone company. You  needed a thumb in every pie. The US underwent its   own version of this with the Telecom Act of 96.  The telecom act is mainly remember for flooding  

the tech market with a bunch of new capital,  and planting the seeds for the eventual dotcom   bubble. But it also initiated a wakeup call at  AT&T. The last decade had been brutal for them.   More specifically, Western Electric was weighing  them down. All the new Baby Bells and independent   telephone companies refused to buy from them,  because their money would still just be going   to their biggest rival. And so AT&T said, fine, we  get the message, we’ll just spin it off. Western   Electric was no more, it underwent a complete  makeover and adopted a new name. Longtime fans   might recognize this one: Lucent Technologies. Nortel and Lucent mirrored each other in the same  

way that Canada and the US mirrored each other,  the difference was just in size and prestige.   Lucent the industry’s 900 pound gorilla, over  twice as big as Nortel. BNR was respected, sure,   but Bell Labs had 6 Nobel prizes, and their latest  hotshot physicist was bound to win them another.   Nortel going public in the 70s was a success…by  Canadian standards. Lucent’s IPO? It shattered  

the world record for most money raised. $3  billion in 1996. Lucent would quickly become   one of America’s most widely held stocks. If you  were betting on either of these two companies,   Lucent would be the logical choice. But  both of them at their core, were telephone  

companies. Neither was truly prepared for the  technological upheaval that was going to define   the 1990s. Something more radical, unrestricted  and unpredictable than the telephone. You see   there’s this new thing called the world wide web.  A network that brought together text, images,   voice, even video, albeit heavily compressed.  All of it viewable on personal computers that   were beginning to pop up in middle class houses.  The telephone took 50 years to reach around half  

the US population. The internet did it in 5.  As it turns out, the copper wires most people   had in their houses to receive phone calls worked  just as well when it came to delivering internet   traffic. Telephone companies, like Nortel, were  remarkably well positioned to gobble up this new   internet market. Or at least they would be,  if they weren’t stuck in their old habits.  If Lucent represented the old guard rival, the  establishment, then Cisco represented the next   generation. A relatively new company, it was an  internet startup fresh out of Silicon valley. It  

blazed a trail in the 80s as the brainchild of  4 Stanford professors and quickly ate up a huge   share of the telecom market. Whereas Lucent had  decades of AT&T’s legacy behind it and a massive   scale, Cisco was small, maneuverable and adaptive.  Its CEO was a cool guy. He raced speed boats. And   most importantly, it had picked the correct side  in a civil war being waged by a bunch of nerds.   The two factions were called the Bell-heads and  the Net-heads, and they each had a competing   vision for how the internet should be transmitted.  The Bell-heads were most often legacy telephones   engineers who likely worked for giant companies  like AT&T and Bell. They championed something  

called ATM switching, asynchronous-transfer-mode.  On the other hand you had the Net-heads, fans   of IP, or internet packet switching. Net-heads  were likely to be open-source nerds working out   of Universities, or maverick tech entrepreneurs  working out of Silicon valley start ups, desperate   to try and disrupt the AT&Ts of the world. The Bell heads loved ATM because it built off the   same principles of telephone switching. When you  set up a telephone connection, you want a live,   continuous conversation, no buffering. You set up  one link between points A and B, and shut out all  

other traffic. It’s fast, and high capacity. It’s  not so great though not great if one point along   the route breaks down. Now you have to reroute  and set up an entirely new connection. That’s   where packet switching excelled. Packet switching  is like mailing someone a jigsaw puzzle, but each   individual piece can get split up and all take  different routes to get to their destination. It   doesn’t matter because once they all reach their  destination they just get assembled into say,   an email. IP by its very nature is decentralized.  Immune to single points of failure, and, notably,  

very hard to track customer billing with,  which frustrated the Bell heads to no end.   ATM was ideal for the high capacity optical fiber  networks that Nortel and Lucent specialized in,   whereas IP was best used with ethernet cables and  routers that Cisco had built its fortune off of.  In the 80s it wasn’t super clear who was winning  this civil war, but by the mid 90s it was. It was   the Net-heads. IP was king, and by the end of the  decade ATM was going to be just another forgotten   technology, like Betamax was to VHS. If you  wanted to use the internet you had to endure  

this sound [dial-up sound] and hope that  no one else at home was expecting a phone   call. No one wanted on-demand, real-time video  calls in this era, they were happy with emails,   slow loading websites, and if they were feeling  fancy, downloading software from the internet.   Activities where buffering and latency didn’t  matter. ATM was on paper the better technology,   the market had committed to IP. Nortel  needed to course correct as soon as possible.  This is when we meet John Roth. He’s what  you’d call a company man. A Canadian,   he grew up in Lethbridge Alberta and joined  Nortel in 1969. Although he went to school  

for electrical engineering, his true talents were  not in design. During his entire career at Nortel,   he never made it onto a single patent. He was  instead destined to climb the corporate ladder,   and at just 35 years old he became a general  manager, the youngest person ever in that role.   He’d break that record again when he became a  VP. Next he hopped on over to President of BNR,   Nortel’s beloved crown jewel, and he later pushed  for Nortel to get into the wireless market. But  

his ascension up the corporate ladder was far from  over, as by the end of the Paul Stern years he was   President of Nortel North America. By 1995 with  Jean Monty’s remodeling well under way Roth was   made his heir apparent, taking on the role of  COO for a two years before finally getting to   wear the big boy pants in 1997, with Monty heading  upstairs to become CEO of Bell Canada Enterprises.  The model Canadian CEO is like a Canadian  Supreme Court justice. The average Canadian   probably doesn’t know your name. Certainly  something that can’t be said for their American   counterparts. John Roth no Bill Gates and he  wasn't Steve Jobs. His first ever interview   as CEO he seemed deeply uncomfortable with the  attention. He was boring. The business press was  

confounded by him. The Globe and Mail, unable  to find anything interesting to say about him,   instead described his body as lanky and weird.  Some people compared him to nebulous Cigarette   smoking man from the TV show the X-files. In other  words, an enigma. He also had big shoes to fill.   Monty had been named Canadian CEO of the year in  97, after he turned the company around following   the disastrous Paul Stern years. As you know from  the intro, John Roth will win the same award, but   the road he takes to get there is a bit bumpier.  Let us introduce the John Roth threshold. This is  

the stock price on the day he assumed the title  of CEO. If he leaves the company above this line,   he was a success. Let’s see how he does. Just two months in, on December 3rd 1997   John Roth sent out a now iconic email to all  74,000 employees of Nortel. It was entitled:   “The Right Angle Turn”. Nortel needed to pivot.  If you asked him, John Roth could tell you the  

exact moment he realized that the internet was  the future. Like many millionaires, he’s an avid   car collector. One day he was trying to find a  replacement liner for the glove box of his 1966   Jaguar E-type, but couldn’t find one in Canada.  But, as he says here: "I started poking around and   within five minutes I'm in a little garage north  of London, England - a four-man operation - and   he's got my parts. How would I have ever have  found this person if he wasn't on the Web?”  

Truly a man ahead of his time, he quickly got  addicted to online shopping, and bought a 1950s   jukebox and a pool table. John Roth had made  it clear. Nortel was an internet company now.  How they were going to do that was a serious  question. This is a point of contention,   and I’ve heard two sides to this issue. John  Roth supposedly went to his technical people   and asked them how long it would take to get a  foothold into IP. He was told around 2 years,   which was too slow for him. On the other hand,  I’ve heard first hand accounts from employees that   Nortel’s engineers had a good grasp on IP,  and had even published some papers on it in   their in-house journal. One of those papers even  described a device extremely similar to the iPhone  

a whole decade ahead of time. There appears to  be a disconnect, John Roth, and the executives   he surrounded himself with, did not trust their  own engineers, that they were dinosaurs who were   stuck in their ways. This is perhaps the reason  that Nortel made the controversial decision to   shut down BNR. In 1996 BNR had been dissolved and  absorbed into Nortel. The Bell Labs of Canada no   longer existed. The name BNR, beloved by those who  worked there, was erased unceremoniously. In the  

span of just one weekend the “corporate logo cops”  paid a visit to Ottawa and had removed every trace   that the name BNR ever existed. The bulk of the  nearly 17,000 employees were simply absorbed into   Nortel’s other product lines. For longtime R&D  folks, like, said it felt “like a dagger to the   heart”. Why BNR was dissolved is a bit of mystery.  It’s possible it wasn’t profitable on its own,   viewed as a “multi billion dollar sinkhole”  that couldn’t exist in this new era that saw   Bell downgraded from its long distance monopoly.  By some, BNR’s culture was viewed as arrogant.   They saw themselves as better than the rest,  even down to their insistence that they use   Macs instead of PCs. They needed to be reigned  in, brought into line with the same

2023-11-07 11:20

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