Switching Relations: the Rise and Fall of the Norwegian Telecom Industry

View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by NORA - Norwegian Open Research Archives Switching Relations The rise and fall of the Norwegian telecom industry by Sverre A. Christensen A dissertation submitted to BI Norwegian School of Management for the Degree of Dr.Oecon Series of Dissertations 2/2006 BI Norwegian School of Management Department of Innovation and Economic Organization Sverre A. Christensen: Switching Relations: The rise and fall of the Norwegian telecom industry © Sverre A. Christensen 2006 Series of Dissertations 2/2006 ISBN: 82 7042 746 2 ISSN: 1502-2099 BI Norwegian School of Management N-0442 Oslo Phone: +47 4641 0000 www.bi.no Printing: Nordberg The dissertation may be ordered from our website www.bi.no (Research - Research Publications) ii Acknowledgements I would like to thank my supervisor Knut Sogner, who has played a crucial role throughout the entire process. Thanks for having confidence and patience with me. A special thanks also to Mats Fridlund, who has been so gracious as to let me use one of his titles for this dissertation, Switching relations. My thanks go also to the staff at the Centre of Business History at the Norwegian School of Management, most particularly Gunhild Ecklund and Dag Ove Skjold who have been of great support during turbulent years. Also in need of mentioning are Harald Rinde, Harald Espeli and Lars Thue for inspiring discussion and comments on earlier drafts. The rest at the centre: no one mentioned, no one forgotten. My thanks also go to the Department of Innovation and Economic Organization at the Norwegian School of Management, and Per Ingvar Olsen. I would also like to thank Tore Grønlie for comments and advice. I would like to express my gratitude to the interviewees, who have been generous in sharing their time and views with me. Thanks, “muttern”, for help and inspiring talk. Thanks also to Mette and “fattern” for great support these years. Most of all, however, my thanks go to Helena and Maria. Oslo, 2 February 2006. Sverre A. Christensen iii Table of contents Introduction 1 “Why doesn’t Norway have a Nokia?” 1 Comparing relations 3 Switching 6 Explaining and understanding 8 Multinational companies 11 Government-industry relations 14 Innovation 16 Corporate governance 19 Sources 24 Outline 25 Chapter 1 Automatisation and oligopolisation 27 Introduction 27 The Bell System and the Scandinavian telecom wonder 29 PTO - monopoly and monopsony 33 The path dependency of automatic switches 35 ITT - a freestanding company 38 ITT's ownership advantages 42 The subsidiarisation of the Norwegian telecom industry 45 Cartelisation and oligopolisation 50 Oligopolic deadlock 54 A five fingered oligopolic grip 58 Chapter 2 Lonely riders 61 Introduction 61 STK's telecom business from 1933 to 1960 62 State ownership 65 The Labour government’s low priority of telecom 68 ITT after World War II 72 ITT's crossbar battle 74 Telegrafverket’s procurement policy 78 The radiolink issue 83 Conclusion 84 Chapter 3 STK as a foreign high-tech company 87 Introduction 87 STK's telecom business and lucrative long-term agreements 88 Electronics and innovation 95 A Norwegian system of innovation in telecom 101 Geneenism 109 Foreign subsidiaries 116 Norwegian high-tech companies 124 Conclusion 129 Chapter 4 STK's telecom business in pain 133 Introduction 133 Electronic switching - ITT's Metaconta 134 iv The 11B - STK's largest telecom project 138 The network as “a weed flora” 142 The Oslo problem 147 The lucrative long-term agreements 150 The Oslo tenders 152 The 11B - an expensive experience 157 Competition and inspections 159 STK's telecom business in pain 167 Televerket - BTM 169 Conclusion 171 Chapter 5 STK as an innovative enterprise 175 Introduction 175 Thoresen - STK's managing Director 176 Kveim, EB and Nera 185 The cornerstone plan 190 ITT vs. LME 194 Colbertism vs. ITT 197 Public procurement policy 201 Conclusion 204 Chapter 6 Digitalisation and liberalisation 207 Introduction 207 A dual regime 208 The System 12, ITT's last rope 216 One supplier or two? 222 The TA vs. the TF 226 Liberalisation 229 The tender 233 Norway, ITT's lead market 240 Conclusion 245 Chapter 7 The fall of the Norwegian telecom industry 249 Introduction 249 STK’s Pyrrhic victory 250 The Trondheim switch 255 ITT - a giant with feet of clay 259 Alcatel N.V. - a European champion 264 The Norwegian financial revolution 266 ABB - a European champion 274 STK - a French subsidiary 276 The fall of the Norwegian telecom industry 284 Televerket - a world leader 290 Conclusion 293 Conclusion: Why doesn't Norway have a Nokia? 297 Literature list 307 Sources and archives 319 v List of Tables Table 1.1: Telephone subscribers per 1,000 inhabitants, 1900. Table 2.1: STK's sales, 1933-1938 (NOK). Table 2.2: STK's average annual sales, 1948-1960 (NOK). Table 3.1: STK's sales, 1964-1970 (1000 NOK). Table 3.2: STK's Net Income after tax in dollars, 1965-1968. Table 5.1: STK's employees, 1973-1980. Table 5.2: STK's sales, 1973-1980 (NOK millions). Table 7.1: Alcatel Telecom Norway employees and sales (NOK millions), 1989- 2003. List of Acronyms BTM Bell Telephone Manufacturing Company (ITT's Belgian subsidiary.) CE Committee for Electronics (NTNF’s Utvalg for Elektronikk from 1961) CGE Compagnie Generale d’Électricité (Alcatel's predecessor/former owner) CGCT Compagnie Générale de Constructions Téléphoniques (One of ITT's French subsidiaries.) EB Elektrisk Bureau (LME's Norwegian subsidiary) ELAB NTH’s Electronic Laboratory (Elektronikk Laboratoriet) FA STK's R&D-centre (Forskningsavdelingen) FDI Foreign Direct Investments FFI National Defence Research Establishment (Forsvarets Forskningsinsti- tutt) FFSB Norwegian Defence Communications Administration (Forsvarets Felles- samband) INDIG Televerket's group for introducing digital switches (INføring av DIGitale sentraler) ITT International Telephone & Telegraph ITTE ITT-Europe IWEC International Western Electric Company (Western Electric’s international subsidiary, which ITT bought in 1925.) KRK Armed Forces Procurement Department (Forsvarets felles Materielltje- neste, Kontraktsrevisjonskontoret) LCT Laboratoire Central de Telecommunications (ITT's French laboratory) LMT Le Materiél Téléphone (One of ITT's French subsidiaries.) LME LM Ericsson NTNF Norwegian Research Council for Science (Norges Teknisk- Naturviten- skapelig Forskningsråd.) vi MNC Multinational Company No. 7 Signalling System 7 NOU Norwegian Public Report (Norsk Offentlig Utredning). NSC Network Service Center (Developed for the Norwegian network while installing System 12) NTH Norwegian Institute of Technology (Norges Tekniske Høyskole) PABX Private Automatic Branch Exchange P/E Price/Earnings (stock price/companies earnings) PCM Pulse Code Modulation (digital transmission) PTO Public Telephone Operator R&D Research and development RSU Remote Subscriber Unit (Rural switches with limited intelligence developed for the Norwegian network while installing System 12) SI System of innovation SKG Skandinaviske Kabel- og Gummifabrikker SPC Stored Program Control (programmable computer and/or switch) STC Standard Telephone and Cables (ITT's British subsidiary.) STL Standard Telecommunication Laboratory (ITT's British laboratory) STK Standard Telefon og Kabelfabrik TA Televerket’s Technical Department (Teknisk Avdeling) TDM Time Division Multiplexing (transmission technique used with digital switching) TF Televerket R&D-institute (Televerkets Forskningsinstitutt) vii viii Introduction “Why doesn’t Norway have a Nokia?” The last ten years have been marked by the increasing use of information and commu- nication technologies, and particularly by different forms of telecommunications. At the same time, the telecom industry has gone through radical changes, due mainly to the digitalisation and liberalisation that have revolutionised the sector since the 1980s. Some companies have disappeared, while new entrants dominate the global arena. The Finnish Nokia emerged in the wake of this development, and together with the old Swedish incumbent, L.M. Ericsson, they make Scandinavia a telecom centre in the world. Norway did not get a Nokia, despite its leading role in telecom in the 1980s. What is more, the old Norwegian telecom industry has virtually disappeared. An industry that employed thousands of workers in the 1980s has all but vanished. Nevertheless, Norway is still a leading country in telecom, and one of the most profitable and promising Norwegian companies in recent years is Telenor, the former Public Telephone Operator. This thesis will try to provide an historical ex- planation and understanding of this development, that is, the rise and fall of the Norwegian telecom industry. The thesis has a particular focus on Standard Telefon og Kabelfabrik (STK), the largest Norwegian supplier of telecom equipment in the 20th century. Together with Elektrisk Bureau, STK divided the Norwegian market through a cartel agreement in 1934. This happened in the wake of the consolidation of the international telecom industry, after which a few companies dominated the global scene. The coming of automatic telecom switches spurred this development, as the costs of developing these switches were too high for small and medium-sized companies. STK and Elektrisk Bureau (EB) were subsidiaries of ITT and Ericsson, respectively, two of the largest telecom companies in the world. From the interwar period to the 1980s, the structure of the telecom sector was stable. Technological and political conditions

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