The Internet bubble the impact on the development path of the telecommunication sector Wolter Lemstra The Internet bubble and the impact on the development path of the telecommunication sector The Internet bubble and the impact on the development path of the telecommunication sector Proefschrift ter verkrijging van de graad van doctor aan de Technische Universiteit Delft, op gezag van de Rector Magnificus prof.dr.ir. J.T. Fokkema, voorzitter van het College voor Promoties, in het openbaar te verdedigen op maandag 16 oktober 2006 om 15:00 uur door Wolter LEMSTRA elektrotechnisch ingenieur geboren te Roodeschool Dit proefschrift is goedgekeurd door de promotoren: Prof.dr. W.H. Melody Prof.dr. J.P.M. Groenewegen Toegevoegd promotor: Dr. R.W. Künneke Samenstelling promotiecommissie: Rector Magnificus, voorzitter Prof.dr. W.H. Melody, Technische Universiteit Delft, promotor Prof.dr. J.P.M. Groenewegen, Technische Universiteit Delft, promotor Dr. R.W. Künneke, Technische Universiteit Delft, toegevoegd promotor Prof.dr. B. de Wit, Maastricht School of Management Prof.dr. J.C. Arnbak, Technische Universiteit Delft Prof.dr. L.L.G. Soete, Universiteit Maastricht Dr. S. Paltridge, Organisation for Economic Co-operation and Development Voor mijn ouders, die studeren stimuleerden en mogelijk maakten. Colophon Published and distributed by: Industry-Insights BV Wakkerendijk 94A NL-3755 DE EEMNES The Netherlands Phone: + 31 35 533 4751 Email: [email protected] English editor: Mrs. W.M.J. Meissner-Stibbe Cover design: Victor Wentink Printing: Febodruk BV, Enschede Keywords: telecommunication, internet, financial bubbles, paradigms, strategy, policy ISBN-10: 90-810895-1-X ISBN-13: 978-90-810895-1-7 Copyright © 2006 by Wolter Lemstra All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the author. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation or endorsement of this book by such owners. Preface Preface In the aftermath of the Internet bubble the opportunity arose to pursue a PhD research project. The idea of an PhD was already planted by Prof. Jan de Kroes in 1978 when I graduated as an electrical engineer specialized in the field of telecommunications. As a participant in the development of the recent financial bubble I observed how expectations changed business practices and affected behaviour at the supply side of the telecom industry. A singular view on the future of the industry became so pervasive and powerful that alternative perspectives were suppressed. It appeared as if meeting sales targets unabatedly obviated the need for strategic reflection. Hence, the topic of the research project became an obvious one: obtaining an understanding of the occurrence of bubbles and their operating principles and to assess the impact on the development of the telecom sector. Recognizing that as a consequence the research would be a reflection on recent history, the aim of the project was to use the insights obtained to explore the implications for strategy and policy formation. After leaving Lucent Technologies, Prof. Bill Melody provided an intellectual home for my telecom interests through an engagement with LIRNE (Learning Initiatives for Reforms in Network Economies)1. My long term relationship with Prof. Bob de Wit, developed through a joint involvement in Delft TopTech2, provided me with the opportunity to continue my involvement in the field of strategy as part of the Strategy Academy. The wish to expand my telecom horizon to include regulation brought Prof. Jens Arnbak, former Chairman of OPTA - the Dutch National Regulatory Agency, into the fold. I discussed my ideas to pursue a PhD project with them. I still recall one of the first questions: “Are you sure that you want to pursue this idea?” In fact I was sure, but in hindsight I have to admit it was based on what economists would call a significant degree of ‘information asymmetry’. The Section Economics of Infrastructures became my home for the following four years. Their commitment to academic excellence, their interest in experience from the field, and their practice of intensive peer reviews made it possible for me to complete the project. Through their open minded approach to scientific research it became possible to establish the bridge between the physical and the social sciences. The change in work rhythm, the weekly trips to Delft replacing the intensive traveling which I had become used to in business, implied a greater opportunity for participation in home life. A side effect that became much appreciated by my loving family Eline, Charlotte and Ingeborg. Although quickly the question was raised whether and when I could be released from the PC. Moreover a new nick name emerged: “stuudje”. Without their support the project would not have been possible. 1 LIRNE is a cooperation between the Section Economics of Infrastructures at the TUDelft, the Centre for Information and Communication Technologies (CICT) at the Technical University in Denmark, the media@lse center at the London School of Economics, and the LINK center at the University of Witwatersrand in South Africa. More recently regional centers have been established in Sri Lanka and in Uruguay. 2 Delft TopTech is associated with the TUDelft and provides post graduate executive education. Our engagement was related to the Master of Business in Telecom program. vii Preface I like to thank Prof. Bill Melody for accepting me, just in time, as PhD student; setting me off on the right track and providing essential guidance at critical junctures in the process. Prof. John Groenewegen for providing stimulating guidance and insights into the theoretical foundations of economics. And Rolf Künneke, as Head of the Section Economics of Infrastructure, for providing intellectual and financial support, and allowing me to enjoy academic life. An intellectual and personal welcome home was also provided by Bob de Wit and colleagues at the Strategy Academy. I thank Bob, Ron Meyer, Martijn Rademakers, Peer Ederer, Casper van der Veen, Karin Feteris and others, for the opportunity provided at the many (off-site) meetings to present my findings and for providing critical but always constructive feedback. I am indebted to many other (former) colleagues and friends who provided valuable input and support. These include Aad Correljé, who provided the perspective of a political economist, Hendrik Rood who surprises me again and again with his broad knowledge of the telecom industry, Andrew Barendse as comrade in arms, Alexander Verbraeck to raise the right questions at the right time, Vic Hayes, the ‘Father of Wi-Fi’, and in the early days of the project: Amy Mahan, Divakar Goswami and Hens Runhaar. One MSc student deserves special attention, Anne Boelsma, who supported this project by making an extensive range of literature accessible by summarizing the content, finding meaningful relationships and patterns that would describe the paradigm shift. I like to acknowledge the time and effort as well as the value of the critical questions raised by the participants in the review sessions at ABN-AMRO, BIPT Belgium, Capgemini, Essent Kabelcom, the Dutch Ministry of Economic Affairs, the LINK Center at Wits University, Rabo-Bank, VKA, Vodafone; and representatives from Alares, Ajempo, BT, Comparc, Imtech, IT-Help, KPN, Stratix, Triarii, the University Twente, and WMC having participated in the sessions conducted at the TUDelft. Of special importance have been the very stimulating interactions with Carlota Perez. I wish to thank Victor Wentink on the many hours of stimulating philosophical discussions on the role of technology firms in the avant garde of society, and for taking the time and effort to create an image for the cover of this book that fits its content. And I thank Winny Meissner, my mother-in-law, for the many hours spent in reviewing this voluminous text. A special “thank you” is due to my great friend Dr. Tapas Sen and his family. Since we met at the Salzburg Seminar in Session 155 on the topic “economic and social implications of telecommunications” in 1987, many hours have been spent during visits to the USA discussing the issues of internationalization of AT&T and later Lucent Technologies, of business leadership and US politics. I like to formally acknowledge the support provided by KMI Research for making available market data on the development of Pan European optical networks. And I like to express my gratitude to Lucent Technologies, for the opportunity provided to have enjoyed the boom of the bubble, and for releasing me in time to also enjoy the bust, through the execution of this research project. Wolter Lemstra Eemnes, August 2006 viii Table of contents Table of contents Preface vii Table of contents ix Chapter 1 Introduction 1 1.1 Context 3 1.2 Exploring the nature of the project 4 1.3 The research problem and research question 11 1.4 Methodological considerations 14 1.5 Research design 24 1.6 Data representation and sources 27 1.7 Quality assurance 28 1.8 Notes 29 2 A stylized model of euphoria 33 2.1 Introduction 35 2.2 The principles of bubbles 35 2.3 A stylized model of euphoria 41 2.4 Summary and conclusions 53 2.5 Notes 54 3 Euphoria